Browsing by Author "Vainio, Topias"

This thesis provides a comprehensive review of the extent a Fiscal Union can address the inherent weaknesses of insufficient policy coordination, limited risk-sharing mechanisms and incomplete Banking Union within the Economic and Monetary Union (EMU). Economic concerns over the functioning of the EMU have persisted since its establishment, but the COVID-19 pandemic has highlighted these intrinsic weaknesses. This paper focuses on a Fiscal Union primarily as an instrument of stabilisation given that the COVID-19 pandemic and earlier crises have underlined that the EMU is particularly vulnerable to economic shocks causing asymmetric effects across the union. This thesis compares the EMU currency area with the US currency area using the Optimum Currency Area (OCA) theory and finds that with less labour and capital mobility, the EMU would significantly benefit from a Fiscal Union to address arising imbalances. Furthermore, many of the intrinsic weaknesses of the EMU relate directly to the absence of fiscal integration given a single monetary policy. Striving towards a Fiscal Union for the euro area would help address the inherent weaknesses by improving monetary-fiscal policy coordination, providing better risk-sharing mechanisms and incentivising private markets to contribute effectively to risk-sharing. This paper finds that a Fiscal Union is more suitable acting as a stabilising function to counteract the asymmetric effects of aggregate shocks but less so in ensuring economic convergence across the union. Appropriate next steps are ensuring a fiscal backstop for the Banking Union, improving the monitoring of funds distributed by the Recovery and Resilience Facility (RRF), and stronger enforcement of fiscal rules set by the Stability and Growth Pact (SGP). Establishing a permanent crisis management mechanism similar to the NGEU would improve the union's readiness for future shocks. Without further progress to improve the resilience of the EMU, the union continues to face existential risk. Progress towards improving the competitiveness and resilience of the EMU cannot be categorically split into features relating to fiscal, economic, financial, and political integration, as these all affect each other. The interdependence of these aspects emphasises that on its own, a Fiscal Union cannot overcome the inherent weaknesses of the EMU. Therefore, it is fundamental to recognise that development toward a more resilient EMU requires progress within all these aspects.