BRUSSELS – It is an old debate, but tensions within the euro area have revived it: can a monetary union survive without some form of fiscal federalism?
This issue is of persistent concern for investors worldwide. Holders of European government bonds believed that they knew what they had bought. Sure, there was no such thing as a eurozone sovereign security. But German, French, Spanish, and even Greek bonds all carried roughly the same interest rate, so they were deemed equivalent.
Investors now recognize that they did not really understand what these bonds represented – that is, the institutional construct behind the European currency. And if the global financial crisis has taught us anything, it is this: when you do not understand a financial product, you should not buy it. But if investors actually take that lesson to heart, the European crisis will be far from over.
So, should Europe embrace fiscal federalism in order to strengthen the eurozone and restore investor confidence? The problem is that fiscal federalism means different things to different people.