Saving Europe’s Automatic Stabilizers

Abstract

What is the role for fiscal policy in Europe’s monetary union? This question is addressed in the MacDougall Report (1977), the Delors Report (1989), and the Maastricht Treaty (1991). The MacDougall Report emphasized the need for fiscal federalism at the EU level to offset asymmetric shocks once monetary independence is lost. It estimated that an EU budget of at least 5 per cent of European GDP was needed to carry out this task. The Delors Report (para. 30) acknowledged that a central budget of this magnitude might not be feasible politically and called instead for the closer coordination of fiscal policies. It argued this case on the grounds that virtually all federations possess budgetary mechanisms with powerful ‘shock-absorbers’ effects’ that dampen `the amplitude either of economic difficulties or of surges in prosperity of individual states. This is both the product and the source of national solidarity, which all relevant economic and monetary unions share’ (Delors, 1989). The implication is that fiscal federalism is necessary to ensure the smooth operation of Europe’s monetary union and to prevent a political backlash against the project. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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