What can the Fiscal Systems in the United States and Canada Tell Us about EMU

The Maastricht Treaty on the move towards Economic and Monetary Union (EMU) raises the prospect of the establishment of a common currency area among EC countries without there being a common fiscal policy. Some have argued (notably, Sala-i-Martin and Sachs, 1992) that a community-wide tax and transfer system would be desirable in order to cushion regional shocks, since member countries in a monetary union are not be able to use the exchange rate instrument for that purpose. Indeed, according to those authors, such a federal system may be essential for the survival of EMU. In contrast, the EC currently has no fiscal mechanisms at the Community level for offsetting short-run, or cyclical, fluctuations-such as unemployment insurance or an EC-wide income tax.