Economic and Monetary Union and the European Community Budget

By MacDougall, Donald | National Institute Economic Review, May 1992 | Go to article overview

Economic and Monetary Union and the European Community Budget


MacDougall, Donald, National Institute Economic Review


In 1977 the European Commission published the report of a Study Group which it had set up, under my Chairmanship, on 'The Role of Public Finance in European Integration'. This is sometimes called the 'MacDougall Report', which does scant justice to my six European colleagues, our two consultants from the United States and Australia, and our excellent Secretariat.

It was based to a considerable extent on a study of eight existing economic and monetary unions--five federations (the United States, Canada, West Germany, Switzerland, Australia) and three unitary states (France, Italy and the United Kingdom). Although it was most unlikely that the European Community would be anything like so fully integrated for many years to come, we believed that our analysis would help to throw light on how its public finance activities might be expanded and improved over a shorter period of time.

The Report is still quite frequently referred to, but there is sometimes a little confusion about what it actually said. It may therefore be useful, before going on to discuss its implications for the future of European integration, to summarise some of our relevant findings and conclusions (to which I shall add, in parentheses, a few comments by way of amplification or justification).

1. Public expenditure by the members of the Community (then nine in number) was about 45 per cent of the GDP of the area as a whole. Expenditure by the Community was 0.7 per cent. In the federal countries we studied, public expenditure by the Federal Government, as distinct from that at lower levels, was around 20-25 per cent of GDP.

2. Per capita incomes were at least as unequal(1) between the nine member states of the Community, and between the 72 regions we distinguished in the Community, as they were on average between the various regions of the countries we studied, even before allowing for the equalising effects of public expenditure and taxation. (The subsequent admission of Spain, Greece and Portugal will have tended to reinforce this conclusion.)

3. In the countries studied, public expenditure and taxation reduced regional inequalities in per capita incomes by, on average, about 40 per cent so that, after allowing for the effects of public finance--which helped poorer regions at the expense of richer ones--there was much less geographical inequality within the existing economic unions than there was within the Community, whose budget, besides being very small, had a weak redistributive effect per ECU spent and received.

4. In unitary states a large part of the total redistribution between regions arose automatically and was in a sense 'invisible'; high incomes went with high tax payments and low incomes with relatively high receipts of centrally provided services and transfer payments. In federal countries, inter-governmental grants and tax-sharing played a much more important part. These achieved relatively large redistributive results with relatively small amounts of federal expenditure, because the net inter-regional transfers were to a smaller extent than in the unitary countries the result of differences between large gross payments in opposite directions.

5. As well as redistributing income regionally on a continuing basis, public finance in existing EMUs played a major role in cushioning short-term fluctuations. For example, we reckoned that one-half to twothirds of a loss of income in a region due to a fall in its external sales was automatically offset through lower payments of taxes and insurance contributions to the centre and higher receipts of unemployment and other benefits. There was no such mechanism in operation on any significant scale between member countries of the Community.

6. Even with the powerful regional effects of public finance just described, several countries had only with difficulty been able to avoid intolerable tensions arising from regional disparities in levels of employment, living standards and rates of growth.

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