As new federations take shape and old ones are revived around the world, a difficult challenge is to create incentives for fiscal discipline. By combining theory, quantitative analysis, and historical and contemporary case studies, this book lays out the first systematic explanation of why decentralized countries have had dramatically different fiscal experiences. It provides insights into current policy debates from Latin America to the European Union, and a new perspective on a tension between the promise and peril of federalism that has characterized the literature since The Federalist Papers.

Alexander Hamilton left an imprint upon this country that time has not effaced. Probably no American statesman since has displayed more audacity and a bolder and more constructive imagination. We can point to no one of his time so prodigal of ideas and so obsessed by a determination to make the United States a powerful nation.

The period in which Hamilton lived was an era of great men, but probably no other statesman had a bolder and more constructive imagination. Many of our current institutions are, in the words of the author, "the lengthened shadow of one man, Alexander Hamilton."

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.

First Published in 2010. Routledge is an imprint of Taylor & Francis, an informa company.

A radical reconsideration of the meaning of freedom and morality in the modern world.