JEFFREY R. SHAFER: Chairman of the Board of Trustees, National Committee on American Foreign Policy, and former Undersecretary for International Affairs, U.S. Treasury.

The European collective debt deal has some of the main features as Alexander Hamilton's U.S. debt assumption legislation of 1790. Both were one-time initiatives to issue collective debt and thereby relieve the immediate financial distress of some of the states of the two unions. Both collective debt policies were undertaken in the face of strong opposition from less-indebted states. And neither obligated the unions to take collective responsibility for future debts.

It is important for Europeans to understand what more needed to happen for Hamilton's initiative to become the modern U.S. fiscal structure and what this structure is still not to this day.

It is not a collective debt structure. Hamilton's assumption may have led European investors to believe that there would be a federal backstop of state debt in the future. The Europeans lent liberally to American states to build canals and railroads in the early nineteenth century. But there was not a backstop, and eight states defaulted in the 1840s. Confederate state debts were repudiated by the Fourteenth Amendment to the Constitution in 1868. Arkansas defaulted in the 1930s.

Looking at the debt and pension obligations of several states, it could happen again. There is still no assured backstop. The risk of state default tempers the moral hazard of lenders who would otherwise lend freely to states, leaving the federal government to pick up the pieces.

The United States...