By putting severe restrictions on the free movement of capital to block arbitrage. Such restrictions were in place just a few decades ago throughout Europe, still are in place in many emerging countries. So there is no fundamental reason that prevents such restrictions. At the time, they were rather counter-productive because they were unilaterally decided by each country with short-sighted fiscal and political aims.

A uniform non-arbitrage taxation on capital flows between regions and business sectors (similar in implementation to the Tobin tax: add an extra spread by means of tax, to loan payments by one sector/region to a party in a more favored sector), agreed at EC level could enable preferential rates to underdeveloped areas, or eco/ethical businesses while controlling bubbles elsewhere, as was suggested in a previous diary by techno. It would eliminate the potential for "asymmetric shock" that was studied and dismissed before the EMU.

Pierre

To Pierre's comment I would also add that beyond levers of monetary policy one can influence via fiscal levers. Unfortunately, these fiscal levers, once available to EU member states, have been largely stripped of them by the Growth and Stability Pact as well as numerous EU directives related to tax harmonization, convergence of market regulation and so forth, with no satisfatory set of EU-wide, federal and (at least eventually) transparent, democratic mechanisms to take their place.

Lest anyone gather from this that I'd advocate going back to the days when Italy's finance ministry printed money to pay for government program and that France run a 6% of GDP deficit,  this is not at all the case. In fact, the GSP doesn't go far enough - why can't member states run balanced budgets? But we cannot expect this to be economically effective if no EU-wide institutions assume the role of economic growth and development oversight and promotion that sovereign member-state governments once assumed.

To give an idea, I was trying to get at this in the first diary I ever posted here, essentially the same inter-regional economic levers employed by FDR back when government actually worked in the United States (citing Galbraith et al):

The relevant rigidities are to be found in the thinking of Europe's central authorities on two  levels. First, these authorities are unable, or unwilling, to foster the development of macro-economic policies that  can effectively build Europe's peripheral economies through national programmes of full employment--and that, indeed, once did so in the heyday of national Keynesianism from 1945 to 1970. Second, they have been unwilling to make the vast income transfers, across national lines, that would be required to make rural or service sector or even civil-service life in Spain as attractive as it is in Sweden.

In fact, present European policy is designed to work in just the opposite direction. Through monetary union and the Maastricht treaty, Europe has moved to restrict the autonomy of both monetary and fiscal policies and to impede the achievement of full employment on the national scale. Meanwhile, barriers to migration and resettlement obstruct the citizens of the European periphery from taking full advantage of the more generous social welfare systems to their north.

Anyhow, I understand that enlargement has made this even more politically tricky, as predictably certain elements throughout Europe are even more averse to income transfers to poor Romania and Bulgaria than they were to income transfers to Ireland and Spain in previous decades. And in fact, I believe this is precisely why the English and the Americans, push so hard for enlargement - they baldly want the project of an effective and proserous federal Europe, one of shared sovereignty, to fail.

And, as an aside, the fact that the most effective proponents of the Europe I think we can and should be have been (to my mind overly, but no matter) conservative social democrats like Delors or Prodi tempers my naturally more leftish tendancies, if for no other reason than pragmatism.

This being said, EU-wide institutions do not grow to take the place of the fundamental role that member-state finance ministries played in guiding and spurring economic growth and development, something will have to give.

The Hun is always either at your throat or at your feet. Winston Churchill