Fiscal Policy and Growth in the Context of European Integration

IMF Working Papers, July 1, 2000

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The paper considers whether a supranational fiscal policy in Europe is needed, and, if so, what responsibilities it should undertake.
The literature on endogenous growth and the principle of subsidiarity suggest limits on supranational fiscal responsibilities to externalities or economies of scale not captured at the national level.
Potential supranational spending areas identified include research and development, transportation or knowledge networks, and harmonization of social security designed to enhance labor mobility.
The paper finds that EU-wide stabilization policy or enhanced EU redistribution does not seem justified.

Supranational fiscal policy should be limited to addressing externalities or economies of scale not internalized by national fiscal policies.
Spending areas appropriate for EU-level involvement:
- Research and development
- Transportation networks
- Knowledge networks
- Harmonization of social security to enhance labor mobility
EU-wide stabilization policy is not supported by the analysis.
Enhanced EU redistribution is not supported by the analysis.

Restrict supranational fiscal action to activities with clear cross-border externalities or economies of scale.
Prioritize EU-level spending on infrastructure and knowledge public goods (research and development; transportation; knowledge networks).
Pursue harmonization of social security provisions to facilitate labor mobility across EU countries.
Avoid establishing EU-wide stabilization mechanisms or expanding EU redistribution based on the arguments in the paper.

Fiscal Policy and Growth in the Context of European Integration - WP/00/133
- Fiscal Policy and Growth in the Context of European Integration - WP/00/133 (Markdown version)
- Fiscal Policy and Growth in the Context of European Integration - WP/00/133 (PDF)