Reflections on the Fiscal Implications of a Common Currency

This paper studies the likely consequences of monetary unification among the EC members for the conduct of fiscal policy in the EC countries (and by an emerging Federal European Fiscal Authority). Among the conclusions are the following. If the Eurofed is to be independent, the external exchange rate policy of the EC should be assigned to the Eurofed and not to the fiscal authorities. Effective (as opposed to formal) independence of the Eurofed is going to be very difficult to achieve. Coordinated upper ceilings on national public sector financial deficits are unnecessary and probably undesirable. Coordination of national public expenditure policies, tax policies and borrowing policies is in principle desirable for both efficiency and distributional reasons. The empirical models required for a serious welfare analysis of fiscal policy coordination do not yet exi.