Written by Chris Barker
Edited by Sarah Mejia
When the political establishment in Europe formulated plans for the European Union in the 1990s, the goal was little more than to establish a common currency for commerce between nations. Today, European governments are finding that such a plan is a far more complicated endeavor than they originally imagined, with more consequences than they anticipated. Most prominently, the strength of one nation’s currency is now impacted directly by the fiscal policy of foreign nations over which individual nations exercise little control. This has created a more intricate international political entanglement between European nations than intended.
In 1790, the United States was a new republic in a state of turmoil. The federal Constitution was newly minted, and states were still struggling to honor their debts from the Revolutionary War. Alexander Hamilton, the Secretary of the Treasury, made a bold proposal for the federal government to assume all state debts and to take on greater responsibility in forging fiscal policy. Before this, the state of Virginia had disproportionate influence over the value of the dollar. It was the largest state with the largest budget. Hamilton’s plan moved this power to the federal government so that smaller New England states would have a voice in currency issues. Virginians, such as Secretary of State Thomas Jefferson, vigorously objected since Virginia had managed to pay off most of its debts, and they protested that taxpayers in the Old Dominion should not be charged for budgetary mistakes of those in states like Massachusetts[i].
Europe today faces a strikingly similar situation. After the subprime mortgage crisis a few years ago, European nations were left in different conditions. The largest economy on the continent, Germany, has weathered the storm with its diverse economy. The bloc’s smaller powers, like Greece and Ireland, have not been so fortunate. Greece and Ireland would benefit from fiscal stimulus to depress the value of the euro whereas Germany prefers budgetary austerity. Unfortunately for Greece and Ireland, Germany’s aid was necessary during the crisis. Banks were failing and needed to be bailed out by the deep-pocketed Germans. Germany, flexing its economic muscle, negotiated these bailouts with the condition of fiscal austerity going forward in Europe[ii]. Why should German taxpayers have to pay for the mistakes of other nations? The correlation between this and the relationship between Virginia and New England is evident.
The power to control the value of any currency must naturally exist somewhere. In the cases of modern Europe and early America, this power rested with the largest, most powerful economy in the unions: Germany and Virginia. What Hamilton did was move that power from Virginia to the federal government over which each state exercised power. Discussions have been held in Europe recently to take similar action there and to forge a more powerful common government to control fiscal policy. Unsurprisingly, Germany has blocked this thus far as did its doppelganger in early America, Virginia.
Some in Europe believe that the continent ought to “[borrow] elements from the American system of federalism.” The argument is that greater economic oversight at the national level works well by defending the interests of individual states. Germany, however, has balked at a “green light for EU bureaucrats in Brussels to spend Germany’s money to rescue banks in Ireland or Spain.” That should sound familiar to the debate in 1790.
The defeated plan would have protected countries particularly harmed by the crisis by funding unemployment benefits and other measures with bonds guaranteed by the collective European Union. It also included other American ideas such as a more powerful central banking system and federal deposit insurance. Europe would have had centrally elected figures.
For now, all of this seems unlikely to come to fruition. French President Francois Hollande sees it as only realistic as a long-term goal. Germany seems to think that sovereign nations should have even more power than they have currently (of course, this implies that Germany would have more influence over Europe), despite some signs in 2012 that Chancellor Angela Merkel was open to the idea. The idea is likely to resurface in the next crisis when smaller states make another push for European federalism.
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[i] “Hamilton and the U.S. Constitution”. PBS. 2000. 21 November 2013. <http://www.pbs.org/wgbh/amex/duel/sfeature/hamiltonusconstituion.html>
[ii] Steinhauser, Gabriele. Walker, Marcus. “Plans for Political Union Unravel in Europe.” The Wall Street Journal. 24 October 2013. A1, A14. Print.