An Analysis Of Economic Asymmetry AndFiscal Robustness Of EMU

Economic integration, taking either the form of globalization or regional integration, has been the trend of change since World War II. The European Economic and Monetary Union, as the leading representative of trend of regional integration, has embarked on a new period of fiscal integration, which is deemed as natural development succeeding economic and monetary integration. Yet continued integration in Economic and Monetary Union has exposed deeper defects, especially the incoordination of economic asymmetry and fiscal robustness, that increases the instability of the Euro zone.In contrast to the concepts of optimum currency areas and desirable currency areas, this dissertation discusses currency areas from the perspective of feasibility, which focuses on the possibility of formation and continuation of currency areas rather than optimum standards, or weighing costs and benefits of currency areas. This dissertation proposes that the feasibility of currency areas lies at whether economic asymmetry and fiscal robustness match the other. The formation and continuation of feasible currency areas, to a great extent, is the precondition of realizing desirable currency areas and eventually optimum currency areas. Therefore, to analyze the feasibility of currency areas, we should first understand economic asymmetry, which includes shock asymmetry and response asymmetry, then understand currency areas’ fiscal robustness, which can be defined from the dimensions of fiscal regulation and fiscal capability.Taking 12 countries from Euro zone as the example, this dissertation analyzes economic asymmetry and fiscal robustness of the European Economic and Monetary Union. In the analysis of economic asymmetry, SVAR model is used to decompose shocks into supply shocks and demand shocks, thus providing deeper understanding of nature and correlation of shocks. Based on SVAR model, this dissertation finds that response patterns of 12 countries exhibit apparent difference and strong inertia along time, indicating significant disparities among economies among countries, possibly because economic and social systems of member countries have been far away from realm of integration.This dissertation summarizes fiscal regulation and fiscal capacity of the union, and evaluates fiscal robustness of 12 countries through decomposing changes of surplus ratio. Here increasing fiscal robustness is proposed as the key to enhancing feasibility of currency areas. Improvement of fiscal robustness can be achieved by better fiscal regulation or more fiscal capacity. Better fiscal regulation means that member states have more fiscal autonomy to moderate macroeconomic cycles while retaining sufficient fiscal sustainability with fiscal disciplines, at the levels of both the union and member states. More fiscal capacity for the union lever would require greater share of budgetary resource and corresponding power to adjust regional disparity among different countries, alleviating economic asymmetry of currency areas and reducing operating risk and cost of currency areas, which could be preventive to fiscal crisis usually caused by economic downturn of some countries.