Transcript The future of euro area: do we need a fully

The future of euro area: do we need
a fully-fledged fiscal union?
Charles Wyplosz
The Graduate Institute, Geneva
Council for Budget Responsibility of Slovakia
Seminar on Macroeconomic and Fiscal Issues
Bratislava, May 5, 2014
Do we need a fiscal union?
• No
• An economically ill-justified judgment
• A political mistake
The economic misjudgment
• Reasoning
 Crisis has shown the need for mutual support
• Fiscal discipline limits use of national fiscal policies
Wrong
• Some federal support needed to make up
Wrong
 More generally, monetary union needs political union
• This includes banking union and fiscal union
Wrong
• Remove ECB from potential transfers
Wrong
• Provide resources for bank resolution
Wrong
Fiscal discipline
• Fiscal discipline absolutely needed within
monetary union
 Moral hazard
• Vis a vis other member countries
• Vis a vis ECB
 Contagion risk
• Solution: centralization
 Common rule
 Enforcement by Commission and Council
The flaws of centralization
• Different countries require different rules
 Presidential vs. parliamentary
 Single majority vs. coalition governments
• Fiscal authority is national
 Central interference conflicts with democratic
principles
 “Brussels” against voters
 Result: disconnect between sovereignty and
enforcement
Centralization has failed
Percent deficits above 3% (original members)
Centralization has failed
Public debts (% GDP)
The unspoken alternative:
decentralization
• A great example: US states
 Sovereign in fiscal policy matters
 All but one have rules
• Own enforcement mechanisms (State Supreme Courts)
• Break occurred in 1840s
 No Treaty, no law
 Just no bailout decision by US Congress
 Then each state invented its own rules
Decentralization works better
Bailouts must be strictly forbidden
Debt/GDP ratios
Two bailouts
No bailouts
since 1840s
Implications
• Fiscal Union seen as necessary for bailouts
 Bailouts ought to be strictly forbidden
• Fiscal Union seen as necessary to deal with
cyclical disturbances
 Indeed the US Federal Model
 But: the equivalence principle
The equivalence principle
• Equivalence: when in recession
Creates
morallevel
hazard
 Insurance: receive support from
Federal
• Pay back in providing insurance to other countries
Incentive to
fiscal discipline
 Borrow to spend, reimburse
later
• Can easily be done when fiscally disciplined
• No need for an insurance system
• The US
Not a model for Europe in this respect
 Old fashioned state budget rules prevent borrowing
 Insurance
The economic misjudgment
• Reasoning
 Crisis has shown the need for mutual support
• Fiscal discipline limits use of national fiscal policies
• Some federal support needed to make up
Wrong ✔
Wrong ✔
 More generally, monetary union needs political union
• This includes banking union and fiscal union
Wrong ✔
• Remove ECB from potential transfers
Wrong
• Provide resources for bank resolution
Wrong
Monetary union needs a central bank
Not a fiscal union
• No bailout but lender in last resort
 To banks
 Not to government (no-bailout clause is crucial)
• Bailing out banks
 SSM, half done
 SRM, quarter done
• Some funds are OK, but will never be enough
 Transfers across countries?
• Not if clear rules of engagement
… and a political mistake
• Fiscal Union requires sovereignty transfers
 Some common spending
 Some taxing power
• No opposition in principle (US of Europe)
 But requires voters’ consent
Not the right time, alas
“Whatever it takes”
Conclusion
• One day, we will have a fiscal union
• Not now
 Too politically dangerous, not needed
• Waste of time, better things to do
 SSM and SRM
 A real central bank
 Legacy debts