The Theory on "Optimal Currency Areas" is at least 50 years old. But somehow the principle insight of this theory did not make it into the collective thinking of key economists and policy makers in Europe. They believe that a currency union like the Eurozone can exist without fiscal transfer mechanisms or sufficient labor mobility.

An optimum currency area is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a common currency. The creation of the euro is often cited as the most recent largest-scale case study of the engineering of an optimum currency area. In theory. The theory of the optimal currency area was pioneered by economist Robert Mundell ("A Theory of Optimum Currency Areas", American Economic Review 51 (1961): 657-665). Credit often goes to Mundell as the originator of the idea, but others point to earlier work done in the area by Abba Lerner. 

The four often cited criteria for a successful currency union are^[5]:

• Labor mobility across the region. The condition is important so that if one region is hit by an unexpected shock (say a hurricane or a government lying about its budget deficit) the regional contraction is mitigated by the movement of labor from low to higher wage regions. In the case of the Eurozone, while capital is quite mobile, labour mobility is relatively low, especially when compared to the U.S. 

• Openness with capital mobility and price and wage flexibility across the region. This is so that the market forces of supply and demand automatically distribute money and goods to where they are needed.

• A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to regions or sectors that have been adversely affected by the first two characteristics. This usually takes the form of taxation redistribution to less developed areas of a country/region. This policy, though theoretically accepted, is politically difficult to implement as the better-off regions rarely give up their revenue easily. Theoretically, Europe has no bail-out clause in the Stability and Growth Pact, meaning that fiscal transfers are not allowed.

• Participant countries have similar business cycles. When one country experiences a boom or recession, other countries in the union are likely to follow. This allows the shared central bank to promote growth in downturns and to contain inflation in booms. 2010 is a great example that highights the downside of this condition. Germany has a booming economy, so the country seeks higher interest rates from the European Central Bank, but the PIIGS are in deep recessions and hope for lower rates. Higher rates would satisfy Germany at the expense of the PIIGS, lower rates would aid the PIIGS but overheat Germany's economy.