This paper investigates whether fiscal-deficit harmonization is a necessary condition for the efficient functioning of a common
market. Using a two-country DSGE model with cross-border factor mobility, trade in goods and services, and endogenous risk
premia, we simulate asymmetric deficit shocks under alternative institutional arrangements. Empirical calibration draws on the
experience of the EU, MERCOSUR and the East African Community. We find that, absent a fully-fledged fiscal union, uncoordinated
deficits generate significant beggar-thy-neighbour effects: relative risk premia widen, capital reallocates toward the more prudent
jurisdiction, and temporary demand spill-overs amplify output volatility in the high-deficit country. These externalities, however, are

largely neutralized when three instruments are in place: (i) a jointly guaranteed safe asset that prevents sovereign-bond market
segmentation, (ii) cyclically-adjusted deficit ceilings enforced by a supranational fiscal council, and (iii) an automatic transfer
mechanism that cushions asymmetric shocks. When all three instruments operate, harmonization of headline deficits yields only
marginal welfare gains relative to the status-quo heterogeneity. The results suggest that the policy debate should shift from
numerical convergence of deficits to the design of robust risk-sharing and enforcement mechanisms.