Policy Article

Euro-Area Fiscal Stance: Definition, Implementation, and Democratic Legitimacy

Authors

  • Ademmer
  • E.
  • Boeing-Reicher
  • C.
  • Boysen-Hogrefe
  • J.
  • Gern
  • K.-J.
  • Stolzenburg
  • U.
Publication Date

In its current approach to achieve an appropriate euro area fiscal stance, the EU Commission asks countries with fiscal space to provide extra stimulus in order to compensate for countries that are constrained by debt sustainability considerations. However, the aggregate fiscal stance is not a particularly useful concept since it abstracts from too much relevant information at the country level. In particular, excessive stimulus in one country is likely to generate welfare losses there, since this may compromise fiscal sustainability and/or cause its economy to overheat. Additional spending in one country can help other countries only if (1) there are significant trade spillovers and (2) monetary policy does not respond to the increase in economic activity. Even then, the composition of national fiscal policies may be inappropriate, since additional spending may be called for in countries where it is not needed. To overcome these problems would entail moving towards a fiscal union (e.g. by implementing a cyclical risk-sharing mechanism), which can potentially loosen fiscal restrictions, but introduces risks of moral hazard and persistent one-sided transfers.

Info

Key Words

  • democratic legitimacy
  • Euro-Area
  • fiscal policy