Budgetary Aspects of Economic and Monetary Integration in Europe

This paper analyses some of the implications of the proposals of the Delors Committee for monetary and fiscal policies in Europe. The merits of an independent ESCB are discussed. We offer four reasons why, in the absence of European coordination of budgetary policies, the size of the public sector may be too small relative to the first-best outcome: first, with an independent central bank seigniorage revenues will only accrue through real growth, so that taxes must be raised and exhaustive public spending must be cut; second, an economic union means that spending by an individual treasury benefits the other treasuries, so that there is an inadequate provision of public goods; third, international competition drives tax rates down and leaves fewer funds for the public sector; fourth, an appreciation of the real exchange rate of Europe has the nature of a public good, hence the level of exhaustive public spending tends to be too low.