Factor mobility and fiscal policy in the EU: policy issues and analytical approaches

This paper outlines some of the implications of factor market integration for fiscal policy in the countries of the EU and for the EU itself. It draws particular attention to the dynamic dimensions of factor market integration, and identifies some of the many issues for further research on these topics. The paper begins by recapitulating some of the basic principles that have emerged from the existing literature on fiscal competition. It then describes recent trends in international migration and capital movements. The evidence suggests that the countries of Europe are experiencing inter-regional movements of labor and capital of significant magnitude, but that these movements are far from instantaneous. Labor and capital markets are clearly linked across regions, but there appear to be obstacles to very rapid adjustments of labor and capital stocks, suggesting that labor and capital are mobile but imperfectly so.