Medium-run impacts of cross-country transfers through a European Union central budget: a general equilibrium evaluation

The European Union budget mostly redistributes resources across its member countries. Using a multi-country overlapping-generations model covering 14 European countries, I investigate the macroeconomic and labor market impacts of central budget options, each leading to different transfers between governments. Simulations show that one can shift prosperity from country to country, measured as gross domestic product variations, at no efficiency cost nor efficiency gains, as long as the central budget can be operated for free and net recipient countries use the transfers to stimulate economic activity rather than support household income. Failing these conditions, the net deadweight loss caused by the distortionary nature of taxation can reach 5% to 8% of the size of the central budget. Simulations also show that the economic burden of large, one-time asymmetric shocks can be shared by all members of the union with a limited public finance cost. Chief among policy implications is a recommendation for earmarking cross-country transfers.
FIRSTRUN deliverable D3.5, Final Report