Emu: An Evaluation of the Asymmetric Shock Problem

Abstract

Economic and Monetary Union (EMU) has a unique set up: while the monetary policy is centralised at the Union-level, the fiscal policies are left to the member states within the limitations of the Stability and Growth Pact. The Commission argues that within time EMU would constitute an optimum currency area, and further centralisation of fiscal policies, thus, is not needed. Fiscal federalism literature, on the other hand argues that stabilisation functions should be centralised, since no individual would be able to deal with an asymmetric shock without harming another member. Therefore the fiscal policy centralisation should accompany the monetary centralisation.This study tries to assess whether the EMU has become more symmetric over time. By proposing a centralised insurance against asymmetric shock, and linking the trend of the stabilisation provided by the insurance scheme to the ability of EMU to absorb asymmetric shocks, the results of the study suggests that EMU has become more symmetric over time.