Launch of an International Monetary Fund Staff paper.
The crisis has exposed critical gaps in the euro area’s architecture. This IMF paper explores the role further fiscal integration can play in addressing those gaps.
While the scope and shape of a fiscal union will remain a matter of socio-political preferences, the paper outlines the minimal elements that would make future crises less frequent and severe: (i) a clear ex ante approach to fiscal discipline; (ii) subject to this, increased fiscal risk sharing, (iii) a credible pan-euro area backstop for the banking sector to help break the sovereign-banking loop in the financial system, and (iv) some form of common borrowing (backed by common revenue) to finance better risk sharing and a stronger backstop, and to reduce the potential for large portfolio shifts between sovereigns by providing a safe asset.
Further fiscal integration will take time. However, one element is time sensitive: the euro area single supervisory mechanism currently being established should quickly be complemented by a pan euro area backstop for the region’s banks to anchor confidence in the banking system.
Céline Allard is Deputy Chief in the European Department of the International Monetary Fund (IMF), in the unit in charge of Advanced Economies, and more specifically the Euro Area. She joined the IMF in 2001 and has worked on a number of European countries, both advanced and in transition.
Fabian Bornhorst is Senior Economist in the European Department of the International Monetary Fund (IMF) and works in the Euro Area team. He joined the IMF in 2006 and has worked on a number of advanced European countries and emerging economies.
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