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Tony Fratto: A ‘Dinner Table Bargain’ for Europe?

Could one of America's historic grand bargains help to rescue the European Union?

In the summer of 1790 the United States' new Secretary of State, Thomas Jefferson, met the Treasury Secretary, Alexander Hamilton, and proposed a dinner with Virginia's James Madison to try to resolve two vexing problems facing the young nation: the disastrous finances and credit standing of both the states and the federal government; and the location of America's national capitol.

Thomas Jefferson
AP
Thomas Jefferson

Hamilton was distressed by the crippling debts held by the states and the federal government's limited ability to finance itself. Madison, and southern agrarian states, opposed Hamilton's plan to assume the debts of the states and strengthen federal taxing powers.

Southern states feared a strong federal authority, dominated by northern financial concerns — many of whom speculated in purchasing Revolutionary War debt for pennies on the dollar. Hamilton feared the collapse of a young Republic lacking financial credibility, unable to finance regular operations of government, including providing for its defense.

The location of the capitol was more than a question of geography — it served as a symbolic matter of trust between the mercantile North and the agrarian South; a northern economy increasingly reliant on manufacturing and commerce, and a southern economy still reliant on the fruits of the land.

The dinner resulted in a grand bargain that would locate the nation's capitol on the shores of the Potomac River — in the South. And that agreement (combined with a sizable tax break for Virginia) allowed Madison to free up votes in Congress for Hamilton's assumption plan.

The dinner table bargain was one of the critical moments in American history. It didn't solve every problem — it would take a bloody civil war 60 years later to cement the Union. But it helped to bind the states together, and to a federal authority, at a time when it could have easily fallen apart.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

Are there lessons for the European Union?

The EU faces some of the same structural and debt problems then faced by the United States — a North-South (or North-Periphery) divide; and state fiscal budgets run amok.

For Brussels to assume the debts of EU nations would be outrageously expensive, and maybe violently opposed in Germany, but it would solve the current acute debt and credit problems stressing Europe. But it would only make sense if EU nations cede fiscal authority to Brussels, and harmonize their divergent social compacts to more rational and sustainable levels. Money alone won't solve Europe's structural problems.

Maybe a dinner party is in order.

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Tony Fratto, a CNBC contributor, is Managing Director of Hamilton Place Strategies – a strategic economic policy and communications firm based in Washington, DC. He is a former White House Deputy Press Secretary for the George W. Bush Administration and Assistant Secretary of the Treasury. You can follow him on Twitter at http://twitter.com/TonyFratto.

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