A TRANsfER MEchANIsM As A sTAbIlIzATION TOOl IN ThE EMU

3 DIW Economic Bulletin 1.2013 With the crisis in the euro area, the issue of the institutional structure of the monetary union has gained in significance. One problem with regard to the longer-term stability of the euro area is the absence of mechanisms to adequately absorb asymmetric cyclical shocks in the individual member states. Such an instrument is essential in order to be able to implement a single monetary policy suitable for all countries. Consequently, the European Monetary Union should be equipped with an economic transfer mechanism—for instance, in the form of common unemployment insurance. This is not an instrument to solve the current crisis but rather to provide more stability to the European Monetary Union in the medium and long term. In historical terms, the European Monetary Union (EMU) is a unique currency area. The member states have committed to a common monetary policy, while fiscal policy remains the responsibility of the individual governments. As a result, monetary and exchange rate policy cannot be used as a stabilizing tool in the event of asymmetric shocks in the individual member states. Only national fiscal policy remains as a tool for stabilizing economic f luctuations.1 The experience of recent years shows that national fiscal policy does not fulfill this function sufficiently. A lack of fiscal discipline and high levels of public debt since the banking crisis of 2008/09 or the bursting of the housing bubble have resulted in governments pursuing pro-cyclical fiscal policies that amplify rather than dampen business cycles at national level.2