Pop quiz, hotshot. You're the prime minister of Spain. It's 2005. Unemployment is at a two-decades low. Housing prices are booming. You're worried that they might be booming too much. You want to put a brake on the economy. You also hope to build up a rainy day fund for any possible bust. How big a budget surplus should you run?
If you've been following the biggest economic debate the past half century, you might think this question is besides the point. Haven't we learned that monetary policy, not fiscal policy, is the best way to manage the economy -- with the possible exception of when short-term rates are at zero? We have. But the irony of Europe is that a defective currency union reverses this logic. When one central bank sets interest rates for different countries with different economic needs and different budgets, it's fiscal policy that matters most. There's no other way to stabilize the economy.
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