A Way Out of the Euro Crisis: Fiscal Transfers Are Indispensable for Sustainability in a Union with Heterogeneous Members

Harashima, Taiji (2015): A Way Out of the Euro Crisis: Fiscal Transfers Are Indispensable for Sustainability in a Union with Heterogeneous Members.

Abstract

This paper theoretically examines a way out of the euro crisis based on a model of inflation acceleration and differentials. The conclusion is that, unless more advantaged states (e.g., Germany) systematically transfer a necessary amount of money to less advantaged states (e.g., Greece) in every period, the euro area cannot necessarily reach equilibrium where all heterogeneous states achieve optimality. In this case, fiscal transfers are not a tool of risk-sharing or a buffer against asymmetric shocks; rather, they are indispensable for escaping from indefinite disparity acceleration within a union consisting of heterogeneous member states. Such fiscal transfers should not be viewed as alms for the less advantaged states but as a right these states should justly assert. The model indicates that the lack of a fiscal transfer mechanism inevitably generates inflation differentials and huge current account imbalances among member states. As a result, although relatively more advantaged member states obtain “extra” benefits from the euro, less advantaged member states eventually lose most of their capital ownership and their economies are devastated.

• Item Type: MPRA Paper
• Language: English
• Keywords: The euro; Monetary union; Inflation; Inflation differential; Current account imbalance; Fiscal transfer; Time preference
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions; N - Economic History > N1 - Macroeconomics and Monetary Economics ; Industrial Structure ; Growth ; Fluctuations > N14 - Europe: 1913-; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O52 - Europe

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