1European Fiscal Policy Coordination and the Persistent Myth of Stabilization

The asymmetric constitution of European macroeconomic governance is well known. Monetary policy is made at the European level, while fiscal policy remains the purview of the member states. The pathologies this creates are also well known. Macroeconomic policy is uncoordinated at the European level and fiscal policy is uncoordinated across the member states. The result is almost universally regarded as sub-optimal (Tsoukalis 2005: 161). Better coordination of monetary and fiscal policy at the European level could improve aggregate demand management for those countries that have adopted the euro taken as a group (the euro-zone). Better coordination of national fiscal policies could also enhance predictability (and reduce negative externalities) in a context of high interdependence and so improve national achievement of national objectives with national fiscal instruments. Alas, the prospects for better coordination are slim. The prospects for a first-best alternative–the creation of common European fiscal institutions–are even slimmer. Despite repeated calls (particularly in France) for the creation of a fiscal counterpart to the European Central Bank, the willingness of the member states to transfer significant tax authority to the European Union is virtually non-existent. Even more modest proposals to create thin fiscal institutions designed to stabilize income performance across membe