Working Paper: CEPR ID: DP15382
Authors: Florin Ovidiu Bilbiie; Tommaso Monacelli; Roberto Perotti
Abstract: We discuss the main fiscal policy issues in the Eurozone, focusing on two that are at the core of the current debate. The first is that, right from the start, the government deficit and debt were the key objects of contention in the debate that led to the creation of the Eurozone, and they still are. The second issue is that a currency union implies the loss of a country-specific instrument, a national monetary policy. This puts a higher burden on fiscal policy as a tool to counteract shocks, a burden that might be even heavier now that the European Central Bank has arguably reached the Zero Lower Bound. Two obvious solutions are mutual insurance (or risk sharing, we use the two expressions interchangeably) between countries; and a centralized stabilization policy. Yet both have been remarkably difficult to come by.
Keywords: No keywords provided
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 |
|---|---|
| government deficit and debt (H62) | contentious fiscal policies in eurozone (E62) |
| Maastricht Treaty limits (F55) | fiscal policies adopted by member states (H39) |
| high debt countries (F34) | pressure on ECB to monetize deficits (E58) |
| ECB's quantitative easing policies (E52) | increase in government debt (H63) |
| loss of country-specific monetary policy (E49) | reliance on fiscal policy to counteract economic shocks (E62) |
| reliance on fiscal policy to counteract economic shocks (E62) | burden exacerbated by ECB's zero lower bound (E49) |
| absence of mutual insurance and risk-sharing mechanisms (G52) | negative spillover effects and contagion among eurozone countries (F65) |