Munich Personal RePEc Archive

Some Fiscal Budgetary Consequences of EMU

Kirrane, Chris (1990): Some Fiscal Budgetary Consequences of EMU.

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Abstract

Economic and monetary unification of Europe has major implications for fiscal policy. As monetary union is characterised by the existence of a uniform real interest rate, the consequences of fiscal policies will no longer be based on exchange rate adjustments, but on changes in absolute price levels; all member countries will bear the effects on real interest rates. As long as there are price rigidities, it will be necessary to compensate for the loss of the exchange rate instrument, it will be necessary to coordinate budgetary policies in order to avoid instability and non-existent actions. But contrary to the recommendations of the Delors report, this does not generally imply the need to strengthen ‘budgetary discipline’ by setting ceilings on Member States' fiscal deficits. These aspects, together with the risks of tax competition between countries and the generalisation of externalities that should go hand in hand with the increasing integration of markets, argue in favour of a substantial increase in the Community budget.

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