Sargent’s American history lesson

February 3, 2012

The European Union is one of the grand experiments of our time,with countries that had been at war earlier in the 20th century agreeing to closer economic ties.   These ties have included, so far, free trade, free mobility of labor, and even (for some) a common currency.  The question, then and now, is which activities to manage centrally, and which to leave up to local control.

Tom Sargent notes that the US faced similar issues with its states; see his piece in today’s Wall Street Journal.  It’s behind their paywall, but worth tracking down.  Here’s an excerpt:

“By refusing to bail out the states in the 1840s, the United States preserved its federal system, with substantial fiscal independence for state governments. Facing a similar moment, Europe might learn from our experience.”

European countries are, of course, different from American states in many ways, including history and culture.  Despite an explicit rule against bailouts, the EU has somehow gotten into a situation where the member states expect help from the center, but the center has (by design) limited authority.  Should the EU leave member states to deal with their own problems, as the US did in the 1840s?  Or help those in need?  What changes in institutions should be established now to deal with such situations?  It’s an awkward situation at best, but perhaps, as in US history, an opportunity to create better institutions for the future.


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