What is a key challenge for fiscal policy within a currency union?

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The central bank manages the interest rates on long-term government bonds issued by union member states.Member governments might incur substantial budget deficits, which could reduce private sector investment.Member countries may accumulate large budget deficits that increase borrowing costs for other members by raising interest rates on their government bonds.Generating sufficient tax income to fund the currency union's operations is problematic.

Explanation

In a currency union, when member governments run significant budget deficits, it can lead to higher interest rates on government bonds, which negatively affects other member countries by increasing their borrowing costs. This interdependence creates fiscal policy challenges unique to currency unions.