The ongoing eurozone crisis has prompted many to argue that monetary union without
fiscal union was bound to fail.
fiscal union was bound to fail.
As fiscal union would require some form of political union, those who are pessimistic about the latter’s prospects are now calling for a significant shrinkage of the eurozone or an outright dissolution of the euro. Others are arguing that a fiscal straightjacket in the form of a fiscal compact is the only option. This paper argues that the eurozone can still function as a viable currency zone without a fiscal union or fiscal straightjacket if the nature of the crisis is correctly understood and one simple constraint is introduced into the government bond markets of member countries.
