Thoughts On The Greek Crisis

There is an article on Naked Capitalism with the title Lessons for Europe’s Fiscal Union from US Federalism by Yves Smith. The author looks at the history of monetary union in the United States under Alexander Hamilton.  He writes the following:

As part of his plan to establish the credibility of the US government as a borrower and build a ‘modern’ financial system, Hamilton famously ‘assumed’ the debt of the states. This federal bailout, which was repeated after the War of 1812, is anathema to present concepts of the fiscal ‘sovereignty’ of the states in the US. But the powers of the federal government grew largely from that decision. After establishing its authority, the federal government shifted to a no-bailout stance in the 1840s, letting several states default. Simultaneously, and subsequently during the nineteenth century, states adopted balanced-budget rules of varying strength on their own accord. Today, all states except Vermont have such a rule inscribed in their law or constitution and, although these rules can leak, state debt accumulation has been relatively limited.

What that would translate to in Europe today is that the economically strongest countries such as Germany and France would assume the hundreds of billions of dollars of Greek, Portuguese, Italian, etc. debt, and then set up a system where all the European countries pay taxes to a central government-sort of how we pay both federal and state taxes here in the United States.  Of course that would take incredible political will because it means that countries would have to sacrifice their fiscal policy to the new central government (which it seems they are doing anyway, Germany is now  asking for a mechanism which would allow any country whose budget deficit  exceeds 0.5% of nominal GDP-Greece's is estimated to be about 9% GDP right now-to be taken to the European Courts. The author continues to explain that the Europeans are actually going in the reverse direction:

The rules of the fiscal union in the US evolved in a distinct sequence. The federal government first developed a robust fiscal capacity, with the assumption of state debt, issuance of federal debt, and access to its own tax revenue. Once that was established, the states could adopt balanced-budget provisions. By introducing strict balanced-budget rules prior to a robust fiscal union – assuming that some of them harbour ambitions for such a union – European policymakers are attempting to reverse this sequencing. Adopting such rules might reassure the ECB and smooth the path for further expansion of its operations, both of which are desirable, but it leaves the Eurozone short in terms of countercyclical tools. 

He concludes:

Creating a common capacity for countercyclical action – through a more robust central budget, issuance of euro bonds, backed by tax authority – is more reliable. But this route of course requires strong political cohesion and robust institutions for the monetary union that would match those through which Hamilton worked.

Issuance of European bonds with taxing authority.  In essence a strong federal European government with the individual countries having the status that the states have in the U.S.A. I have heard it said many times that there can be no fiscal union without political union.  But that will take a lot of work and time-something that Greece doesn't have.