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From Wikipedia, the free encyclopedia

Fiscal union is the integration of the fiscal policy of nations or states. Under fiscal union decisions about the collection and expenditure of taxes are taken by common institutions, shared by the participating governments. A fiscal union does not imply the centralisation of spending and tax decisions at the supranational level. Centralisation of these decisions would open up not only the possibility of inherent risk sharing through the supranational tax and transfer system but also economic stabilisation through debt management at the supranational level. Proper management would reduce the effects of asymmetric shocks that would be shared both with other countries and with future generations. [1]Fiscal union also implies that the debt would be financed not by individual countries but by a common bond.[2]

For further European integration as a next step forward was proposed fiscal union. For all member countries, spendings and tax rates would be set by central European authority. There would be Eurobond instead of individual country bonds that would finance Euro debt.[2]

Stages of economic integration around the World (each country colored according to the most integrated form that it participates with):   Economic and monetary union (CSME/EC$, EU/€, Switzerland–Liechtenstein/CHF)   Economic union (CSME, EU, EAEU, MERCOSUR, GCC, SICA)   Customs and monetary union (CEMAC/XAF, UEMOA/XOF)   Common market (EEA–Switzerland, ASEAN[dubious  – discuss])   Customs union (CAN, EAC, EUCU, SACU)   Multilateral Free Trade Area (CEFTA, CISFTA, COMESA, CPTPP, DCFTA, EFTA, GAFTA, NAFTA, SAFTA, AANZFTA, PAFTA, SADCFTA) vte
Stages of economic integration around the World (each country colored according to the most integrated form that it participates with):
  Economic and monetary union (CSME/EC$, EU/, Switzerland–Liechtenstein/CHF)
  Common market (EEA–Switzerland, ASEAN[dubious ])

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  • ✪ What is a Fiscal Union?
  • ✪ Banking and fiscal union
  • ✪ Common Fiscal Policy in the EU: The Sooner the Better

Transcription

Welcome to the Investors Trading Academy talking glossary of financial terms and events. Our word of the day is "FISCAL UNION" Fiscal unity is centered on integrated taxation and spending. The eurozone is a monetary but not fiscal union, meaning its 17 members maintain their own taxation policies and also raise money to fund them. Fiscal union involves individual countries sharing the same common budget. It means spending and tax levels would be taken by a central fiscal authority. Fiscal union also means debt would be financed by a common bond rather than individual countries. Fiscal union is proposed as a step for further European integration. It would mean a central European authority would set spending and tax rates for all member countries. Rather than individual country bonds, there would be a common Eurobond for financing Euro debt. The United States is a fiscal union of different American states. Some states receive net inflows of money from federal government; others put more in than they get out. For example New Mexico receives a net fiscal flow (federal spending -- federal taxes) of over 250% of its GDP. States like Delaware, New York and Illinois are net creditors. At the moment, members of the Eurozone are responsible for their own. Individual countries also need to raise sufficient funds to meet their borrowing requirements.

Contents

European Union

It is often proposed that the European Union should adopt a form of fiscal union. Most member states of the EU participate in [Economic and Monetary Union of the European Union|economic and monetary union]] (EMU), based on the euro currency, but most decisions about taxes and spending remain at the national level. Therefore, although the European Union has a monetary union, it does not have a fiscal union.

Laruffa describes the European economic governance as "an economic constitution made by rules, policies and institutional practices aimed to establish the a fiscal-monetary policy mix, competition rules, financial markets regulations, the single market and international trade policies. When the euro was created, monetary policy was established as a centralized policy, while fiscal policy remained in the hands of national authorities under some institutional arrangements for sound budgetary policy and an ex-ante control by the European Commission."[3]

Control over fiscal policy is considered central to national sovereignty, and in the world today there is no substantial fiscal union between independent nations. However the EU has certain limited fiscal powers. It has a role in deciding the level of VAT (consumption taxes) and tariffs on external trade. It also spends a budget of many billions of euros. There is furthermore a Stability and Growth Pact (SGP) among members of the Eurozone (common currency area) intended to co-ordinate the fiscal policies of member states. Under the SGP, member states report their economic plans to the European Commission and explain how they are to achieve medium-term budgetary objectives. Then the Commission evaluates these plans and the report is sent to the Economic and Financial Committee for comments. Finally, the Council of Economic and Finance Ministers decides by qualified majority whether to accept the Commission's recommendation to the member state or to rewrite the text. However, under the SGP, no countries have ever been fined for not meeting the objectives and the effort to punish France and Germany in 2003 was not fulfilled. Therefore, after the Eurozone crisis, some people in Europe felt the need for a new union with more powerful fiscal influence among member states.

On 2 March 2012, all members of the European Union, except the Czech Republic and the United Kingdom, signed the European Fiscal Compact, which was ratified on 1 April 2014. The treaty is designed to implement stricter caps on government spending and borrowing, including automatic sanctions for countries breaking the rules. The results of the treaty on the Eurozone economy, are yet to be known.[4]

With the crisis of the euro area deepening, more and more attention has been put by scholars on completing the fiscal side of the monetary union. Marzinotto, Sapir and Guntram Wolff (2011), for example, were among the first to call for proper fiscal resources at the federal level that would allow to stabilize the financial system and if necessary help individual countries (What kind of fiscal union?).

Advantages of fiscal union

A common currency and standard interest rate are difficult to manage without a fiscal union that provides similar borrowing costs. The European debt crisis demonstrated that monetary union cannot function well without fiscal union. The macro-economic imbalances cannot be managed without a standard federal structure that organises spending and revenue collection in the Eurozone. Otherwise, asymmetric shocks will affect the stability of the euro. Thus, the combination of national fiscal policy with the European monetary system is unsustainable. A fiscal union under proper democratic control run by a European Union finance ministry, if these are compatible, would provide the Union with stability and strength, sharing credit risk through the imposition of strict fiscal policy.[5]

A European fiscal union¸ with strong institutions would be able to manage the EU economy as a whole more appropriately. The benefits from this union would be seen both in the short and in the long term. In case of a future crisis, the likelihood ration of its appearance would decrease, and in case of occurrence it would be less severe.[6] The emergence of fiscal union will ensure more creditability towards developing European countries because risks will be shared among all the state members. Weaker Euro countries would benefit from sharing the same Euro bonds as more creditworthy countries.[5] Also, a centralised fiscal policy will introduce more tools for a particular policy implementation rather than national policies. By transferring some fiscal responsibilities to the centre, it would offset the decrease of some stabilisation capacity at the country level  resulted from active control of national budgets.[6]

See also

References

  1. ^ Beetsma, Roel M. W. J.; Bovenberg, A. Lans (2001). "The Optimality of a Monetary Union without a Fiscal Union". Journal of Money, Credit and Banking. 33 (2): 179–204. doi:10.2307/2673880. ISSN 0022-2879. JSTOR 2673880.
  2. ^ a b "Fiscal Union Explained - Economics Help". Economics Help. Retrieved 2019-04-28.
  3. ^ Laruffa Matteo, The European Economic Governance: Problems and Proposals for Institutional Innovations, Winning Paper for the Annual Meeting Progressive Economy, Brussels, 6 March 2014.
  4. ^ "Statement By The Euro Area Heads Of State Or Government" (PDF). Retrieved 2011-12-13.
  5. ^ a b "Arguments for and against fiscal union". Debating Europe. Retrieved 2019-04-28.
  6. ^ a b Allard, Céline; Brooks, Petya Koeva; Bluedorn, Mr John C.; Bornhorst, Fabian; Ohnsorge, Franziska; Puh, Mrs Katharine M. Christopherson (2013-09-25). Toward A Fiscal Union for the Euro Area. International Monetary Fund. ISBN 9781484325186.
This page was last edited on 6 June 2019, at 21:56
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