Working Paper: CEPR ID: DP13813
Authors: Helge Berger; Giovanni Dell'Ariccia; Maurice Obstfeld
Abstract: After significant progress as an immediate result of the euro crisis, the drive to complete Europe’s Economic and Monetary Union (EMU) has decelerated. While there is a broad consensus in Europe that EMU needs further development, the exact nature and timing of the reform agenda remains controversial. This paper makes an analytical contribution to the ongoing discussion about the euro area’s institutional setup. An in-depth look at the remaining gaps in the euro’s architecture, and the trade-offs that repairing them would present, suggests the need for long-run progress along three mutually supportive tracks. First is more fiscal risk sharing, which will help enhance the credibility of the sovereign “no bailout” rule. Second is complementary financial sector reforms to delink sovereigns and banks. Third is more effective rules to discourage moral hazard. Helpfully, this evolution would ensure that financial markets provide more incentives for fiscal discipline than they do now. Introducing more fiscal union comes with myriad legal, technical, operational, and political problems, however, raising questions well beyond the domain of economics. These difficulties notwithstanding, without decisive progress to foster fiscal risk sharing, EMU will continue to face existential risks.
Keywords: risk sharing; banking union; euro area; ESM; optimal currency area
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing fiscal risk sharing (E62) | enhance the credibility of the no-bailout rule (G28) |
| lack of fiscal transfers (H77) | increased risk of sovereign debt crises (F34) |
| improved banking union (F36) | reduce the risk of sovereign crises (F34) |
| insufficient fiscal risk sharing (E62) | existential risks for the EMU (F36) |
| complementary financial sector reforms (G18) | reduced vulnerabilities in public finances (H69) |
| lack of legal and operational frameworks to support fiscal union (F36) | vulnerability to shocks (D80) |
| introduction of more effective rules to discourage moral hazard (G18) | enhance fiscal discipline (E62) |