Abstract:
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.