A Remedy for Fiscal Externalities in a Monetary Union

Abstract

Conflict over the appropriate degree of policy centralization on the supranational level has been a major theme throughout the history of European integration, from the early beginnings in the 1950s to the present (Wallace 1996). At present, and as a corollary of the move to a European Monetary Union, the field of fiscal policy is one of the hottest topics on the radar screens of politicians and academic commentators. Whereas advocates of a stronger European government argue the case for a move towards genuine taxing powers on the European level, others are more reluctant and even question the politically less ambitious stability pact with its rules for the conduct of national fiscal policies (see, e.g., Economist 2001). The question of sovereignty is always of preeminent concern: fears of an erosion of the nation-state stand against hopes to regain political control by means of a European layer of policymaking in an increasingly interdependent world economy.