Fiscal policy coordination as fiscal federalism: Economic integration, public goods and efficiency in growing economies

The prospects of freer trade and of perfect (or nearly so) financial capital mobility within Western Europe, along with reductions in exchange rate flexibility, have focused attention on the desirability of fiscal policy coordination across national boundaries. Although the European Community is often referred to as a pre-federal union, it is acquiring a resemblance to a federal system. In the absence of international mobility of consumers of the services of public goods, national government autonomy over the level of spending on national public goods with lump-sum taxation alone does not cause problems for allocative efficiency. International mobility imposes severe restrictions on the abilities of national governments to pursue income redistribution. Intergenerational redistribution using deficit-financing of exhaustive public spending streams leads to a need for fiscal policy coordination over all jurisdictions between which high household or factor-owner mobility is possible.