LONDON -- When the euro was being planned some years ago, the austere German central bankers, led by the formidable Hans Tietmeyer, then the Bundesbank chairman, were adamant about one thing: The currency would work only if every member state adhered rigidly to the Stability Pact -- the set of rules that were intended to govern each state's fiscal behavior, such as budgetary policy, public expenditures, taxation and borrowing.
It was reasoned that while the new European Central Bank would look after monetary policy throughout the European Union, stiff rules would be needed to control budgetary policy. Otherwise, the big spenders would just freeload on the system, forcing other member states to cut back while they just borrowed more and more.
If the EU had been a single state of course this would be an internal problem, just as it is inside existing countries where individual finance ministers control government spending tightly to prevent an explosion of borrowing that leads to either higher interest rates, monetary inflation or both.