Fiscal integration and growth stimulation in Europe

With the current sovereign debt crisis, the incompleteness of economic integration in the Economic and Monetary Union (EMU) has become patent leading to an intense debate among academics and policy makers. Most of the debate focuses on the needs to strengthen fiscal rules and to restore fiscal imbalances through austerity measures which weigh on growth prospects. In this paper we analyse current economic developments within the euro area through the lens of general equilibrium theory. We address two issues (international sharing of macroeconomics risks and coordinated growth stimulation) which are essential to guarantee the sustainability of the EMU. More specifically, we propose mechanisms to cope with intergenerational and interregional risks while focusing on (fiscally neutral) investments meeting social needs and apt to break the vicious circle between fiscal imbalances and stagnation.