This paper theoretically investigates the impact of European integration on employment by
developing a new-keynesian model where fiscal policy effectively reduces firms’ market
power. Stronger product market competition is shown to reduce the marginal ability of
governments to improve employment through public consumption. As competition crowds out
fiscal spending, the positive impact of markets integration on employment is weakened.
Moreover, in a context where national goods’ demand becomes “global”, the marginal benefit
for each national fiscal authority of increasing public consumption is lower than the marginal
benefit for the community. This result stresses one source of coordination failure within the
EMU.
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