The fiscal pillar of the Eurozone: Analysis of the alternatives for the completion of the economic and monetary union

Abstract

The aim of this work has been to analyze the alternatives that the euro area has with respect to the completion of the economic and monetary union (EMU), and more specifically with regards to the fiscal pillar. For the purpose to be fulfilled, a research in this topic has been performed so as to identify the possible solutions to the fiscal union of the euro area and select, among those, different approaches to the same problem. Therefore, the paper intends to identify pros and cons from the chosen alternatives in relation to the current context of the European Union (EU). With regards to the prospects of a possible fiscal union there is plenty of information and studies performed by economists from all around the world. Thus, one of the main challenges has been to select solutions from all the information available and try to come up with a concise and summarized paper that is able to reflect the current challenge that the EU is facing; as well as the diversity of feasible solutions that can be implemented. As a result, the paper intends to provide with a clearer picture of the needs of the EU and the options it has. The alternatives for the completion of the fiscal pillar have been obtained from a variety of sources, ranging from institutional EU sources to specialized articles. The objective has been to offer a simplified explanation of each alternative in order to provide for a clear image of the solutions and its implications. The first chapter of the work consists on the basic concepts related to an EMU in order to introduce the reader with the topic that is further developed. The focus of this work is on the fiscal pillar of the EMU, thus, the attention is with regards to this topic. This chapter also describes the legal framework of the EU with regards to fiscal rules, as well as the available tools the EU had, previous to the crisis of 2008, but also after the crisis, in order to coordinate national fiscal policies and provide for macroeconomic stabilization. This chapter was included in the work because it was considered necessary, before analyzing possible reforms or new mechanisms to be implemented, to know which is the starting point of the EU, what are the elements with which the EU has been able to act until the date. The second chapter of the work is focused on identifying some of the design failures of the EU, more specifically the euro area, that specially affect the completion of the fiscal pillar. This chapter helps to identify the main design failures, or the non foreseen vulnerabilities, the EMU had from the beginning that have supposed a barrier for further integration. Not only that, aside from being a limitation for a more integrated union, these vulnerabilities have brought the euro area in a deeper recession. The recognition of such divergences across the Eurozone countries also helps to understand the resistance towards the implementation of some of the alternatives to solve the fiscal pillar issue, as major convergence needs to be realized first. Lastly, the third chapter of the work analyzes the possible alternatives to move towards a more coordinated or even an integrated, fiscal policy. The research on the topic has revealed different manners to address this issue, more or less intervening. The work tries to reflect this by choosing three alternatives from less to more intervening, or from less to more integration, in order to show that there are several options available and feasible, and that the first steps to take do not require major sacrifices.