Single currency, multiple budgets?

The painful process of convergence of national macroeconomic performances in order to comply with the Maastricht treaty criteria is coming to an end and the creation in time of the European single currency, probably with eleven members in the initial stage, is now taken for granted by most analysts and financial market participants. It is thus high time to think about how best to organise economic policy-making within the new euro zone. Although monetary unification will bring benefits for European consumers, there will also be costs, in particular due to increased competition within the single European monetary area. The combination of a single central bank and tax and fiscal competences retained, for the most part, by national governments necessitates an explicit coordination of fiscal policies for at least three reasons: macroeconomic stabilisation in Europe, especially in cases of asymmetric shocks; the "policy mix", i.e. the combination of monetary and fiscal policies at the European, aggregate level, and its influence on the external exchange rate of the euro; and the potential dangers of tax competition and "social dumping" , as national governments, deprived of their power over the exchange rate, may be tempted to gain a competitive advantage by other means. In the wake of monetary unification, the European Union will thus have to invent its own brand of "economic and fiscal federalism" , the recent creation of a "Council of the euro" being but one step in this direction.