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CEF.UP - ECO Seminar - Euro Area: looking inside and outside

March 04th, 2020 | 1:00 -2:30 p.m. | Room 626

Fiscal Governance in the EMU: What Kind of Union?
Juergen von Hagen
University of Bonn

Political debates over the fiscal framework of the European Monetary Union have focused on two issues, dealing with asymmetric shocks and maintaining a high degree of fiscal discipline. After reviewing the development of the EMU fiscal framework, we argue that transfers dealing with asymmetric shocks are less important than commonly argued. Fiscal discipline is the critical issue. Three stark alternatives exist, a fiscal union, a debt union with decentralized authority, and a monetary union with fiscal freedom and a sovereign default framework. The debt union is not sustainable. Choosing between fiscal union and fiscal freedom is a decision between collective coercion combined with individual safety on the one hand and the ability to choose one’s own best policies combined with individual responsibility on the other.

Whom or what do flexible exchange rates insulate?
Keith Kuester
University of Bonn (joint work with Giancarlo Corsetti, Gernot J. Müller and Sebastian Schmidt)

We reassess whether flexible exchange rates provide insulation against foreign shocks.
First, we establish new evidence for 20 countries in the periphery of the euro area. We find robust evidence for spillovers from euro-area shocks to real activity in the periphery, irrespective of whether the exchange rate is pegged or flexible vis-a-vis the euro. Second, we provide a rationale why the exchange-rate regime appears to have little bearing on international spillovers. We employ a New Keynesian open economy model, in which both exports and imports are priced in euros. Flexible exchange rates could insulate domestic activity from external shocks. The key to understanding the empirical facts is that countries do not choose to do so, however. We show that if floaters pursue inflation targeting (be it of consumer or producer prices), they prevent the domestic expenditure switching that would insulate activity from shocks. The global move toward inflation targeting may mask the insulation potential of flexible exchange rates.

To confirm your attendance please fill in your lunch voucher here, no later than Tuesday, March 3th at 3:00pm. If you want to skip the snack please send an email to

We are looking forward to seeing you there.
Kind regards,
Ana Paula Ribeiro and Pedro Gil


“Cef.up is financed by  Portuguese public funds through FCT - Fundação para a Ciência  e a Tecnologia, I.P., in the framework of the project UID/ECO/04105/2019

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