This post from Henry Kaspar is in German, but Google Translate renders it pretty cogently and it makes the important point that hard money policies from the European Central Bank threaten the viability of the overall monetary union. He makes the point with reference to an economic history article (PDF) by Marc Flandreau, Jacques Le Chacheux, and Frederic Zumer that’s conveniently in English, “Stability without a pact? Lessons from the European gold standard 1880-1914”:
One clear lesson is that debts matter. Another basic finding is that the stability of the European gold standard depended on the underlying price trend. Deflation prior to 1895 resulted in rising public debt burdens, Which forced some countries to leave the system. Once gold was discovered and deflation gave way to inflation, real interest service fell, debt grew more slowly and a high degree of convergence allowed most countries to return to gold. For EMU, this result implies that stability will hinge on the ECB’s policy not being too restrictive. Other lessons concern the fragility of institutions in the face of deep public finance difficulties, the risks for the single market of leaving out countries that have not fully converged, and the existence of a virtuous cycle including low real interest rates, fast growth and debt decumulation.
Under the gold standard, countries didn’t really conduct monetary policy. Instead it just “happened” as gold was or wasn’t discovered in the ground. So monetary policy shifted from uniformly tight to uniformly loose when massive gold reserves were found in South Africa. This lets us see that the tight monetary union worked fairly well under inflationary conditions, but that during the deflationary period the more indebted countries (yes: Italy, Spain, Portugal, and Greece) couldn’t stay in the system.