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How effective is Europe’s fiscal union policy?

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The Euro zone crisis is going on since a long time. Europe and the neighbouring countries have been trying to overcome this crisis but to its dismay the situation hasn’t improved yet. Analysts’ have proposed various theories and there have been several debates regarding the implementation of certain fiscal reforms that would stabilize the situation, but to no avail. The best known outcome of Euro’s failure was “no bail out, no exit and no default”. Many observers of the Euro zone crisis are thus praying for the intervention from someone who can lead a movement for a robust fiscal union.

In order to achieve the euro stabilization target, the economic leaders’ have proposed certain changes which include:

  1. Budget Balancing: The basic designed was propounded by Alexander Hamilton who basically wanted to establish the credibility of the US government as a borrower and to constitute a ‘modern’ financial system. This idea of federal bailout is an action which was already implemented after the War of 1812 and which had made a positive impact on the US economy post war.
  2. Debt Brakes: These are the constitutional rules or framework laws proposed by the European Council in the December 2011 summit. However, these laws are written with the US constitutional design as the base. The difference between the two scenarios can be categorized into:
  • There is a huge difference between the US constitution and the situation in Euro zone.  In case of the US constitution, debt breaks were subjugated under local ownership and enforcement which was more effective than the imposition of mandates by the central government, particularly in the context of credible no bail-out norms. Also the rules that are centrally mandated are more likely to prove to be more brittle than those adopted in a decentralised fashion.
  • In contrary to the Euro zone level, where recapitalization of the fiscal costs of bank is the prime responsibility of the nation in particular and where the banking regulation is in its initial phase the balance-budget rules are too early to be implemented; on the other hand, the banking system stabilization in the US is primary the responsibility of the federal government.  The introduction of debt brakes threatens to collide with the need for member states to mount to large scale rescues of their banking systems.
  • The benefit the US debt brakes had over Euro zone debt brakes impositions are that the US federal debt was supported by the full system of federal powers. The federal budget implemented in the US also helped the national economy to stabilise in a counter cyclical fashion. The same cannot be hold true to the Euro zone countries as these stabilisers may play a greater role in certain national economies of Europe, while the other countries might not be able to contain the counter cyclical stabilization.

The establishment of fiscal union would require massive changes like the persistence of internal imbalances that includes cross-country imbalances which may get exasperated by the friction in the financial sector.

Fiscal union adopted by the US
The federal government of the US adopted a very robust fiscal strategy with the capacity of predicated to state debt, issuance of federal debt, and to access its own tax revenue. These prerequisites determine the balance-budget provisions. The Euro zone is planning to adopt these provisions to reassure the ECB and the smooth functioning of its operations. The aim towards the creation of a common capacity for countercyclical action which includes a stronger central budget, issuance of euro bonds, with a backing of tax authority, can be achieved by a stronger political inclination along with robust institutions supporting this monetary union.

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