Stability of EMU and prospects for fiscal union

The Euro Yearbook 2015 will be presented in Brussels at a Bruegel event on 9 March 2016.

How can Europe make progress with EMU and move towards a Fiscal Union?

Euro Yearbook 2015 is a project of the Spanish Financial Studies Foundation and ICO Foundation. This edition focuses on fiscal union, banking union and Euro Area governance. After the presentation, there will be a debate on the topic of the fiscal union, and the ICO CFO, Fernando Navarrete, will be among the panellists. 

Progress with EMU to date has left a bitter-sweet taste. While major advances have certainly been made (strengthening the European Central Bank’s role as a federal institution; achieving a return to growth, albeit muted; implementing a model of European banking supervision; agreeing on a Resolution Mechanism; and, above all, successfully navigating the Greek crisis), we have also seen unmitigated failures, such as persistent concerns over the mutualisation of bank debt, continuous delays with the proposed deposit guarantee scheme, plus endless debates on the merits of a fiscal union.

This event featured a presentation around these issues as well as a panel discussion about the issue of Fiscal Union.


The event began with a presentation of the Euro Yearbook 2015, an analysis of progress made so far towards the completion of European Monetary Union (EMU).

Firstly, Fernando Fernández offered an overview of the report. His central argument was that the European project is incomplete, due to a lack of political consensus and adequate policy instruments at the EU level. For the EMU to evolve into a more optimal currency area, the first step would be to finalise the banking union by establishing a European deposit insurance scheme. From the fiscal standpoint, he argued that Europe does not have an instrument of fiscal risk-sharing across euro area countries, which may lead to systemic consequences when a country is hit by an idiosyncratic shock.

José Leandro joined the discussion by arguing that even though member states in a common currency area have to develop their own mechanisms to absorb shocks individually (flexible labour markets, competitive goods, etc), some shocks “need to be shared”. The financial crisis ended up being overwhelming for countries like Spain or Ireland, even though they initially had fiscal capacity to let automatic stabilisers work. His policy recommendation to solve large individual shocks would be to finish capital and banking union and to enhance financial integration. His claim is that the private sector would then be prepared to absorb a larger fraction of any individual shock, implying a lower negative effect on aggregate demand. Moreover, Fernando Navarette argued that completing banking union would have a fiscal stabilisation effect. The costs of saving banks would be distributed, leaving more fiscal space in the countries experiencing an economic and financial shock.

The Q+A raised further interesting questions. One guest asked whether a capital markets union is needed in the presence of a perfect banking union. José Leandro argued that these two instruments are not substitutes but complement each other. A final question was whether the EU should focus on reducing risk or should implement a risk-sharing mechanism across euro area countries. In response it was argued that risk-sharing implies a de facto risk reduction.

Event notes by Jaume Marti Romero, research intern


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