Fiscal Union Consensus Design under the Risk of Autarky

Inspired by the current debate over the future of the monetary union in Europe, this paper provides a simple model for the determination of the conditions of survival of the common good, which requires the creation of an effective fiscal union. We highlight the importance of institutional design and varying decision weights for the enlargement of the space for consensus. Our model deepens the discussion of economic risk and political risk in fiscal federalism, and highlights the related roles of country heterogeneity and institutional design in enlarging the scope for cross country fiscal agreements.