EMU and the Size of the Public Sector

The purpose of this paper is to examine whether membership in the EMU increases the size of the public sector. The estimation of the effect of the EMU on the ratio of government outlays to GDP is based on synthetic counterfactuals. It is found that the average size of the public sector in the EMU countries is higher than what it would have been without the monetary unification. The estimated effects are particularly strong in countries that have had the most unstable governments and the highest level of political competition in the eurozone. These findings support the hypothesis that political distortions of short-sighted governments that produce excessive deficits already under monetary autonomy may be worsened by accession to the monetary union.