“Although the first step to dealing with country-level fiscal problems must be larger national fiscal buffers, the size of shocks and their capacity to freeze up markets suggest a role for a zone-wide insurance mechanism. Fiscal integration can be that mechanism,” IMF economists recommend in their report called Toward a fiscal union for the euro area.
How should governments do it? The IMF suggests they contribute up to €200bn a year to help weaker countries and avoid a systemic crisis. On the contrary, forcing countries to endure repeated rounds of austerity to exit future crises is not the best method, the report says. It would definitely plunge them into a deflation spiral and drag the whole region into a “prolonged period of stagnation.”