Reconciling Insurance with Market Discipline: A Blueprint for a European Fiscal Union

26 Pages Posted: 7 Aug 2015

See all articles by Mathias Dolls

Mathias Dolls

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; IZA Institute of Labor Economics

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research; University of Mannheim - School of Economics (VWL); IZA Institute of Labor Economics; University of Essex - Institute for Social and Economic Research (ISER)

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Date Written: July 2015

Abstract

This contribution develops a blueprint for a European fiscal union. The proposal addresses the shortcomings of most other reform designs which do not offer a solution for insolvent or non-cooperative euro countries. We suggest a design which combines fiscal insurance with an orderly procedure to restructure the debt of an insolvent euro member. We show that fiscal insurance and a sovereign insolvency procedure are no contradiction but, on the contrary, mutually enforcing: An effective fiscal insurance helps to limit the stability risks involved in the implementation of an insolvency regime for sovereigns. And vice versa, a well-defined insolvency procedure reduces the danger that a fiscal capacity motivated as an insurance against transitory asymmetric shocks degenerates into a permanent transfer system. Moreover, we show that both elements are a helpful complement for the functioning of the European banking union and the new European fiscal governance.

Keywords: sovereign insolvency procedure, European unemployment insurance, euro area debt crisis

JEL Classification: H87, H12

Suggested Citation

Dolls, Mathias and Fuest, Clemens and Heinemann, Friedrich and Peichl, Andreas, Reconciling Insurance with Market Discipline: A Blueprint for a European Fiscal Union (July 2015). ZEW - Centre for European Economic Research Discussion Paper No. 15-044, Available at SSRN: https://ssrn.com/abstract=2640272 or http://dx.doi.org/10.2139/ssrn.2640272

Mathias Dolls (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

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HOME PAGE: http://www.cesifo-group.de/ifoHome/CESifo-Group/ifo/ifo-Mitarbeiter/cvifo-dolls_m.html

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

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Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
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++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Essex - Institute for Social and Economic Research (ISER)

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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