Discussion paper

DP17577 A Central Fiscal Capacity in the EU Policy Mix

A central fiscal capacity (CFC) in the European Union (EU) can in principle perform three roles: provide cyclical stabilisation, support national reforms and investment, and deliver European Public Goods. We build a simple aggregate demand - aggregate supply model, where a CFC depends on shocks and degrees of compliance with common fiscal rules. This analytical framework allows us to examine the policy implications of the three options for a CFC. Based on both the theoretical analysis and the EU’s experience in handling the global financial crisis and the pandemic, we show that a CFC would improve policy efficiency by focusing on stabilisation in the event of negative demand shocks and on boosting potential output in the event of negative supply shocks. In the current stagflationary environment, the provision of European Public Goods appears to be the most promising avenue. The need to calibrate the central interventions in relation to the typology of shocks implies that a CFC cannot be put on an automatic pilot. CFC calls for a reform of the euro-area institutional set up, including the creation of a European Minister for Economic Affairs in charge of the “vertical coordination” of the EU’s and national budgets and the calibration of the centralised expenditures.

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Citation

Buti, M and M Messori (eds) (2022), “DP17577 A Central Fiscal Capacity in the EU Policy Mix”, CEPR Press Discussion Paper No. 17577. https://new.cepr.org/publications/dp17577