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

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 noncooperative 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.

Dolls, Mathias, Clemens Fuest, Friedrich Heinemann and Andreas Peichl (2015), Reconciling Insurance with Market Discipline: A Blueprint for a European Fiscal Union, ZEW Discussion Paper No. 15-044, Mannheim.