Creating a central fiscal agency for the eurozone is one of two solutions suggested in a new staff paper from the IMF. The current (decentralised) system doesn’t work properly, argues the paper, because buffers are not built up in good times; there is insufficient central risk management; and decentralised crisis response is inefficient, increasing the chance of ad hoc bail-outs.
“The case for binding fiscal constraints in a fiscally decentralized monetary union ultimately rests on the fact that all members’ solvency constraints need to be simultaneously satisfied, effectively exposing the credibility of the common currency to fiscal policy mistakes by the weakest performer,” reads the paper.
Centralising European functions has two proposed elements: a central fiscal agency, and the creation of a single European bond. Such moves would require changes to the Treaty on the Functioning of the European Union. Less radical suggestions, requiring minimal legislative changes, include broader sanctions such as financial penalties in good times, and reduced voting rights in bad times.