Thomas Sargent used the bully pulpit of the Nobel Prize acceptance speech to tell Europe to follow the US example in the aftermath of the War of Independence and assume the debts of the individual states (2011). Such an assumption of debts was, for Hamilton, “the powerful cement of our union”. Paul de Grauwe has recently stated the case quite simply: “The euro is a currency without a country. To make it sustainable a European country has to be created” (2012).But;
In fact, the fiscal union turned out to be dynamite – rather than cement – because the tariff dispute turned into a constitutional struggle by the 1830s in which southern states claimed that the Constitution was merely a treaty between states and that the southern states could ignore federal laws that they deemed to be unconstitutional. The fiscal mechanism designed to allow servicing of a common liability raises inherently explosive distributional issues.
The fiscal union [of the American states] was also dangerous because it allowed states to recommence their borrowing. As with the dispute over the tariff, this problem became very apparent in the 1830s. As international capital markets developed in the first decades of the nineteenth century, US states used their newfound reputation to borrow on a large scale, and ruined their creditor status fairly quickly as a result.
The eventual solution lay in the adoption of debt restraint or balanced budget laws. At the end of the 19th century, many states set a very low ceiling on permissible state debt, and other states limited indebtedness to a (small) share of total taxation. Only the northern states (New Hampshire, Vermont, Massachusetts, Connecticut and Delaware), which had never really experienced the debt problem, allowed their legislatures to contract unlimited debt. By the early 21st century, such legislation limits state indebtedness in all but one of the 50 states.Cry, Monetary Union! And let lose the dogs of war?