Regional Currency Areas in Financial Globalization
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Regional Currency Areas in Financial Globalization

Edited by Patrick Artus, André Cartapanis and Florence Legros

This book is an up-to-date, authoritative and comprehensive analysis of the key issues and challenges facing regional currency area projects in the context of financial globalization. The authors focus on several central issues that emerged during the experiences of the 1990s and 2000s: exchange rate regimes and optimal currency area theory; exchange rate regimes in emerging countries, international capital markets and regional currency areas; EMU and the euro; exchange rate regimes in Central and Eastern Europe, Asia and Latin America; dollarization and the coordination of macroeconomic policies in the presence of regional currency areas.
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Chapter 11: Can the Free Rider Behaviour of Small Countries Offset the Profligacy Spending Bias of Large Countries in the Euro Zone?

Patrick Artus


11. Can the free-rider behaviour of small countries offset the profligacy spending bias of large countries in the euro zone? Patrick Artus INTRODUCTION Manifestly, there is significant tax competition from countries with lower per capita income or from small countries in the euro zone, particularly since the late 1990s. The tax burden is markedly lower in some countries (we take in Figure 11.1 the examples of Spain and Portugal) than in France and Germany. Other countries (Ireland) have steadily lowered their tax burden. Divergences are notably impressive with respect to mandatory welfare contributions (Figure 11.2). They are made possible by the fact that different choices are made about public finances, the role of the state and social welfare. In the countries with a low tax burden, government expenditure is also weak (Figure 11.3). The gap with respect to total government expenditure in 2003 between France and Ireland stood at 17 per cent of GDP. Regarding spending on transfer payments (excluding government investment, Figure 11.4), it stood at 19 per cent of GDP. This policy of cutting the tax burden therefore naturally entails the cost of reducing the amount of government expenditure that can be financed. Clearly, it allows these countries to attract business via foreign direct investment (Figure 11.5), and it is consequently higher in Spain and Portugal than in France and Germany (excluding exceptional operations), far higher in Ireland. This has allowed Spain and Ireland (but not Portugal since 2000) to post more robust growth...

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