Conventional wisdom holds that the eurozone problem is the adoption of a common monetary policy without a common fiscal policy. But a common fiscal policy is not necessary for a successful monetary union. No such agreement existed under the gold standard. Nor does one exist now between the US and the several countries – including China – which have pegged their exchange rate to the dollar.
Nor is a common fiscal policy sufficient for a successful monetary union. Neither the European Commission nor the German government can put tanks on the streets of Athens. The only mechanism the European Union has, or can have, for imposing fiscal discipline in any country or region is to refuse further payments to that country or region. This is precisely the mechanism that has been deployed, with limited success.
Monetary union implies that areas with different economic conditions, growth rates and price expectations are no longer forced by markets to make compensating adjustments through currency devaluation. They must instead impose appropriate local policies towards wage growth, taxation and public spending. Differences in incomes, growth and price movements are inevitable in a union that stretches from Aran to Athens and from Lapland to Lisbon. No institutional arrangements can change these facts.