December 20, 2010
Even while affirming their commitment to do “whatever is required” to combat the eurozone crisis last week, European leaders failed to address the question that has bedevilled the euro since before its birth: is monetary union without fiscal union – the current arrangement – either feasible or desirable in the long run? Their reticence guarantees that the market’s testing of their policy intentions will continue unabated.
Doubts that a single currency can work without centralised fiscal powers were sounded long before the euro’s launch. But at least in the countries that joined, euro enthusiasts drowned out the voices aiming (in their view) to spoil the party. But the sceptics have gained strength from a crisis often seen as vindicating the early naysayers. Those tempted by conspiracy theories even see the alleged incompatibility of currency union with national fiscal sovereignty as part of a plan – to entrap an unsuspecting European public into a fiscal union it never wanted.
Whether the euro can work without a fiscal union depends on what is meant by fiscal union and which other policy choices it is politically possible for leaders to make.