In the case of a monetary union among sovereign countries with independent fiscal authorities, the challenge is much bigger. In a monetary union the misbehaviour of one fiscal authority can be offset, at least partially, by the virtuous behaviour of other countries, and the more so the smaller is the economy that misbehaves.
In the face of these free-riding incentives, the non-cooperative behaviour of the member states can generate unsustainable fiscal policies. A large number of papers have highlighted the challenges that come with the establishment of a monetary union among countries with independent fiscal authorities. We know, for example, that if there are no limits to non-monetary policies (e.g.