Monetary Union and Fiscal Policy Discipline

The possible emergence of a monetary union in Europe raises a number of new and difficult questions. A central concern is the implication for fiscal policy-making. Fiscal policy assumes an increased importance once the monetary policy instrument is lost. The Delors Report has suggested that there may be a bias towards less discipline. This paper, which focuses on the longer run, is a preliminary attempt at sorting out the issues. It considers how both the incentives and the constraints on fiscal policy may be affected. There is no Delors-type, clear-cut conclusion emerging. The most obvious conclusion is that eventually a monetary union requires some degree of fiscal federalism.