Nobel Prize Lecture and the European Return of Hamilton

The “Fiscal Compact” signed by 25 Member States on March the 2^nd has been welcomed by many as the proof that Europeans are obsessed with fiscal discipline. Since the beginning of the year, more and more articles drawing comparisons between the US after the War for Independence back in the 1780s and the current situation in Europe have been published.

Randall Henning and Martin Kessler do it for a Bruegel essay. In their conclusions they call for a unified “bank regulation and (…) a common fiscal pool for restructuring the banking system” in the Eurozone. Harold James, from Princeton University and the European University Institute, also covers this comparison in his project-syndicate post arguing that collective debt-sharing mechanisms along with a “greater degree of political accountability and control at European level” is only long-run viable solution for Europe.

The pioneer in this sense, however, has been the 2011 Nobel Price winner, Thomas John Sargent.  He discussed the topic in his Nobel Price lecture, the transcript of which has been recently released. In his opinion, the US were even more obsessed with fiscal discipline than Europe when they became a federation. Fiscal decisions came before the establishment of a central monetary authority and they rightly did so. The majority of the debt was due to the inability of the central government to raise revenues in order to pay back its creditors. Social security spending was not as developed as today. Even with a small overall budget (2%-3% of GDP), the federal government of US in 1790 was able to allocate 40% of its revenues to servicing its debt.

Alexander Hamilton, the Secretary of Treasury appointed by the Congress in 1989, was able to make creditors believe in the federal government’s capacity to honour its debt by creating a fiscal union. From that moment onwards a series of events, some of them highly painful as the 1840’s crisis, led the US to modify the original federal set-up put in place by Hamilton and adopt their actual system. Now it is time for Europe to find her way out of the crisis. Could a European return of Hamilton be the solution to the whole problem? Or is the crisis a multidimensional phenomenon requiring a more complex strategy to be solved as suggested by Jean Pisani-Ferry’s Bruegel Policy Contribution?