Fiscal Policy in a Currency Union – Instruments and Implementation

Abstract

If Sweden becomes member of the European currency union, the conditions for fiscal policy will change. The stabilization policy objectives will, however, hardly change with a membership. At the same time it is not clear if the need for stabilizing the Swedish economy will increase or decrease. National fiscal policy will, however, have to carry a bigger burden than before in stabilization policy as there no longer will exist national monetary and exchange rate policy. Fiscal policy will also be more effective in affecting real variables such as production and employment. Counteracting forces such as a flexible exchange rate and a domestic interest rate do not exist any longer. Fiscal policy will, at the same time, meet new and changed formal and economic restrictions. As member of the currency union we will face sanctions if our fiscal policy does not keep within the limits for the public sector’s net lending and consolidated gross debt that apply within the EU. Increased mobility of tax bases and tax competition are examples of economic restrictions that may become stricter. The fiscal policy instruments and institutions will need to be reformed. Our conclusion is that fiscal policy will not be very much affected if Sweden becomes a member of the currency union. The pressure, to do what we anyway should do, will increase however. The paper finishes with a fiscal policy agenda with twelve items.

Keywords: fiscal policy, convergence criteria, economic and monetary union, currency union, policy instruments, policy implementation

JEL Classification: E6, F3, H6