Working Paper

Designing a Permanent EU-Wide Stabilization Facility

Roel Beetsma, George Kopits
CESifo, Munich, 2020

CESifo Working Paper No. 8735

While the EU recovery plan provides a useful step in alleviating the economic effects of the coronavirus crisis and achieving further European integration, a permanent fiscal stabilization capacity dealing with major crises is still missing. Such a EU-wide stabilization function would be in accordance with the subsidiarity principle, enshrined in the Treaty of Maastricht, as the risk-sharing that it provides can only be conducted at the supranational level. We envisage a mechanism to semi-automatically respond to region- and country-specific shocks via a central fiscal stabilization fund (CFSF). A simple model incorporating hysteresis, cross-border externalities and moral hazard, is deployed to illustrate the optimal responses of the CFSF to these shocks. A well-designed CFSF has the potential to improving welfare not only in crisis-hit member countries, but also in the union as a whole.

CESifo Category
Fiscal Policy, Macroeconomics and Growth
Keywords: subsidiarity principle, shocks, fiscal stabilization, transfers, European Union, corona
JEL Classification: E320, E620, E630