The steady-state budget constraint and the integration of european financial markets: an arithmetical exercise

This paper calculates the effect of European financial integration on the long-run sustainable budgetary situations of individual countries and highlights the adjustments required in order to conform with "integrated" and "domestic" steady-state scenarios. In the relative tightening/loosening of the steady-state budget constraint in comparing scenarios, the change in the real rates of interest is shown to play a central role, while the effect of the change in the reserve system variables is a minor one and that of the change in the rates of inflation is only significant in the highest inflation countries. Different factors are at play in the relative tightening/loosening of the steady-state budge constraint in small northern and southern countries. The tightening/loosening of the steady-state budget constraint between the "domestic" and "integrated" scenarios has implications for the comparative conduct of fiscal policy, in particular, taxation.