Hamilton's Paradox Revisited: Alternative Lessons from US History

CEPS Working Document, No. 2017/10, September 2017

24 Pages Posted: 17 Oct 2017

See all articles by Waltraud Schelkle

Waltraud Schelkle

London School of Economics & Political Science (LSE)

Date Written: October 4, 2017

Abstract

Armed with the knowledge of today, a scholar revisits the US historical experience with fiscal federalism and learns how it avoided three pitfalls now facing the euro area.

The lingering crisis of the euro area has made leading observers call for the completion of the economic and monetary union with fiscal federalism. They point to the US federation as the example to emulate. Opponents can point to evidence from US history that strong fiscal capacities at the federal level lead to free-riding at the member state level, with “spectacular debt accumulation and disastrous failures of macroeconomic policy” (Rodden, 2006: 2) in its wake. This paper revisits the historical US evidence with the knowledge of today. It takes lessons from the euro area crisis to see whether they apply to the history of the US dollar area. The first lesson asks whether political-fiscal union should come before monetary union; a second lesson concerns the need for fiscal union; and the final lesson is about the question where fiscal discipline should be located in a monetary union. Lessons from the euro area crisis reveal trade-offs that neither monetary union can evade. This becomes apparent if one looks at the interfaces of a fiscal federation with financial and monetary integration.

Keywords: economic and monetary union, EMU, fiscal federalism, US, euro area crisis, political-fiscal union, fiscal union

Suggested Citation

Schelkle, Waltraud, Hamilton's Paradox Revisited: Alternative Lessons from US History (October 4, 2017). CEPS Working Document, No. 2017/10, September 2017 , Available at SSRN: https://ssrn.com/abstract=3053793

Waltraud Schelkle (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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