Fixing the Eurozone Setup: On Viable Forms of Fiscal Union

There is a growing consensus that the eurozone configuration requires substantial reforms, but member countries have vastly different views on the issues that should be addressed and the specific reforms to be implemented. A number of limited and sometimes unbalanced packages concerning fiscal coordination, the Banking Union and a European Monetary Fund have yet to be completed and a more ambitious effort concerning a Fiscal Union is still in the stage of a laborious political debate. In this paper, we focus on reform proposals that can deliver effective results by discussing different forms of Fiscal Union and looking for one that is more likely to survive the conflicting point of views of the different eurozone members. Finding that an unemployment insurance scheme is the more plausible short-term step to bolster the current reform efforts, we discuss different alternative implementation strategies for such a scheme. We conclude that a scheme with direct payments to the unemployed is the most effective approach to equip the eurozone with central shock absorption capacity while taking into account political feasibility, and that scientific literature provides appropriate backstops and conditionalities to prevent moral hazard.