DP3296 One Money, but Many Fiscal Policies in Europe: What Are the Consequences?

• Harald Uhlig
20 Apr 2002

This Paper outlines some issues regarding the interaction of independent fiscal authorities and one central bank in the European monetary union. It points out the possibilities for coordination failures, ranging everywhere from potentially excessive deficits and free-riding problems to coordination failures in European fiscal or banking crises. As policy conclusions, some suggestions for institutional improvements are made. In particular, the Growth and Stability Pact needs strengthening rather than weakening. Furthermore, a solution for EMU-wide banking regulation needs to be found.