Though a currency union makes the monetary policy independence of member countries impossible, it is not obvious that the same is true of fiscal policies.37 If a well-developed financial market exists on which governments can borrow, they need not resort to monetary financing; hence it is sometimes argued that even independent and divergent fiscal policies will not disturb monetary conditions. However, the danger exists that governments would accumulate so much debt that they would be unable to service it or to borrow further at acceptable cost, and that as a result they would put pressure on the central bank to monetize that debt or to finance deficits through money creation. In these circumstances, the central bank could not credibly commit itself to price stability, and the private sector, recognizing this, would incorporate inflation into its expectations. Labor would demand higher wage settlements, and purchasers of government debt would demand higher interest rates to be compensated for expected inflation. The advantages of a stable currency would be lost.

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