Fiscal Policy Coordination in EMU

HM Treasury invited Paul Masson to revisit his 1996 paper ‘Fiscal dimensions of EMU’,with particular reference to the quotation: “Though the question of whether the Maastricht criteria are appropriate entrance requirements for monetary union will eventually go away, the issue of how EU countries’ fiscal policies will interact in EMU will not. As I have argued above, the use of fiscal policies for stabilisation purposes will be limited in coming decades, by the size of existing debt stocks, by demographic trends, and, to some extent, by the Maastricht debt and deficit criteria themselves. This, and evidence about its greater effectiveness when spread over a wider economic area, suggest that an EU-wide stabilisation policy acting as insurance for regional shocks may be desirable if a number of questions can be resolved. To my mind, it seems inevitable in any case that there will be pressure to move away from independent fiscal policies toward some system where national sovereignty in this area is more limited.”

1. I have not changed my views concerning the need to harmonize and coordinate fiscal policies within a monetary union like EMU, but I now think that what is more likely to occur in the next few decades is harmonization of tax and benefit policies and increased spending on education, research and infrastructure in the EU budget. EU-wide externalities argue for changes in this direction. For instance, harmonization of tax and benefit policies and EU involvement in education will be desirable to support other aspects of European integration such as the Single Market, which aims to eliminate barriers to the mobility of goods and factors of production, including labor. As for stabilization policies, changes are likely to lead to greater coordination, rather than the mechanical convergence embodied in the Stability and Growth Pact.

2. My recent views are expressed in a chapter of a book, “Fiscal Policy and Growth in the Context of European Integration”. I review the various aspects of fiscal policy, and assess whether they are likely to be taken over by community-level institutions or lead to greater coordination among countries. The size of government spending by governments makes any expansion of the role of government by introducing EU-wide spending programs undesirable (unless national programs are reduced), but a case can be made for a supranational role where there are externalities that cannot be corrected or exploited by national fiscal policies. As an example of the latter, I argue that pressures will increasingly develop for standardizing social programs, in particular pensions, to facilitate mobility. In my view, increasing numbers of Europeans will take advantage of their right to migrate among European countries, but the fact that this reduces their retirement income by forcing them to participate in at least two incompatible national plans will be viewed as increasingly unjust and inefficient. Hence, there will be pressures on their governments to harmonize. While the principle of subsidiarity has been invoked to argue that social policies are, and should remain, the province of national governments, since not coordinating them has harmful effects on other aspects of European integration, they will be viewed as increasingly a shared responsibility and some limited role for the European Commission will, in my view, be accepted.

3. Another area where there are cross-border externalities is education, since with factor mobility the gains to education will not necessarily accrue to the country undertaking the spending. In addition, there are advantages to creating common curricula so that students can more easily transfer to other countries’ systems, use degrees to gain professional qualifications, and to facilitate the mobility of university teachers. This may lead to some community involvement in spending on education and in providing norms for countries’ schools, but the case is more compelling at the post-secondary level, and EU involvement is likely to be restricted to this.

4. Education is closely allied to research, and as the new theories of endogenous growth argue convincingly, there are externalities in research (those doing innovations cannot completely appropriate the gains that result) which also may argue for a supranational role within Europe. Already the EU has some joint efforts (CERN, etc.) and provides subsidies for research activities. This may expand, but the literature on innovation suggests that the public sector should be cautious in getting involved, and support private sector efforts rather than dictating a line of research.

5. A final area in which cross-border externalities exist is communication and transportation infrastructure, to which the EU budget already devotes some funds, and this may increase.