The European Union today is confronted with a broad and painful transformation of its environment as supply chain shocks rattle its domestic markets, Washington appears to withdraw as the primary guarantor of transatlantic security, Beijing seeks to wrangle global trade through its Belt-and-Road projects, and a revanchist Russia chafes at the post-Soviet order. These convulsions have placed significant pressure on the Union and its member states to claim agency in an increasingly hostile context.
The economic disruptions stemming from the COVID-19 pandemic, the ongoing climate crisis, and geopolitical destabilization have placed significant strain on the institutional architecture that underpins the European social model and placed demands on collective action that exceed the governing capacities of individual nation-states. Without strong transnational mechanisms for enforcing their own economic and security interests, the appetite for intervention from Brussels has increased, with the EU issuing common bonds to fund loans, direct fiscal transfers, and grants across member states, including just over 800 billion in COVID-19 recovery funding and 150 billion in loans for defense procurement.
The reality of joint borrowing and growing pressure for Europe to mutualize debts raise political questions about how these debts will be managed: how can the EU demonstrate its ability to repay joint bonds? Should the EU introduce novel revenue streams to reduce reliance on member-state contributions? Should joint liability be accompanied by a centralized authority to ensure the fiscal health of the bloc? As Monnet famously remarked, Europe will be forged in crisis and will amount to the sum of the solutions it adopts. Will the EU’s emergency fiscal capacities harden into permanent institutions or will they recede once the crises have passed?
Joint debt has often been a vehicle for political integration and federalization. In the United States, the War of Independence spurred a similar dynamic, where the fledgling national state had scant means to raise revenue at a scale commensurable with that of its debt. Debt thus created a political pressure, particularly from Federalists like Hamilton, for the federal state to adopt a stronger role in managing joint liabilities and assume tax-raising powers. However, the American experience suggests that while debt can create the fiscal foundations for political union, it cannot generate the legitimacy necessary to sustain it.
Common Bonds, Common Burdens?
The late 18th century was a period of heightened global interdependence and shifting power relations. British North America comprised more than twenty colonies embedded in transatlantic trade networks, imperial financial systems, and global supply chains. Their economies depended on sugar from the Caribbean, credit from Britain, manufacturing from Europe, and the shipping of enslaved people across the Atlantic. The thirteen colonies that declared independence in 1776 and formed the United States emerged into a geopolitical environment dominated by the world’s largest naval empires and formidable Native confederacies. Eight long years of revolutionary war against the Crown outstripped the revenue-raising powers of the loose confederation formed by the newly sovereign states and exhausted its coffers as it rapidly printed money to fund the war effort.
Delegates to the 1787 Constitutional Convention who advocated for a federal union worried that under the existing Articles of Confederation, the United States would be impaired not only by its inability to repay its massive debt, but also by interstate economic competition, weak military capacity, and the lack of a unified foreign policy. Federalist delegates argued that the institutions through which the former colonies had exercised self-government had become misaligned with the scale of the forces reshaping the eighteenth-century Atlantic world. They wrestled with many of the same questions as the founders of the EU: What functions of state ought to be organized centrally, and which should be devolved to the individual states? How can novel collective institutions be legitimized? Can diverging commercial interests be incorporated under a central authority?
Alexander Hamilton, a former Continental Army officer and delegate to the Constitutional Convention who emerged as a leading spokesman for the Federalist movement, saw in the debt crisis an opportunity to resolve some of these questions. Hamilton argued that mutualizing the states’ debts, held largely by domestic merchants and speculators, would create a demand for common revenue and common governance, and could thereby bring legitimacy to the nascent federal state. Moreover, he argued that in an interdependent system of commercial nations, raising revenue “is the essential engine” of a functioning modern state and ought to be the unfettered license of the federal administration. In his first major fiscal policy report to the US Congress as the first Secretary of the Treasury in 1790, Hamilton proposed to subsume the debts of the states under the federal government and thereby place national and state creditors under a common credit system. He called the debt a “national blessing” insofar as it would create confidence in the federal government, tie creditors to the success of the Union, strengthen national institutions, and establish American credit internationally.
Later that year, the US Congress passed the Funding Act, which formally consolidated the states’ debts under the federal government and issued US Treasury securities, backed by “full faith and credit” of the United States, to holders of the former states’ and Confederation’s bonded debts. Seeking new sources of revenue to repay bondholders, the Treasury Department, newly equipped with the constitutional power to levy taxes, enacted an excise on distilled spirits in 1791. Hamilton promoted the measure both as a reliable revenue stream and as a measure to improve the moral health of the nation by diminishing the consumption of alcohol.
Questions of fiscal capacity quickly degenerated into open political revolt as citizens living in the western frontierlands of Pennsylvania responded to subpoenas for distillers who had not paid the tax by attacking federal revenue collectors. In the rural frontier regions, distilled spirits were a more profitable and transportable way to sell surplus grain, and served as a means of payment where specie (gold and silver coin) was scarce. The burden of the tax, levied exclusively in specie, was perceived to be shouldered disproportionately by these small-scale farmer distillers, for whom the levy was effectively a tax on income at a time when such taxes were unprecedented. The structure of Hamilton’s whiskey tax favored heavily capitalized, more efficient industrial producers on the Eastern shore, whose industry he aimed to consolidate.
The rebels, many of whom were veterans of the War of Independence, believed they were fighting the federal state on revolutionary principles. One liberty pole in Parkinson’s Ferry was brandished with the slogan “Liberty, and no excise! No asylum for cowards and traitors!” The revolt, which came to be known as the “Whiskey Rebellion,” was only quelled once a federal militia, led among others by Hamilton himself, marched westward and arrested the rebel leaders. While two of the leaders were convicted for high treason and sentenced to death by hanging, President George Washington issued them the first presidential pardons and absolved the rank and file rebels.
Although debt may have created common liabilities, regional divergence and maladroit fiscal management damaged confidence in the new constitutional order. In the frontier regions, resentments towards the federal government had been smoldering for its failure to provide adequate security against Native confederacies and secure the right to use the Mississippi river, then owned by Spain, for commercial navigation. The tax on spirits reinforced and radicalized the perception that the costs and benefits of union were being distributed unevenly and disabused many in the frontier populations of the sense that the state represented their interests. In the last instance, as they saw it, political union would be guaranteed not by common bonds, but by military force.
Europe’s Debt Crisis, Solidarity, and Legitimacy
Once debt becomes common, questions of repayment readily become questions of political authority, democratic accountability, and solidarity. Like the Whiskey Rebellion, the Eurozone crisis revealed how abruptly disputes over burden-sharing can become disputes over political legitimacy. The crisis undermined confidence in the Union’s ability to reconcile economic integration with democratic legitimacy and social protection, and exposed unresolved tensions in the monetary union. The challenge confronting Europe today is whether it can effectively manage the transformation of technical questions of fiscal governance into constitutional questions about political obligation and legitimacy.
In the wake of the 2008 financial crisis, several peripheral Eurozone economies found their public finances under acute strain as governments sought to support failing banks, stabilize domestic economies, and manage rising borrowing costs amid a deep recession. Bereft of the ability to independently set interest rates and devalue their currencies, these deficit economies lacked the macroeconomic tools to respond once capital inflows dried up and sovereign borrowing costs spiked. The US financial collapse surfaced fault lines created by the structural imbalances in the Eurozone’s partially federalized system, which shifted the authority to issue currency to the EU level while leaving the authority to tax and borrow to the nation-state.
To prevent a Greek exit from the Euro, deter bankruns, and avoid a broader economic conflagration, the EU coordinated bilateral loans and provided direct assistance to Greece conditioned on intrusive and unpopular austerity measures, despite the majority of Greeks having voted against accepting such a bailout in a 2015 referendum. Couched in moralizing terms around “profligacy” and “prudence,” the bailout stigmatized beneficiaries and came to be associated with the so-called “Troika” – the European Commission, the European Central Bank, and the International Monetary Fund. Although the crisis was not caused solely by EU institutions, the burden of maintaining the credibility of the EU monetary system was experienced by many Greek citizens as cuts to wages, pensions, employment, and public services.
Keen to avoid the mistakes made a decade earlier, the EU’s response to the COVID-19 pandemic has been characterized by a rather more solidaristic vision of pan-European cooperation, one that attempts to align common liabilities with visible forms of mutual benefit. The “Next Generation EU” recovery package is financed through borrowing undertaken by the European Commission on behalf of the Union and backed by the EU budget, rather than through bilateral loans between member states. The Commission has also proposed new “own resources” to reduce reliance on national contributions, though many remain subject to negotiation. Unlike the assistance extended to Greece, member states retain greater discretion over spending priorities and the fund is oriented towards macroeconomic resilience and investment rather than fiscal consolidation, with conditions tied to green and digital transitions rather than austerity measures.
While the delegates to the US Constitutional Convention recognized that the absence of collective political institutions capable of acting in a complex global environment would be an unceasing source of discord, the American republic’s first efforts to finance joint debts at a continental scale demonstrated that common liabilities do not automatically generate political loyalty. If Europe moves towards deeper forms of integration, the EU must create durable and credible political foundations for sharing liabilities by pairing them with corresponding mechanisms of investment and solidarity.
As the EU experiments with more mutualistic mechanisms for responding to large scale supply shocks, it remains to be seen whether these transnational debt instruments will in fact be temporary measures, as they were originally presented, or whether they will set a precedent for more permanent forms of joint action. Historically, warfare has been a much more persistent catalyst for the centralization of the political power to tax, borrow, and spend – one that a Europe comfortably nestled under the US security umbrella has largely externalized. The wide-reaching threat of Russian aggression has outlasted the pandemic, and whether or not the US’s withdrawal from transatlantic security endures, Europe has signalled that it is seeking a permanent release from American tutelage. Although security is likely to prove more politically fraught than the response to the pandemic, the EU is already extending support to Ukraine through similar joint borrowing arrangements and testing new models for financing defense procurement, suggesting the Union may continue to develop the fiscal instruments necessary to manage geopolitical and economic pressures that exceed the institutional capacity of its member states.
