Redistribution and Risk Sharing in EMU

This study analyses possibilities for independent national redistribution and risk sharing policy in EMU by reviewing literature on fiscal federalism. The currency union will not directly affect the national welfare policy. It might increase mobility of people and capital, which would tighten tax competition and cause pressures for harmonising. The main effect on national policy comes from losing the national monetary policy and from pressures for fiscal policy coordination. For countries which are especially prone to asymmetric shocks the strict budget constraints of the stability pact might cause problem in national policy. There is also one chapter about Finland as an example of a small open welfare economy, which has traditionally used active exchange rate policy as an instrument of adjustment. Special emphasis is placed on the unique agreement between employees and employers on 'buffer funds' for stabilising labour costs and employment in case of external economic shocks.