Proponents of the "Euro" often cite the gold standard era from 1879 to 1914 as demonstrating the benefits of a common currency. But the gold standard also had its costs. The period was characterized by declining prices from 1879 to 1896, rising prices thereafter, and sharp fluctuations within each period, especially severe in the 1890s. The standard was viable only because governments were small (spending in the neighborhood of 10 per cent of the national income rather than 50 or more per cent as now), prices and wages were highly flexible, and the public was willing to tolerate, or had no way to moderate, wide swings in output and employment. Take away the rose-colored glasses and it was hardly a period or a system to emulate. Not sure if he is correct here. The pre-WW1 gold standard was a good system. He sees deflation as a negative, but their is no evidence that deflation is negative when productivity is growing and prices/wages are not expected to grow. To be sure, deflation now would be negative, but back then there is no evidence that is was. Reworked data by the prime economic historians show this. The 'sharp flunctions' are also not correct, or maybe its correct that they were 'sharp' however they were not deep or long. Most of them were caused by a horrible banking system, not be the gold standard itself. Other countries with better bankings (for example Canada) did have far less problems. I would call it highly flexible but maybe more flexible then now. Seams to me the problem is expectations and not actual flexibility...
An Optimum Currency Area, a region that would maximize economic benefit by sharing a common currency, thus subscribing to the governing body's monetary policy. Since it's usually a free floating economy, the exchange rate also becomes a tool for the policy body. In the case of countries though, some argue and we see this with Greece, this forces a country to give up its monetary policy and 'sovereignty according to some and instead rely on fiscal policy to maintain the BOP accounts. They no longer can depreciate their currency to improve advantage in exports to help a deficit and/risk capital outflows from the country. As far as I know though, and it might be only for fixed exchange rate economies, but this one economist named Rudi Dornbusch came up with the overshooting exchange rate model saying that manipulating the exchange rate can be difficult to achieve the intended goal because of the volatile nature of the exchange rate system. I also remember the higher risk a country, the more issues that can arise and Greece with corruption isn't exactly a model example. It doesn't even necessarily have to be a joint group of countries. Some economists have proposed OCA regions for the U.S and Canada with the idea that broad policy goals intended to help one area one hurt another areas as badly. It catch on because you can imagine how Americans on the state independence reacted to that one. The thing with the Euro and Mundell called this failing with Greece joining was first off, they 'worked their books' to get in after several attempts and it wasn't really an open secret. In his paper where he coined the OCA, he says for it to work, there needs open fiscal transfer within the union or it can lead to instability in peripheral members. If your mobility of capital (the BP curve in the IS-LM-BP model) is immobile (a vertical line if you took economics or international finance) within the internal region, then the external valuation of the currency won't perform the stabilization function that's required. If anyone remembers more about this then feel free to add on, and here's the paper if you want to read it. I won't lie, it's a dry read if economics or finance aren't your thing.
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