FMI: Toward a Fiscal Union for the Euro Area

Vale a pena ler os contributos de vários especialistas do FMI sobre a União orçamental  na Zona Euro: Toward a Fiscal Union for the Euro Area.
Reproduzimos aqui as duas páginas do sumário executivo:

The crisis has exposed a critical gap in EMU: the capacity for country-level shocks, whether exogenous or home-grown, to spread across the euro area, calling into question the viability of the common currency. This paper explores the role that deeper fiscal integration can play in correcting architectural weaknesses in the system, reducing the incidence and severity of future crises and lending long-term credibility to the crisis measures in train. The Europeans have already taken important measures to improve economic and fiscal governance and steps to further fiscal integration have been proposed (Box 1). Country-level adjustment, euro area wide support via the ESM/EFSF and the OMT backstop, and progress toward a banking union are also substantial achievements, notwithstanding the fact that cross-border fiscal oversight and transfers raise difficult political issues. Going forward, the argument is that a clearer ex ante approach to fiscal discipline and transfers will further strengthen the architecture of EMU, ensuring the stability of the euro area. This paper complements a companion paper that investigates the role of a banking union for the euro area (IMF, 2013a).
What gaps has the crisis exposed? At its inception, it was thought that the euro area would at most face moderate country-specific shocks, made rare by a common commitment to fiscal soundness. In fact, not only have there been larger and more frequent idiosyncratic shocks but also more idiosyncratic policies. For instance, many countries did not build sufficient fiscal buffers in good times. Moreover, spillovers from idiosyncratic policies were not sufficiently taken into account. Worse, the coupling of domestic fiscal and banking risks, together with extensive financial linkages across countries, turned country-specific shocks into systemic ones, as there were no existing mechanisms to deal with such shocks.
How can greater fiscal integration address these gaps? Although the first step to dealing with country-level fiscal problems must be larger national fiscal buffers, the size of shocks and their capacity to freeze up markets suggest a role for a zone-wide insurance mechanism. Fiscal integration can be that mechanism, providing an ex ante framework for enforced fiscal discipline and temporary transfers—and hence for more certainty that shocks will be contained. Far from diluting market discipline, insurance with strict ex ante rules could be an improvement over the current situation, where the credibility of the no bailout clause has been undermined by ad hoc responses to systemic stress. Yet, even if market discipline could be an important complementary element to prevent future crises, it will take time to establish its role in tranquil times. In the interim, fiscal union will also mean stronger enforcement powers by the center.
What are the minimal elements of a fiscal union that would make a future crisis less severe? The ultimate scope and shape of the fiscal union will remain a matter of social and political preferences. But to address the gaps identified above, four elements seem essential: (i) better oversight and stronger incentives for sound national fiscal policies to build buffers and ensure common concerns are addressed; (ii) subject to better oversight and stronger incentives, some system of temporary transfers or joint provision of common public goods or services (e.g., organized by a centralized budget) to increase fiscal risk sharing, (iii) credible pan-euro area backstops for the banking sector to help break the sovereign-banking loop in the financial system, and (iv) some form of common borrowing (backed by common revenue) to finance better risk sharing and stronger backstops, and to reduce the potential for large portfolio shifts between sovereigns by providing a safe asset.

What are the pros and cons of further fiscal integration? With these elements in place, future crises would be made less frequent, less severe and less prone to systemic spillovers. A shared approach with some elements of centralized fiscal policy would also reduce the risks of idiosyncratic national policies, expand the scope of available counter-cyclical tools, and allow for better fiscal coordination, subject to appropriate governance safeguards. Yet, there are political costs from ceding some national sovereignty over budgets. And there is always the risk that imprudent national policies are not reined in if centralized fiscal oversight proves ineffective, putting a premium on strengthening enforcement provisions prior to any further steps to increase risk sharing.
Would fiscal integration be a zero sum proposition? With appropriate safeguards, the answer is unambiguously no. It is sometimes assumed that financial costs would systematically fall on those countries with a stronger tradition of fiscal prudence. But ex ante risk sharing only means that, at any point in time, countries experiencing better cyclical conditions support those at the other end of the spectrum; it does not mean the same country is always on the giving or receiving end. Our analysis shows that, with a risk-sharing mechanism in place over a sufficiently long period, all current euro area members would have benefited from transfers at some point in time.
What are the priorities right now? Deeper fiscal integration would cement a more stable monetary union in the long term. However, one element is time sensitive: the euro area single supervisory mechanism currently being established should quickly be complemented by a firm and early commitment to establish a single resolution framework with an adequate backstop to anchor confidence in the banking system. Meanwhile, the momentum for longer-term reforms needs to be maintained. Historical experience with fiscal integration shows that effective crisis management often goes hand in hand with far-reaching long-term reforms, including introducing stronger central oversight.
What will be the remaining challenges inherited from this crisis? The proposals here are for future crises. They will not address the existing debt overhang. On the one hand, relying entirely on country-adjustment could trigger debt-deflation dynamics in the periphery, dragging the entire region into a period of prolonged stagnation. On the other hand, mutualization of existing debt would be akin to selling insurance after the fact and could reduce incentives to restore competitiveness and fiscal sustainability. Because of these important tradeoffs, dealing with the debt overhang will remain a delicate issue.

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