Labour Mobility and Fiscal Coordination: Setting Growth Agenda for an Economic Union

Using a human-capital-based growth model, we show the essential role of labour mobility and cross-country tax harmonization in equalizing income levels of countries that start off from different initial income positions. Knowledge spillovers cum labour mobility are the driving forces behind the income level equalization process. In the absence of tax harmonization within an economic union, equality of income levels is not achievable. Coordination of educational subsidies necessary for the internalization of knowledge spillovers may or may not be necessary. These considerations constitute the basis for our efficient growth agenda for an economic union such as the European Union.