Creating a Sustainable EMU: A Proposal for a Semi-Automatic Stabilisation Mechanism

Abstract

The persistence of asymmetric shocks affecting the Economic and Monetary Union (EMU), established within the European Union (EU), necessitates a consideration of an expanded role for fiscal policy stabilisation. Having examined principles for fiscal policy assignment and EMU's impact upon economic policy flexibility, the paper develops a semiautomatic stabilisation model dependant upon the output cost of unemployment for individual member states. The distributional impact is estimated via a simulation of how the system would have operated by reference to a time period encompassing a full economic cycle and the previous two recessionary episodes, namely 1982-1996. Conclusions emphasise the importance of the method of finance, the difficulty in securing consensus around a design and the desirability for a complementary structural programme.