Clearly, these conditions did not - and do not - hold for the euro area. After all, the euro zone is characterised by significant rigidities in labour and product markets, the absence of a significant centralised fiscal transfer mechanism, and national economies with unique institutional and economic features - a set of circumstances that results in a high incidence and impact of asymmetric shocks.
In these circumstances, so the argument goes, such shocks are likely to lead to widening price differentials so that a common nominal interest rate in the monetary union results in different real interest rates among countries. For member countries with relatively-strong domestic demand and a higher-than-average inflation rate, the lower real interest rate fuels domestic demand and national inflation.