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Fiscal Policy in Europe: Controversies over Rules, Mutual Insurance, and Centralization

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  • Florin Bilbiie
  • Tommaso Monacelli
  • Roberto Perotti

Abstract

We discuss the main fiscal policy issues in Europe, focusing on two that are at the core of the current debate. The first is that the government deficit and debt were, from the outset, the key objects of contention in the debate that led to the creation of the Eurozone, and they still are. The second issue is that a currency union implies the loss of a country-specific instrument, a national monetary policy. This puts a higher burden on fiscal policy as a tool to counteract shocks, a burden that might be even heavier now that the European Central Bank has arguably reached the Zero Lower Bound. Two obvious solutions are mutual insurance (or risk-sharing) amongst countries and a centralized stabilization policy. Yet both have been remarkably difficult to come by, especially due to political constraints. We review and discuss the relative merits of several proposals for increased insurance or centralization, or both. We conclude with an early discussion of the implications of the COVID-19 crisis for European fiscal policy reform and an assessment of the current fiscal measures.

Suggested Citation

  • Florin Bilbiie & Tommaso Monacelli & Roberto Perotti, 2021. "Fiscal Policy in Europe: Controversies over Rules, Mutual Insurance, and Centralization," Journal of Economic Perspectives, American Economic Association, vol. 35(2), pages 77-100, Spring.
    • Handle: RePEc:aea:jecper:v:35:y:2021:i:2:p:77-100
    DOI: 10.1257/jep.35.2.77
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    Citations

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    Cited by:

    1. Plamen Nikolov & Paolo Pasimeni, 2023. "Fiscal Stabilization in the United States: Lessons for Monetary Unions," Open Economies Review, Springer, vol. 34(1), pages 113-153, February.
    2. Julia del Amo Valor & Marcos Martín Mateos & Diego Martínez López & Javier J. Pérez, 2023. "Is the European economic governance framework too “complex”? A critical discussion," Working Papers 2023-06, FEDEA.
    3. Havlik, Annika & Heinemann, Friedrich & Helbig, Samuel & Nover, Justus, 2022. "Dispelling the shadow of fiscal dominance? Fiscal and monetary announcement effects for euro area sovereign spreads in the corona pandemic," Journal of International Money and Finance, Elsevier, vol. 122(C).
    4. Mario Alloza & Javier Andrés & Pablo Burriel & Iván Kataryniuk & Javier J. Pérez & Juan Luis Vega, 2021. "La reforma del marco de gobernanza de la política fiscal de la Unión Europea en un nuevo entorno macroeconómico," Occasional Papers 2121, Banco de España.
    5. Florian Misch & Martin Rey, 2022. "The case for a loan-based euro area stability fund," Discussion Papers 20, European Stability Mechanism, revised 05 May 2022.
    6. Ilzetzki, Ethan & Thysen, Heidi, 2024. "Fiscal rules and market discipline," LSE Research Online Documents on Economics 125402, London School of Economics and Political Science, LSE Library.
    7. Economides, George & Koliousi, Giota & Miaouli, Natasha & Philippopoulos, Apostolis, 2024. "From debt arithmetic to fiscal sustainability and fiscal rules: taking stock and policy lessons," LSE Research Online Documents on Economics 122241, London School of Economics and Political Science, LSE Library.
    8. Daniel Loureiro & Oscar Afonso & Paulo B. Vasconcelos, 2024. "Global directed technical change model with fiscal and monetary policies, and public debt," Economic Change and Restructuring, Springer, vol. 57(2), pages 1-57, April.
    9. Pompeo Della Posta & Roberto Tamborini, 2021. "The Existential Trilemma of EMU in a Model of Fiscal Target Zone," EconPol Working Paper 66, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    10. Jean-Baptiste Gossé & Camille Jehle & Yann Perdereau & Roger Vicquéry, 2022. "European unemployment insurance and macroeconomic stabilisation: are permanent fiscal transfers between States needed? [La stabilisation macroéconomique par une assurance chômage européenne impliqu," Bulletin de la Banque de France, Banque de France, issue 240.
    11. Mario Alloza & Javier Andrés & Pablo Burriel & Iván Kataryniuk & Javier J. Pérez & Juan Luis Vega, 2021. "The reform of the european Union’s fiscal governance Framework in a new Macroeconomic environment," Occasional Papers 2121, Banco de España.
    12. Căpraru, Bogdan & Georgescu, George & Sprincean, Nicu, 2022. "Do independent fiscal institutions cause better fiscal outcomes in the European Union?," Economic Systems, Elsevier, vol. 46(2).

    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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