Monetary Unions

Monetary unions are interesting and a subject on which I haven't learned enough about. From my understanding a country enters into the union and takes on that currency. I don't totally understand the incentive for entering into these things in the first place. It seems like all they really do is limit what a country can do from a monetary and fiscal perspective. Paul Krugman looks into the case of Spain, a relatively fiscally responsible nation in the EU. He mentions that a Monetary Union is difficult to maintain if you don't also have fiscal and labor market integration across countries. Here's the basic story:

"Spain is an object lesson in the problems of having monetary union without fiscal and labor market integration. First, there was a huge boom in Spain, largely driven by a housing bubble — and financed by capital outflows from Germany. This boom pulled up Spanish wages. Then the bubble burst, leaving Spanish labor overpriced relative to Germany and France, and precipitating a surge in unemployment. It also led to large Spanish budget deficits, mainly because of collapsing revenue but also due to efforts to limit the rise in unemployment.

If Spain had its own currency, this would be a good time to devalue; but it doesn’t.

On the other hand, if Spain were like Florida, its problems wouldn’t be as severe. The budget deficit wouldn’t be as large, because social insurance payments would be coming from Brussels, just as Social Security and Medicare come from Washington. And there would be a safety valve for unemployment, as many workers would migrate to regions with better prospects."

Krugman has more of the same here... He mentions that even skeptics of the euro monetary union didn't foresee problems being this bad, which makes some sense. Nobody thought we were going to have exogenous shocks in the housing markets to quite the extent that we did. But given the shocks, the outcomes in Europe certainly aren't surprising. Spain is paralyzed at the moment, (as a Greece and Ireland, but for slightly different reasons,) almost powerless to do anything to keep themselves from falling into a deflationary spiral, which, as it is, represents the only way to bring them back to some kind of equilibrium with the rest of the EU.