BRUSSELS – The emerging consensus in Europe nowadays is that only “debt mutualization” in the form of Eurobonds can resolve the euro crisis, with advocates frequently citing the early United States, when Alexander Hamilton, President George Washington’s treasury secretary, successfully pressed the new federal government to assume the Revolutionary War debts of America’s states. But a closer look reveals that this early US experience provides neither a useful analogy nor an encouraging precedent for Eurobonds.
First, taking over a stock of existing state debt at the federal level is very different from allowing individual member states to issue bonds with “joint and several” liability underwritten by all member states collectively. Hamilton did not have to worry about moral hazard, because the federal government did not guarantee any new debt incurred by the states.
Second, it is seldom mentioned that US federal debt at the time (around $40 million) was much larger than that of the states (about $18 million). Thus, assuming state debt was not central to the success of post-war financial stabilization in the new country; rather, it was a natural corollary of the fact that most of the debt had been incurred fighting for a common cause.
Moreover, the most efficient sources of government revenues at the time were tariffs and taxes collected at the external border. Even from an efficiency point of view, it made sense to have the federal government service public debt.