A couple of places where I disagree with Krugman: ...as the earlier Ireland-Nevada comparison shows, the United States works as a currency union in large part

A couple of places where I disagree with Krugman: ...as the earlier Ireland-Nevada comparison shows, the United States works as a currency union in large part precisely because it is also a transfer union, in which states that haven’t gone bust support those that have. I disagree strongly with his Ireland-Nevada comparison because the US Federal government is currently bailing out homeowners and banks who got into trouble as a result of Federal policy. The fact that the US housing bubble was most severe in California, Florida, and Nevada has little to do with the state and local government policies there and more to do with geography and migration patterns related to demographics. In Europe, the Germans are basically being asked to bail out governments who got into trouble as a result of malfeasance or bad policy that had nothing to do with the German government. Until the Feds start explicitly bailing out states like California or New Jersey (which could certainly still happen), it seems to me as if they are really just bailing out themselves. Since these bonds (E-bonds) would be guaranteed by the European Union as a whole, they would offer a way for troubled economies to avoid vicious circles of falling confidence and rising borrowing costs. They would also offer a way for these economies to take advantage of lower interest rates to continue to act irresponsibly, which seems a likely scenario given the history of this situation. Political institutions (and people) being what they are, it seems like extreme amounts of pain is likely to be the only effective tool to get them to actually move away from spendthrift policies. The Euro would probably be in a better position if it came with an explicit requirement that the bonds of member countries could not be purchased by the Union itself or by other Union members, which might have reduced the appetite for the bailout trade that major banks were so happy to engage in (although such guarantees can certainly be circumvented, as the Argentine example shows).