Fiscal Harmonization or Fiscal Union in Eurozone?

Fiscal Harmonization or Fiscal Union in Eurozone?

Durmuş Çağrı Yıldırım, Seyfettin Erdoğan, Ayfer Gedikli
DOI: 10.4018/978-1-4666-7288-8.ch007
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The aftermath of the financial crisis and following debt crisis that the European Monetary Union faced in 2008 required re-examining the architecture of the Euro area and a cost/benefit assessment of the monetary union. When one examines the causes of the crises, one sees that EMU's financial architecture stands out. Although there is a common monetary policy application authority within EMU, local economies can carry on with their own autonomous fiscal policies without any effective control mechanisms. Problems with structures caused arguments about EMU's architecture. It is clear that there is a need for changes in EMU's architecture in short term for euro to survive. The objective of this chapter is to present some suggestions to the policy makers and to point out the problems with the architecture and mechanisms needed to be brought into being in order EMU to survive with the ongoing crisis.
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Optimum Currency Area

The theoretical framework of monetary union is comprised by Optimum Currency Area Theory. Optimum Currency Area constitutes a theoretical framework to identify the common currency while presenting the characteristics of the countries that will generate the monetary union. In this context, optimum currency area tries to reveal the optimum size of the currency area by researching costs paid and gains earned by the countries that prefer to use the common currency.

Key Terms in this Chapter

Fiscal policy: General policy design of government’s revenue and spending policies. Taxation is the main revenue source of government. To achieve low inflation, low unemployment and sustainable development, government decides revenue and spending policies, i.e. fiscal policies.

Banking Union: After the 2008 Global Crisis, to have a safer and more stable financial sector for the single market, the European Union founded the Banking Union. The Banking Union is the transfer of responsibilities for banking policy from the national level to the EU level.

European Monetary Union: Having a single/common currency in Euro Area countries which is monitored and controlled by European Central Bank. Monetary Union is considered as one of the most important steps of political union.

Fiscal Equalisation: Fiscal equalization system is the way to form a common income sharing mechanism without abstention of EMU countries from tax collecting in short term. In this system, the countries collect taxes nationally and the income is distributed between the countries.

Financial Integration: Financial integration as a related concept with financial markets defines the integration of financial markets either regionally or globally.

Fiscal Union: It is defined as public expenses of union countries, acting in harmony with other countries as having a single budget in terms of fiscal issues such as taxation and risk sharing activities.

Fiscal Transfer Mechanism: See Fiscal Equalisation.

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