UAM. Departamento de Análisis Económico, Teoría Económica e Historia Económica
Abstract
Current proposals to address the European sovereign debt crisis envision some
sort of fiscal union to complement the Economic and Monetary Union, backed by stronger
sanctions against countries that deviate from budget balance. We argue that sanctions are
an indirect approach to balancing budgets, and that member states, and Europe as a whole,
could instead consider delegating effective fiscal instruments with a direct budgetary impact
to an independent authority.
Outside of a fiscal union, a solvent country could establish an independent fiscal authority
at the national level, with a mandate to maintain long-term budget balance. Delegating a
few powerful fiscal instruments to an institution of this type could cut off speculation about
fiscal sustainability without ceding sovereignty to a supranational body. Inside a fiscal union,
delegating one or more fiscal levers of each Eurozone member state to a national or European
fiscal authority could eliminate moral hazard without relying on sanctions per se.
Many fiscal instruments can serve to balance budgets, but in the context of a monetary
union the chosen instrument should ideally be one that increases competitiveness when recession
looms. The instrument should also be one that is quick and simple to adjust, with
a large budgetary impact and minimal redistributional consequences. For consistency with
these criteria, we argue that fiscal adjustments should operate on the spending side, rather
than the revenue side, and that spending adjustments should affect the prices the government
pays, instead of the quantities of goods and services it purchases. We discuss in detail how a
system of this sort could be implemente