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On May 31st, the European Commission issued a reflection paper on the deepening of the Economic and Monetary Union calling for a far-reaching debate on reforms to the economic governance architecture of the euro area. The Commission’s document also states that a fiscal stabilisation function for the euro area could be envisaged in the longer run (2020-25) in addition to the deepening of private risk-sharing mechanisms.

The present paper offers a timely contribution to the important debate on the design of a possible fiscal stabilisation function for the euro area by assessing the stabilising effects and the nature of the US federal tax-transfer system to shocks. We question the mainstream argument for a euro area ‘fiscal capacity’, which revolves around the need to “dampen the effects of asymmetric shocks”, and argue that there are important lessons to be derived from US federal fiscal risk-sharing institutions, but that they are not what policymakers typically envisage.

Cinzia Alcidi is Senior Research Fellow and Head of the Economic Policy Unit and Gilles Thirion is Researcher at CEPS. This paper was originally prepared in the framework of the FIRSTRUN project, which is financially supported by the European Commission’s Horizon 2020 Programme.