JOSEF BRAML: Head of the Americas Program, German Council on Foreign Relations (DGAP).

To succeed in state-building, and to avoid social and political unrest, European decision makers would be wise not to repeat but learn from Alexander Hamilton's mistake.

Hamilton, one of the most admired of the U.S. founding fathers, and the founder of the nation's financial system, was convinced that the communitization of debt--which, he argued, was due to the first War of Independence--would be the "cement" for the new American state. As the collective debt grew during the second war against the British (1812-1815), however, this approach caused a very serious moral hazard problem, and created a bursting bubble followed by a severe recession, laying the economic grounds for a future secessionist war.

When individual states expected that their debts would continue to be assumed by the federal government, loans were increasingly taken out and used to finance infrastructure investments. While this stimulus provided jobs and generated short-term economic growth, it created a bubble in the long run.

The states were willing to borrow because they assumed they themselves would not be responsible for repayment. Since creditors also expected the federal government to protect them, they were content with low interest rates. Credit growth in the second half of the 1820s fed a construction boom. When the economic bubble burst in the mid-1830s and financial markets panicked in the spring of 1837, a recession began that severely affected the young union. The federal government's ability to provide further loans for the individual states was soon exhausted. By 1842, a third of the 29 U.S. states and territories of the at that time had gone bankrupt.

The European Union may face a similar challenge--sooner rather than later. Fiscal deficits in Italy and Spain are rising and debt-to-GDP ratios are increasing rapidly--reinforced by a slower-than-anticipated economic recovery from the Covid-19 crisis. The European Central Bank will need to make even larger debt purchases from these "southern" countries in the foreseeable future, magnifying a moral hazard problem and pitting the "southern" members against the fiscally conservative "northern" members on the ECB's Governing...