Working Paper: NBER ID: w23220
Authors: Michael D. Bordo; Harold James
Abstract: The recent Eurozone crisis of 2010-2013 has brought to the fore the argument that a successful monetary union needs to be combined with a fiscal union. The history of the U.S. monetary/fiscal union is often given as a template for Europe. In this paper we describe how the push towards creation of the American fiscal union was long and arduous—it took from 1790 to the mid 1930s. In the European case ,unlike the U.S. story, there is strong opposition to creating a fiscal union because members fear the loss of sovereignty that is entailed. \nAs a compromise between the status quo and a U.S. style fiscal union we highlight a series of measures which amount to partial fiscalization. These include: a banking union; a tax union; a capital markets union; a social security union; an energy union; and a military union. These fiscalizations can be viewed as a variety of insurance mechanisms in which different risks for different participants are covered. Each taken by itself may produce substantial objections from those who fear that someone else’s risks are being covered at their expense. The answer to such objections may be to think not in terms of partial but comprehensive reform packages as are often negotiated in the sphere of international trade.
Keywords: Fiscal Union; Eurozone; Monetary Union; Banking Union; Economic Stability
JEL Codes: E62; N14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of a fiscal union in the eurozone (F36) | economic instability (E32) |
| lack of a banking union (F36) | economic instability (E32) |
| slow economic growth (O49) | economic instability (E32) |
| historical precedents from the United States (N41) | stabilization of the eurozone economy (E63) |
| partial fiscalization measures (banking union and tax union) (F36) | insurance mechanisms (G22) |
| comprehensive reform package (I28) | overcoming challenges (O35) |