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Monetary Giant with Many Fiscal Dwarfs

2015. július 14. - Kevin Jackson

Martin Feldstein is currently an economics professor at Harvard and was formerly the chief economic advisor to President Ronald Reagan. In addition to his long list of achievements, Feldstein has been arguing against the creation of the European Union long before it ever happened. In an article that appeared in The Economist on June 13th, 1992, he wrote: “The main conclusion is that the now popular idea that the European Central Bank will cope with union-wide shocks while national governments will stabilize domestic shocks is not always the most efficient assignment choice, and it is inconsistent with the imposition of a fiscal deficit ceiling on member countries.”

Feldstein further argued that the only way a union can work is that if economic shocks can be evenly distributed across member states. In other words, in a perfect world there are symmetric spill-overs. The troubles in the E.U. have been nothing but asymmetric as the economic gap between countries like Germany and Greece has never been wider. In a perfect world, labor is mobile and there should never be high unemployment as an equilibrium is always instantly established. The problem is that there have always been significant disparities between European countries and perhaps the creation of the E.U. was a disaster waiting to happen. Martin Feldstein argued this point  back in 1992.

The Greeks have just come to terms with the E.U. and their creditors and will once again try to restore fiscal order. They will try really hard to stimulate their economy, while simultaneously trying to honor all of the commitments it has made to it citizens. They will try really hard to collect taxes from people who have already lost a significant portion of their wealth and promise to create jobs for the young and old who are out of work. The real question remains: "Is there any hope for Greece or is the E.U. just buying itself more time until they are better handle a member state exit?"

Roberto Tamborini is an economist who coined the term “Monetary Giant with Many Fiscal Dwarfs.” He made this statement in 2002 as the E.U. celebrated its formation and ten years after Feldstein published his article in The Economist. I guess it is too easy to say that the writing has always been on the wall, but I cannot honestly see how individual E.U. nations will be able to survive global economic shocks and support a standard of living that is uniquely European. For me, it is just a matter of time before E.U. is forced to break apart due to the structural imbalances that have existed since post W.W. II. Until then, let’s just hope that the Greeks can honor their commitments and show the world that there really is a way to fix a sinking ship.

For more information on Monetary Giants and Fiscal Dwarfs, please refer to the following articles:


One "monetary giant" with many "fiscal dwarfs": The efficiency of macroeconomicstabilization policies in the European Monetary Union: Roberto Tamborini, Discussion Paper No. 4, 2002,

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