The Eurozone and the Dollarzone

I’m sure this was covered before, either by PGL at this very blog, or by someone like Brad Setser, either of whom knows a lot more about this than I do. But for whatever reason, in the middle of the night I was thinking about the stories that seem to crop up now and again about the Euro, in particular how some of the big countries (especially Italy) have gotten themselves into a bit of trouble. Since they no longer have separate monetary policy from the rest of the EU, they can’t use looser monetary policy and/or a devaluation to spur the economy.

In the past, if, say, Italian workers were becoming less productive relative to Irish workers, the currency would eventually devalue, reducing the costs of hiring Italian workers. This can’t happen any more. The problem is such that every so often there are articles in the financial newspapers about how eventually Italy might be booted from the union.

But I was thinking… this is similar to the situation with the dollar. Its been a common currency in the US for a long time, and for much of that time, some parts of the country have surged ahead (California, New England) and some have fallen behind. (Note to reader Don Marek – its also similar to the Bretton Woods gold standard – when most countries peg their currency to the dollar, and the dollar is pegged to gold, nobody has flexibility any more.)

So why did the dollar last so long whereas there has already talk of problems with the Euro (to Don Marek again – and why did the Bretton Woods system last about thirty years) for years? (Note… the fact that the dollar is tanking relative to the Euro doesn’t mean the Euro doesn’t have problems.) Off the top of my head…

1. In the US, the states that have prospered subsidize the others. There is the famous transfer of federal funds from blue states to red states. That’s hard to pull off if, as with Italy in Euroland, the problem is with one of the very big states.
2. Migration is relatively easy in the US compared to within Europe. Sure, a Portuguese citizenship lets you live in Germany, but it doesn’t mean you speak German, or that you will feel at home.
3. The same problems did exist in the dollar zone, but its been a while, things have worked out, and I have forgotten them.
4. There is no real problem in the Euro zone.

Which of these is it? Or is there another option? What is your opinion? (I lean toward 1 and 2.)