This week’s Economist has a welcome column from Charlemagne on what lessons early American fiscal federalism can offer European leaders during the euro crisis. I wrote my masters dissertation on Hamilton’s fiscal program and have been talking up his example to my European friends ever since. I am kicking myself for not putting my thoughts into writing before this, but would like to take this opportunity to do a detailed response to Charlemagne’s analysis.
One of the important things that Charlemagne hits upon is the moral element of federalization. In America, as in Europe, some states considered themselves virtuous while considering others vicious. There are important differences, though. The American debts had all been incurred together as part of the revolutionary war effort, and while some states had paid their debts off during the interval (1783-1789) others had not; in addition, the debt was owed entirely to foreign creditors in Europe – no state had provided bail-out loans to its neighbors that needed to be paid back. In contrast, the EU crisis revolves around states that have gone into debt to finance consumption independently of a pan-EU effort, and those debts are mostly owed back to intra-EU banks and member states. This is an important difference for framing the nature of the challenge faced by Hamilton and the EU decision-makers today.
Charlemagne also portrays the barrier to EU federalization as a difference in proximity to a revolution and the process of state-building. While Hamilton acted as a legislator consolidating a revolutionary settlement, the EU’s officials are not in an analogous position. This is only half the story. The other half is that the nature of that revolutionary moment was that Hamilton was operating in a larger context of nation-building. The United States was understood to be made up both of partially-sovereign states and of a unitarily sovereign national people. Hamilton saw the assumption of state debts and the creation of national financial infrastructure as a way of binding potentially recalcitrant states to the national government. Such a nation-building project does not exist in Europe. While some European leaders have made rhetorical noises about a single European people, the EU constitution remains a treaty between states, not a national compact. Furthermore, while there is binding implicit in Germany’s proposal for EU-auditing of national budgets, this is to bind those nations to the will of a fellow-state acting as their creditor (Germany), not to the will of a pan-European political entity.
So what can we take away from Charlemagne’s piece? To reiterate, we have similar problems of virtue and vice, although American creditors were outside the US whereas European creditors are within the EU; and Hamilton was nation-building while the Europeans are not.
Setting aside these differences, Hamilton’s actions form an important example because it is relevant for understanding how confederations handle debt. To an extent, it does not matter how the debt was incurred or who it is owed to, but it does matter that the debts of a few posed a problem for the whole. In the 1790s, Hamilton understood that laggard states threatened to create divisions in the union of states that could undermine the unity of the people by fracturing the weak-but-strengthening national government. Today, all Europeans understand that the default of Greece or another eurozone country could create a contagion throughout the entire eurozone and bring down the EU itself.
Hamilton’s response to this problem was not his debt assumption program, nor his national bank, nor his revenue tariff regime. His response was the creation of a federal government capable of enacting those reforms. This is where Charlemagne correctly identifies the Hamiltonian moment as 1789, the year of the seating of the new national government, not 1791 and the enactment of his fiscal-economic programs, although this distinction seems a bit lost on Charlemagne himself.
Hamilton is sometimes described as a neo-monarchist, but really his concern was with having an executive power that was strong enough to be effective. This is currently a problem for the European executive, with its lack of statutory authority or political legitimacy. What is sometimes missed is that Hamilton was also very concerned that Congress have the authority to enact legislation to create stable financial institutions and to enact taxation that would keep those institutions funded. Again, this is a problem for the European Parliament, which does not have the authority to create such legislation or taxation.
For Europe to undergo its Hamiltonian moment, it needs sweeping constitutional change before financial reform can be implemented. This includes the creation of a powerful executive with the authority and political legitimacy to be effective. It also includes greater authority for the European Parliament which must be responsible for writing the laws granting authority to the executive and raising the taxes to make it all work, and for exercising oversight responsibility to ensure performance and accountability. In this respect, Charlemagne misses the mark. Fiscal federalism can only follow on political federalism. Financial institutions, no matter how well-designed, cannot function without antecedent political ones.