U.S. precedents for Europe

As Michael Bordo pointed out in an article with Carlos Végh (2002), under Alexander Hamilton the United States developed a model of debt management which allowed a credible fiscal response to emergency situations – notably large-scale military conflict – involving tax-smoothing: in other words, borrowing during the emergency when taxation of labor income would reduce work effort at the time of greatest need and retiring the debt after the war by raising taxes. Bordo and Végh conclude with a speculation that had Hamilton been an Argentinean, that country might have had better institutions, and a better inflation and indeed growth performance. A great deal of the discussion of how European integration might operate - both in the past and in the future - has been driven by thoughts of how precedents on the other side of the Atlantic have worked. At the highest political level, such reflection concerns the constitution, where the U.S. precedent has driven European leaders to contemplate (up to now rather unproductively) the possibility of realizing a European constitution. At the time of independence in 1776, the thirteen former colonies were widely thought of as independent and sovereign entities, and Americans did not want the United States simply to be another conventional state like France or Britain. The constitution was drawn up only in 1787, and really completed only in 1791 with the Bill of Rights. Modern European attempts to follow the eighteenth century U.S. constitutional path were suspended after the proposed constitutional treaty was rejected in referenda in France and the Netherlands in the summer of 2005. That was not, however, the end of the discussion. In the wake of the financial crisis, some - including Chancellor Merkel - suggested that in the long run, a new constitutional settlement is the only acceptable way of defining the claims and obligations of member states. This argumentation is convincing.