Abstract

The chapter begins with a description of the imperfect character of the EMU, one of the main components of the European Economic Constitution, and the crisis-induced mechanisms to address any ensuing external, asymmetrical shocks. In absence of monetary policy instruments at the national level, fiscal policies can become overwhelmed if country-specific shocks are very large and not well catered for by the shock-absorbing capacity of the economy and the financial sector. Hence, risk-sharing in the EMU takes place through two channels: the market channel and the fiscal channel. In particular, the second section examines the preventive and corrective fiscal rules, the third elaborates on the role that the European Stability Mechanism and the European Central Bank play in providing fiscal relief to Member States in need, and the fourth section analyses how the Banking Union is aimed to absorb fiscal imbalances rather than reinforce them. We then conclude.