To harmonize or to compete? That's not the question

Neoclassical public economists stress economic distortions induced by differential taxation and therefore favour harmonization; political economists focus on political distortions and therefore reject harmonization. However, policy choices on the possibility frontier between economic and political distortions tend to be biased: economic advisers, politicians and interest groups typically favour harmonization. Harmonization is, moreover, undermined by incentives to re-establish tax differences. Both activities prevent the possibility frontier from being simply a menu of choice. Popular referenda and functional, overlapping, competing jurisdictions (FOCJs) are institutions able to reduce political distortions and to shift the possibility frontier.     

The cyclical impact of EU cohesion policy in fast growing EU countries

Most of the newly acceded central and east European EU countries are among the main beneficiaries of EU Cohesion Policy. The main objective of this policy is to improve the long-term growth and employment prospects of the supported regions, and thereby to support convergence towards higher levels of per capita income. In the short run, however, EU Cohesion Policy may at times amplify macroeconomic challenges for supported countries. In periods of a downturn of the economy it can have a stabilising impact. During periods of unsustainably fast economic growth, however, its short-term demand effects may contribute to internal and/or external macroeconomic imbalances. Economic policymakers should thus ensure that EU Cohesion Policy enhances long-term productivity, while avoiding, in times of overheating, an increased risk of unsustainable developments as a result of the additional demand stimulus from EU Cohesion Policy. The opinions expressed in this article are those of the authors and do not necessarily reflect those of the European Central Bank. The authors are grateful to Martin Bijsterbosch, Gesa Miehe-Nordmeyer, Ad van Riet, Philipp Rother and Desom Weller for their helpful comments.