Does the Euro Zone Really Need a Common Budget? Challenges of an Incomplete EMU

Abstract

The implementation of a monetary union in Europe, to take full advantage of the Single Market’s potential benefits, has not hitherto delivered the expected results. On the contrary, the euro area has been afflicted by many troubles, including anemic growth, unemployment, and inequality. Many blame the euro’s defective design, and especially its incapacity to promote economic convergence and provide adjustment and stabilization mechanisms. Others blame fiscal indiscipline by some of its members. The latter view prevailed when shaping the austerity policies imposed on the countries more affected by the financial and sovereign debt crises, intensifying an economic recession with dramatic social consequences. As a result, citizens’ distrust in the European Union’s institutions grew, along with support for nationalistic political forces opposing the European integration project. This chapter assesses one of the main deficiencies of the euro’s governance model – lack of automatic stabilization – and discusses proposals to overcome it.