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A new paper from International Monetary Fund (IMF) staff argues that advancing fiscal integration would help address a number of gaps in the euro area’s architecture. Alongside the Banking Union, a fiscal union would reduce the incidence and severity of future crises by strengthening fiscal discipline and providing a minimum amount of insurance against deep recessions. While putting in place a fiscal union will take time, providing a roadmap for implementation is viewed as essential to anchor confidence in the euro area’s viability, thereby also supporting current crisis management efforts.
European policymakers have taken important steps to strengthen fiscal and economic governance frameworks. However, vigorous implementation and robust enforcement mechanisms are a prerequisite for greater fiscal integration. With these safeguards in place, according to the paper, a clearer ex ante approach to fiscal discipline and cross-country insurance mechanisms—as opposed to a strategy that relies exclusively on support when crises have already occurred—would further strengthen the architecture and ensure stability of the Economic and Monetary Union.
Essential elements of a fiscal union
The paper sees fiscal integration providing a framework of fiscal discipline and insurance mechanisms that would help contain economic and financial shocks while ensuring better national policies before crises occur:
While the first three of these elements would help build a more stable union in the medium to long term, the final one is time sensitive, and thereby requires immediate attention.
Political backing for a clear roadmap that outlines the contours of a fiscal union is critical. While advancing fiscal integration will naturally take time, historical experience shows that effective crisis management has often gone hand in hand with far-reaching long-term reforms, including transferring some fiscal responsibilities to the central level.
Video presentation by Reza Moghadam, Director of the IMF’s European Department: "Is Europe on the mend?" This highlights the need to keep up the reform momentum, especially when the first glimmers of growth for the euro area are appearing.
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