Revitalizing the Eurozone without Fiscal Union

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.