Reflections on the fiscal implications of a common currency

Willem H. Buiter · Kenneth Kletzer

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European Monetary and Fiscal Policies Global Financial Crisis and Policies Fiscal Policies and Political Economy

Abstract

Introduction: sense and nonsense in the Delors Report The much increased likelihood of significant advances in European monetary integrations – and even of European monetary union in the mediumterm future – has not surprisingly shifted the spotlight onto the need for coordination of fiscal policies as a complement to monetary unification. The Delors Report (1989) made much of the fiscal implications of the movement towards a greater degree of rigidity of nominal exchange rates among participants in the exchange rate arrangements of the European Monetary System (EMS). A monetary union would require a single monetary policy and responsibility for the formulation of this policy would consequently have to be vested in one decision-making body. In the economic field a wide range of decisions would remain the preserve of national and regional authorities. However, given their potential impact on the overall domestic and external economic situation of the Community and their implications for the conduct of a common monetary policy, such decisions would have to be placed within an agreed macro-economic framework and be subject to binding procedures and rules. This would permit the determination of an overall policy stance for the Community as a whole, avoid unsustainable differences between individual member countries in public sector borrowing requirements and place binding constraints on the size and the financing of budget deficits. (Delors Report, 1989, p. 18) No deficits, please There are frequent further references in the Delors Report to the need to control national public sector deficits and in a number of places the Report becomes rather specific about the constraints to be imposed on national budgetary policy.

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1985The Optimal Degree of Commitment to an Intermediate Monetary Target 1954Two Concepts of External Economies 1985A Guide to Public Sector Debt and Deficits 1989Report on economic and monetary union in the European Community.2017Rational Expectations and Inflation 1990Tax Harmonization and Tax Competition in Europe 1989Policy Cooperation Among Benevolent Governments May Be Undesirable 1981Time Preference and International Lending and Borrowing in an Overlapping-Generations Model

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