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Can the Euro Exist Without Fiscal or Political Union?

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Harold James, Professor of History and International Affairs and the Claude and Lore Kelly Professor of European Studies, Princeton University and Hans-Werner Sinn,
Professor of Economics and Public Finance at the University of Munich. Cross posted from VoxEU

Can the euro exist without fiscal or political union? This column draws on the history of the US – especially its assumption of states’ debt after the War of Independence – to investigate which path might best serve the Eurozone. History tells us that unions require a well-constitutionalised system of restraint on fiscal behaviour, both at the federal level and at that of individual states.

It is often claimed – especially but not only by US economists – that the travails of the euro show that it is impossible to have a monetary union in the absence of a political union. Thomas Sargent used the bully pulpit of the Nobel Prize acceptance speech to tell Europe to follow the US example in the aftermath of the War of Independence and assume the debts of the individual states (2011). Such an assumption of debts was, for Hamilton, “the powerful cement of our union”. Paul de Grauwe has recently stated the case quite simply: “The euro is a currency without a country. To make it sustainable a European country has to be created” (2012).

Following US precedent

The discussion of European integration – both in the past and in the future – has largely been driven by analyses of how precedents on the other side of the Atlantic have worked. At the highest political level, such reflection concerns the constitution, with the US precedent encouraging European leaders to contemplate (rather unproductively to date) the possibility of drafting a European constitution. The US constitution was not drawn up until 1787, and was really only completed in 1791 with the Bill of Rights.

Modern European attempts to follow the 18th-century US constitutional path were suspended after the proposed constitutional treaty was rejected in referenda in France and the Netherlands in the summer of 2005. That was not, however, the end of the discussion. In the wake of the financial crisis, some – including Chancellor Merkel – suggested that, in the long run, a new constitutional settlement is the only acceptable way of defining the claims and obligations of member states. This is a convincing argument. If monetary union is to be followed by the development of some measure of fiscal federalism, a constitutional solution that clearly lays out the extent and limits of European member states’ commitments would be an essential condition.

The aftermath of the recent financial crisis has prompted another sort of European reflection on how a workable federal fiscal system arose in the US. Again, this system was not introduced until 1790, some 14 years after the Declaration of Independence. Fiscal federalism actually took much longer to work its nation-building magic. It was not until the middle of the 19th century that ‘the US is’ became the accepted grammatical form – rather than ‘the US are’.

Assuming debt

Alexander Hamilton’s eventually-successful proposal in 1790 for the assumption of War of Independence state debt was certainly a decisive initial step in the creation of a real union – and it accompanied the constitutionalisation of the American experiment. This assumption, however, did not produce a responsible system of state finance and during the half century that followed there were numerous state-level defaults and a debate about new debt assumptions and/or new ways of blocking state indebtedness. The irresponsibility of individual states also gravely damaged the reputation of the federal government and made external borrowing prohibitively expensive.

Hamilton argued – against James Madison and Thomas Jefferson – that the war debt accumulated by the states in the War of Independence should be assumed by the federation. There were two sides to his case, one practical, the other philosophical:

  • Initially the most appealing argument was that a federal takeover of war-related state debt was an exercise in providing greater security, and thus reducing interest rates from the 6% at which the states funded their debt to 4%;
  • As for the philosophical side, Hamilton also insisted on a stronger reason for following good principles than merely the pursuit of expediency;
    There existed, he stated, “an intimate connection between public virtue and public happiness.” That virtue consisted of honouring commitments.

The condition for success in the US case was that the Union raised its own revenue, initially mostly through new excises and federally administered customs houses. The logic of a need for specific revenue also applies in modern Europe, where the sources of funding for bank rescues or for a recapitalisation fund should be clearly spelled out. This consideration has produced an initiative to impose a small levy or tax on financial transactions.

In the longer term, and after the foundation of a common state with a common army, parliament and government, the analogy with Hamilton’s system would require a more extensively reformed fiscal system that might include a common administration of customs or of value-added tax (with the additional benefit in both cases of eliminating a great deal of cross-border fraud).

Lessons for Europe

Would an expansion of European federal fiscal capacity represent a massive transfer of power from member states to EU authorities? It is significant that the 1790 assumption of state debt occurred in the context of an understanding that federal powers should be few and limited. In Federalist Paper No. 46, James Madison had made it clear that central authority should be carefully circumscribed, and had concluded that: “The powers proposed to be lodged in the federal government are as little formidable to those reserved to the individual states, as they are indispensably necessary to accomplish the purposes of the Union”.

Not cement but dynamite

In fact, the fiscal union turned out to be dynamite – rather than cement – because the tariff dispute turned into a constitutional struggle by the 1830s in which southern states claimed that the Constitution was merely a treaty between states and that the southern states could ignore federal laws that they deemed to be unconstitutional. The fiscal mechanism designed to allow servicing of a common liability raises inherently explosive distributional issues.

The distributional consequences between states of a fiscal mechanism would also be a potentially divisive mechanism in contemporary Europe. The most popular suggestions currently under discussion are a general financial transactions tax, which would fall heavily on major financial centres (and for this reason is resolutely blocked by the UK); or a European payroll tax, which would raise problems of different implementation and coverage in the various European states.

The fiscal union was also dangerous because it allowed states to recommence their borrowing. As with the dispute over the tariff, this problem became very apparent in the 1830s. As international capital markets developed in the first decades of the nineteenth century, US states used their newfound reputation to borrow on a large scale, and ruined their creditor status fairly quickly as a result.

The practice of default spread in 1841-42, with Mississippi, Florida, Michigan, Pennsylvania, Maryland, Indiana, Illinois, Arkansas and Louisiana all announcing their unwillingness or inability to pay. At this time, a whole palette of responses was contemplated, ranging from the expulsion of defaulters from the Union to the repetition of the Hamiltonian assumption.

Inevitably, the Hamiltonian option of debt assumption became influential again. In 1843, a congressional committee recommended a new assumption, on the grounds that the debts incurred had been mostly to fund infrastructure, which was “calculated to strengthen the bonds of Union, multiply the avenues of commerce, and augment the defences from foreign aggression” But this proposal was rejected, primarily on moral hazard grounds: if states were freed of present debt, they would only be likely to get into debt very quickly again.

The eventual solution lay in the adoption of debt restraint or balanced budget laws. At the end of the 19th century, many states set a very low ceiling on permissible state debt, and other states limited indebtedness to a (small) share of total taxation. Only the northern states (New Hampshire, Vermont, Massachusetts, Connecticut and Delaware), which had never really experienced the debt problem, allowed their legislatures to contract unlimited debt. By the early 21st century, such legislation limits state indebtedness in all but one of the 50 states.

Conclusions

The choice of the fiscal mechanism to service a federalised debt potentially raises deeply divisive issues about the distributive effects of the tax or tariff on the constituent states. It requires a well-constitutionalised system of restraint on fiscal behaviour, both at the federal level and at that of individual states. In particular, a commitment not to renew the assumption of state debts is a condition for stable financial and political development of the union.

References

Sargent, Thomas (2011), “United States Then, Europe Now”, Nobel Prize speech.

De Grauwe, Paul (2012), “The Eurozone’s Design Failures: can they be corrected?”, 28 November, LSE Public Lecture.

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27 comments

  1. Paul Tioxon

    While this is thought provoking, more exploration of the historical basis for America and the MASSIVE differences in centralized power in Europe make a discussion to diffuse to go any where but off into tangets.

    European governments still consist of living Monarchs. England, Spain, and of course, The Vatican, as small as it is. Sovereignty, in the broadest sense, in Europe, is much stronger. The history of power in Europe is one of unlimited powers, tremendous centralization, even in France after the aristocracy was wiped out or capitulated its titles and entitlements. The birthplace of modern bureaucracy, France, as well as England, where all of the land is owned by the aristocracy or the Church of England, which is of course, headed by the crown, have only gradually liberalized. To have strong, wealthy states and nations with kings and queens place themselves on a level playing field, much as New York or Pennsylvania is equalized by Delaware or Rhode Island is just not going to happen. England may have to be left out altogether and operate like Singapore or Hong Kong.

    America is simply a weak centralized power, even today, we are twisted up like a pretzel because of one or two crackpot Senators. There was no powerful church or aristocracy whose interests may have been gored by the integration of the USA into a continental powerhouse. It was good for business and business runs America on the local, state and federal levels.

    Europe has many long standing competing authorities, the church, the aristocracy, (just try counting how many kings and queens are still in Europe, Asia does not seem to have any, and look at their economic progress) and the more recent business interests. Kings by definition hold sway over a sharply defined border area, while the church and business are transnational. To integrate Europe, the aristocracy has to be relegated to a quaintness that by not be achievable.

    1. Claudius

      Paul Tioxon wrote:
      ‘Europe has many long standing competing authorities, the church, the aristocracy, (just try counting how many kings and queens are still in Europe, Asia does not seem to have any……’,

      Agree with you entirely on the European Monarchs (church etc). While much of the aristocracy has been neutred, constitutionally from public politics and policy, it does continue to extert enormous private influence on government politics and financial policy in many countries

      Btw SE Asia (or with Japan, Asia) does have it’s own:
      Bhutan – HM Jigme Khesar !King Jigme Khesar Namgyel
      Brunei – HM Hassanal Bolkiah !Sultan Hassanal Bolkiah
      Cambodia – HM Norodom Sihamoni !King Norodom Sihamoni
      Japan – HIM Akihito !Emperor Akihito
      Malaysia – HM Abdul Halim !King Abdul Halim
      and the grandaddy of them all: Thailand – HM Bhumibol !King Bhumibol Adulyadej

      1. Paul Tioxon

        I would discount Japan, which is still under our military thumb and would also say, Japan is the only significant SE Asia/Pacific Rim nation with a King, worth mentioning in the same breath as England or France. But, yes, there are still some royals in SE Asia. When we frequently hear about Socialist Europe or Old Europe at all, kings, queens and barons is not the image, but it is still a confining burden that is not as apparent as the image of German autos or French culture. When we hear about SE Asia, we usually only hear about China, Korea, Japan, Taiwan, Singapore, the other highly populated nations are still kind of beyond the misty isles, except Viet Nam, which we are trying to completely forget ever existed.

  2. Claudius

    I agree, the article has so many talking points it’s hard to know where to start.
    But one standout for me:

    ‘In the wake of the financial crisis, some – including Chancellor Merkel – suggested that, in the long run, a new constitutional settlement is the only acceptable way of defining the claims and obligations of member states. This is a convincing argument……’

    I don’t think it is a ‘convincing argument’; it’s a political blind.

    Money flows along the least path of economic resistance, and Germany knew this when Chancellor Kohl signed off on the Maastricht Treaty (with very tangible plans for the monetary union, but none for political union). Prior to Maastricht Germany understood that it had had lower rates of wage inflation than France and much lower rates than the Mediterranean countries, and that a common currency would amplify export surpluses.

    This was Merkel’s’ way of saying “Well, Germany’s not paying for your political and economic naiveté ” unless we have ‘the’ say in how Europe creates any mechanism to control German surpluses – that is, a Bundesbank controlled European Central Bank, one that would manage European monetary union; with supervisory and regulatory powers responsible for:

    (i) “Re-unifying” the banking system;
    (ii) Establishing a fiscal union with enforceable rules;
    (iii) Sustained growth and Employment across the EU;
    (iv) Shared ‘sovereignty’ across Fiscal and Monetary policies.

    Merkel knows that if any of this was to happen, it would give the appearance of a German economic dominance over European – a success in the new millennium where a similar German expansionist, military plans had failed a century earlier. Merkel knows that this idea is entirely unacceptable for the rest of Europe, but while it remains a “viable “option for the technocrats it allows Germany to continue inflicting austerity measures and bring restitution to German banks and private money without hindrance through the current mechanism.

  3. Jim

    “It was not until the middle of the 19th century that “the US is” became the accepted grammatical form rather then “the US are.”

    An alternative interpretation would argue that “the US is” became the accepted grammatical form only near the close of the 19th century after the South had been defeated, Reconstruction collapsed, and the Republican party successfully mobilized the State to construct a truly national market, institute a gold standard and launch a tariff to protect American industry (see writings of Richard Bensel and Brian Balogh).

    Before that we did indeed experience an initial move towards a more assertive central government when Hamilton successfully promoted an absorption of the State’s debts as well as the initial founding of a national bank. And by pushing a national bank Hamilton understood that he was linking the interest of the national State with the rich individuals belonging to that same State. Ironically, Hamilton was probably one of the earliest supporters of hybrid institutions (a linking together of public and private interest) which today appears to be at the hegemonic center of modern power.

    1. TC

      “…by pushing a national bank Hamilton understood that he was linking the interest of the national State with the rich individuals belonging to that same State.”

      True as this link surely had to be, as it must be out of practical necessity, the effective means to “promote the general Welfare” this link facilitated ultimately at the discretion of Congress regulating (and thus directing) the bank’s operations is better not downplayed or ignored, or in the least thought to be a less effective means of establishing the value of dollar-denominated credit.

      Yet ignore this facet of the American experience the authors of this article have. The bank established the practical means by which the credit of the United States could be soundly founded, this through investments the bank facilitated serving to raise the productive power of the U.S. labor force, which end closed a viruous circle raising the value and soundness of the dollar–the sovereing currency unit on which the U.S. credit system was founded. This the EMU most critically lacks (as does the U.S., too, which has been our downfall since 1836 when Jackson destroyed the Second Bank of the United States, a matter of circumstance whose consequence the authors likewise fail to cite as being instrumental in state defaults occurring in the 1840s).

      Indeed, were the Bank of the United States formed by Hamilton and furthered by Biddle sustained, one is left to wonder how its acting as an anchor to state banks similarly disposed to financing state legislature approved projects venturing to raise the productive powers of that given state’s labor force might be facilitated in a manner not requiring states to be legislatively shackled to a debt collar, as has been the evolution of circumstance following Jackson’s treason.

      This sort of well-anchored, “national bank” credit allocation arrangement the EMU requires, particularly if sensitivities toward maintaining sovereign self-determination are to be respected and furthered. A constitutionally mandated debt collar is not the answer. Rather, establishing a constitutional framework for taking Hamilton’s national bank to the next level is what’s needed. Seems to me the secret lies in codifying the framework whereby certainty is raised that, the means facilitating credit will raise the ends by which debt raised for its accomplishment will be easily extinguished, and so prove a blessing. This dilemma Hamilton perplexed over, too.

      “Ironically, Hamilton was probably one of the earliest supporters of hybrid institutions (a linking together of public and private interest) which today appears to be at the hegemonic center of modern power.”

      I’m not sure what’s ironic about this. Indeed, was this not cause for the American colonies to issue a Declaration of Independence and fight a war over, that the public and private interest be joined?

  4. Andrew Watts

    Is debt assumption just another way of saying bailout? Cui bono?

    It is our good fortune that Alexander Hamilton was quite honest that his goal of debt assumption was to bind the loyalty of the rich to the new government. It was not the original holders of the debt which benefited from the federal debt assumption. The revolutionary war veterans, the small farmers, and petty businessmen who were given little to no choice but to accept the worthless currency/debt were soon bought out by rich speculators. Who often possessed inside information on the forthcoming assumption.

    “The US constitution was not drawn up until 1787, and was really only completed in 1791 with the Bill of Rights. “

    The original constitution of the United States was the Articles of Confederation. Like the European Union of the present the American Confederation government was a weak and ineffectual government that ultimately left it’s responsibilities up to the states. It was only with the most painful of compromises that the Constitution of 1787 was enacted. The Bill of Rights was only one example of the political compromises that took place. Other controversial compromises involving slavery would eventually tear the Union apart in a War of Secession.

    This is where the comparison falls apart completely. While Germany is clearly in the role that Virginia played in the tightening political union of the United States it lacks most of Virginia’s blessings. For instance can anybody name a German which transcends his/her nationalism that could unite Europe with unanimous consent under their leadership? Without George Washington and the faith the American people had in his leadership there would have been no workable American union. That’s what ultimately made the Constitution of 1787 acceptable.

    It is not just the lack of universally acclaimed leaders that the European Union lacks. Though the openly contentious leadership of member-states hardly inspires confidence in the European project. There is a skewed vision of compromise which animates it. Germany was quite willing to bear the costs of reunification. While most Germans willingly accepted the decreased living standard that came with the euro. What else are the Germans expected to do to further integration? More importantly what are they willing to do?

    It’s the answers to questions like that which will ultimately make or break the European Union.

    1. Claudius

      Andrew Watts says:
      ‘It is not just the lack of universally acclaimed leaders that the European Union lacks. Though the openly contentious leadership of member-states hardly inspires confidence in the European project. There is a skewed vision of compromise which animates it. Germany was quite willing to bear the costs of reunification. While most Germans willingly accepted the decreased living standard that came with the euro. What else are the Germans expected to do to further integration? More importantly what are they willing to do?’

      Germany has never integrated with Europe, at least not in the way one often imagines. It’s been the other way around:
      It’s ironic, perhaps, that one of the factors that leads us to the point where Germany was at a competitive advantage over France and Southern Europe was due to German unification after the collapse of communist East Germany in 1989-90. Many of the ablest and most entrepreneurial East Germans were suddenly able to participate in a free market, capitalist economy with many of the fundamental skills education levels of their West German counterparts; first arresting then depressing wages which, until that point, had been rising in Germany (along with the rest of Europe).

      Additionally, massive transfers, and national resources were devoted to gigantic infrastructure projects, with new roads, railways and other infrastructure programs in both West and East Germany, which further bolster the German economy. Result: a growing economy with low wage inflation and a strong currency.

      Chancellor Kohl’s government saw that road ahead: By Germany giving support to the European monetary union project, it would finance German unification. Because, [From my comment above] money flows along the least path of economic resistance, and Germany knew this when Chancellor Kohl signed off on the Maastricht Treaty (with very tangible plans for the monetary union, but none for political union). Prior to Maastricht Germany understood that it had had lower rates of wage inflation than France and much lower rates than the Mediterranean countries, and that a common currency would amplify export surpluses.

      The challenge was how to get Europe to pay for reunification without the German Bundesbank ceding control of its role in maintaining financial stability and inflation. Cleverly, Kohl promised a political union with Europe right up to the end: on November 6, 1991, he told an applauding German parliament that “one cannot repeat it often enough: political union is the indispensable counterpart of the economic and monetary union.” But when the governments negotiated a few weeks later in Maastricht, there was nothing.

      One might argue that this has never really been a European project so much as a German project. And, if austerity continues throughout Europe – with Sovereign states repaying private German debt – it will have been an entirely successful project too.

      1. Susan the other

        What Kohl knew about the importance of political unification, Merkel also knew because she was his protege; and what both of them knew all the rest of Europe knew too. So who was and is playing who? This is a standoff that everyone saw coming. What nobody saw coming was the GFC. Which is odd. But the GFC is what ripped Europe apart, not German ulterior motives. The financial crisis is an economic crisis, not a monetary crisis. It caused a monetary crisis because everyone pretended like politics was not important. But coming full circle, economics is politics. If this crisis had been just a European crisis, and not world-wide, it would have precipitated a political union. Too many moving parts to this problem. Like France’s imperial interests in northern Africa. Britain’s privateering banks. The bankruptcy of the American domestic economy.

    2. jake chase

      Yes, the purpose of Hamilton’s scheme was to enrich a crowd of insiders who gobbled up State and Revolutionary war debt at pennies on the dollar, then used the proceeds to gobble up public lands which actual settlors could only acquire on mortgages which ultimately broke a good many of them. Meanwhile, the farmers were taxed to service this new Federal debt, although excise taxes provided the principle avenue of exaction (and led to the Whiskey Rebellion).

      Europe already has a plutocracy, and its citizens are already taxed beyond endurance (although the rich generally avoid and evade the taxes), so the idea that the same nitwit scheme would work over there is patently ridiculous, which doesn’t mean that conniving politicians won’t try it, only that it cannot possibly produce any benefits to anyone but them.

  5. Gerard Pierce

    “Alexander Hamilton’s eventually-successful proposal in 1790 for the assumption of War of Independence state debt was certainly a decisive initial step in the creation of a real union – and it accompanied the constitutionalisation of the American experiment.”

    All of Hamilton’s reasons for preserving the credit of the republic made perfect sense. The fact that Hamilton’s cronies had bought up most of the script that made up the debt (at about a nickle on the dollar) could not possibly have had anything to do with his determination that the debt must be paid. [/end-sarcasm]

    Fortunately, they had the income from taxing whiskey in Western Pennsylvania. But of course many of those farmers were the same guys who had been conned out of the script they were paid in for actually fighting the American Revolution.

    This may have been the first United States instance of something David Hapgood called “caroom screwing” in his book “The screwing of the Average Man”. This is where the first screwing sets you up for the followup screwing.

    1. TC

      One need not strain imagining how persons possibly better connected to what was developing in the constitutional convention would pull off such a thing. The same tricks feeding disinformation live to this day. Yet whether those who employed them were at all Hamilton’s cronies is entirely debatable, particularly given Hamilton’s genuinely patriotic service to the nation throughout the war and beyond. To claim Hamilton was empowering shysters is a bit much.

  6. JTFaraday

    This only stands a prayer of a chance if the European states and all large systemically important European institutions are strictly forbidden from transacting any sort of business whatsoever with any and all criminal US financial institutions.

    Otherwise, the muppets will be bailing out the muppets right and left, while Lloyd Blankfein gets richer and Godlier.

    I don’t think that’s going to work.

  7. Dan Kervick

    Unlike the US following its revolution, the Europeans already have an very well-organized monetary union.

    I would think the next stage, before trying to move to full political union, would be to create some kind of European public investment and employment fund funded by a combination of progressive capital gains taxes and central bank direct injections. If the European center proves in can act aggressively to get the continent back on its feet, invest in economic progress and restore full employment, then it will build the trust needed for nations to gradually invest the center with more authority.

    1. Jim

      Except that Germans and Italians don’t want to belong to a US of Europe. Two days ago, a sold majority of voter in Italy voted for parties which oppose the Euro.

      Why is it so difficult for some to accept the fact that the Euro is a failed experiment?

      Brussels won’t take no for an answer. Even if it means that it needs to sacrifice democracy in its quest for a US of Europe.

      As bad as the political situation is in the US, it’s far better than in European continent.

      1. The Rage

        Basically yes. Being that America has no real tradition to speak of that was native, it isn’t that hard to integrate. Speak English and consume.

        America was the first “superstate”. If Jefferson came back today, he would probably shake his head and say “about what I expected”…………when he came to grips with that we aren’t Unitarian, cell phones and motor cars are in vogue, considering he was one of the people who pushed us into that direction during his Presidency. 50 “little countries” wouldn’t have worked. They would have been taken over and been upsurped at some point like Rome upsurped city states. Which explains what “some” global capital owners want.

        That is what the founders goal. When you see a non-white successful transition to this ability, success. Asians are very successful. While “ghetto” negros and “illegal immigrants” represent our failure.

    2. Susan the other

      I’m wondering if the motive for the new trade treaty between the US/UK/EU is to create a framework which will be the beginning of an EU political union. That would make sense.

  8. Hugh

    From the kleptocratic perspective, it was no accident that the euro was created specifically without a fiscal and debt union. As others here have suggested in other terms, the North, principally Germany (its rich, ruling class, not its 99%) could draft off a euro which, because of the weaker economies and finances of the periphery, was cheaper than the mark, and the open trade within the EU and EZ to expand exports, build up debt and bubbles in the periphery (with the connivance of the local elites and kleptocrats), and then when these blew up, force the sovereigns in the periphery to assume what would otherwise have been the losses of German banks (i.e. the German and Northern rich).

    In other words, the euro was designed as an extractive mechanism of the ruling class of the German and Northern rich, and it has functioned beautifully as such.

    I mean Europe’s political classes aren’t stupid and incompetent. These are smart, knowledgable people. However much the 99%s of Europe (including Germany) have been harmed, it is important to note that Europe’s rich and political elites have not been. As is the case in the US, that’s the tell that they aren’t idiots. First, their positions of power and wealth are based on their supposedly superior understanding of the workings of the economy and government. So if they were idiots, on this ground alone, they should be disqualified from both power and wealth. But more than this and secondly, if they were idiots, their policies would be as likely to harm themselves as anyone else. However, we see the opposite. Everyone’s interests are harmed, except theirs.

    How hard is it to understand that these are in fact entirely competent people who just happen to be working in their own best interests to the detriment, indeed ruination, of everyone else?

    I think the post’s author Harold James has his own tell as well. Note the following examples of possible ways to fund a fiscal union:

    “The distributional consequences between states of a fiscal mechanism would also be a potentially divisive mechanism in contemporary Europe. The most popular suggestions currently under discussion are a general financial transactions tax, which would fall heavily on major financial centres (and for this reason is resolutely blocked by the UK); or a European payroll tax, which would raise problems of different implementation and coverage in the various European states”

    Do you see the 800 pound gorilla that is missing, taxing the rich, both in the core and the periphery?

    Evocations of Hamilton are dicey because he is, to put it mildly, such an equivocal figure. But if we are to look at the American experience in its context, how can any discussion of US monetary policy not mention the creation of the Fed in 1913?

    Again compare James’ post to the six problems that would need to be resolved in order for the euro to work for ordinary Europeans and not the continent’s 1%s:

    1. Lack of a democratic fiscal and debt union
    2. A weak central bank
    3. An insolvent and highly predatory banking sector
    4. Europe internal mercantilist trading patterns
    5. Completely corrupt political elites
    6. A ruling class of the kleptocratic rich

    James treats only the first of these and in a fairly unconvincing fashion, but that’s it. This is why I tend to look on writers like James as proponents and defenders of the kleptocratic status quo. Indeed the last and greatest tell is to be found in James’ concluding sentence”

    In particular, a commitment not to renew the assumption of state debts is a condition for stable financial and political development of the union.

    Doesn’t that say it all? A fiscal union possibly, but no debt union? In other words, more of the same, just in an academically pleasing wrapper.

  9. juliania

    Not being an economist I cannot comment on the meat of this posting, but the following stands out for me:

    “In particular, a commitment not to renew the assumption of state debts is a condition for stable financial and political development of the union.”

    Juxtapose against this the facts reported in “LIBOR: Viewing the Biggest Financial Crisis in History” by Darwin Bond-Graham (can be found on yesterday’s counterpunch.org.)

    Therein the claim is made that bailing out the banks, which our federal government did with taxpayer monies, not only shafted taxpayers but also states and municipalities. That sucking sound you hear doesn’t come from abroad, it comes from your local government.

  10. piet

    I fail to see the argument why the Eurozone should have a fiscal and/or political union, when the Dollarzone gets by without one. Sure, the US is a fiscal and political union to some extent, but the US dollar is used in many deals in faraway countries that fall outside of that union. Foreign investors buy shares, companies, derivatives, oil is sold in dollars, the Chinese renminbi is pegged to the dollar. Some of those positions are hard to unwind; some countries use the US dollar as legal tender, with no influence on the currency whatsoever.
    I myself have a mortgage denominated in a currency that I haven’t printed myself.

    So what?

  11. Susan the other

    About the “cement or dynamite?” analogy. The denial of economic factors is such a lie. Economics is politics. Politics made real. Otherwise politics is just so much bullshit, as we well know in our country. Look what really happened in our Civil War. The bloodiest battle of brother against brother that ever was. Even tho’ the history revisionists, most recently the movie Lincoln, have tried to present the Civil War as a noble war to end slavery, emancipation was just a secondary tactic. The North needed tariffs to protect its textile and steel industries from the more industrialized Europeans. The South adamantly opposed them. They were imposed against the votes of the South; the South was challenged to put up or shut up and they took the bait; the North blockaded the South into near poverty but the South came back to fight for 2 long and murderous years before it gave up. If there had been a more temperate god, the issues leading to the Civil War would have been resolved, but instead it evolved into a situation for both sides where time was of the essence, vital interests were being harmed. So Sherman burned Atlanta to the fucking ground.

    1. Calgacus

      The “revisionists” – in the bad sense – like holocaust revisionism – are the ones who say that the Civil War was primarily about anything but slavery. As a wise contemporary aptly characterized it, it was a “proslavery rebellion” & that is thankfully finally again the mainstream historical view.

  12. don

    The problem is that euro survival requires debt forgiving transfers that cannot be justified on grounds that the debts were incurred in a common cause (as in our Revolutionary War). The only real incentive for donors to accept the transfers would be if the debtors will anyway repudiate their debt. So it seems to me unlikely that a solution will be forthcoming until the issue hits a really drmatic face-off.
    Draghi may try to pull the transfer off to preserve his job, while obfuscating what is going on. (Something like was done with the Greek default – how many clearly recognize that the bulk of the Greek debt was repudiated? Even derivative insurance seems to have gotten away with denying that it ever happened). Even if he is successful, however, the shadow exchange rates would still be out of whack, requiring deflation in some members, absent what seems to be unacceptable inflation for the euro zone overall.

  13. theyenguy

    On Monday February, 23, 2013, stocks and commodities traded lower on falling currencies, as political crisis stalks Greece and Italy.

    The very linchpin of ECB sovereign debt support, as well as the capstone of Liberalism’s Banker Regime of Credit Stimulus, has collapsed, as Greece, GREK, traded 8.2% lower. The nation that defines Clientelism, Barriers To Competition, Unionism, and Corruption, is leading Europe, and the World into Investment, Economic and Political Failure.

    Sovereignty begets seigniorage, that is moneyness, and trust in the debt of the sovereigns, that is in the US, VTI, Germany, EWG, Spain, EWP, Italy, EWI, Greece, GREK, Germany, EWG, China, YAO, Australia, EWA, Japan, EWJ, Norway, NORW, Finland, EFNL, Sweden, EWD, and others produced Peak Commodities, DBC, on September 14, 2012, Peak Credit, on December, 6, 2012, Peak Wealth, on January 28, 2013, and Peak Currencies, and thus Peak Seigniorage, and Peak Prosperity on February 11, 2013.

    The sovereigns of Liberalism, nation states and their central banks gave seigniorage to money, that is wealth, producing the seigniorage of investment choice. Asset Managers such as BLK, WDR, EV, STT and WETF, Investment Bankers such as JPM, the World’s Leading Banks such as SAN, NBG, RBS, LYG, BCS, HDB, IBN, and UBS, The Too Big To Fail Banks such as BAC, and C, the Regional Banks such as SNV, HBAN, and RF, coined Liberalism’s money, consisting of fiat investments; some of which were given more seigniorage than others, such as Gaming Stocks, BJK, Leveraged Buyouts, PSP, Small Cap Growth Companies, such as CSL, Global Producers, IP, and GE, Dig And Dirt Equipment Manufacturers, MTK, Agricultural Companies, MON, and Small Cap Revenue Companies such as LAD, to name just a few.

    Where seigniorage exists, that is where moneyness manifests, there exists a sovereign producing it.
    New seigniorage, that is new moneyness, is coming on the death of the fiat money system, that is on the death of the Milton Friedman Free To Choose Floating Currency Regime. The sovereigns of the Era of Credit and the Epoch of Fiat Asset Appreciation and the Age of Prosperity are dying on the exhaustion of the world central banks’ monetary authority and on the death of of currencies. Kayla Tausche of CNBC reports JPMorgan to slash 4,000 staff, $1 Billion in costs. And Bespoke Investment Group reports Euro Spreads widen out. Bloomberg reports Bank credit risk surges in Europe amid Italian election deadlock. The cost of insuring against default on European bank debt surged to the highest in three months on concern deadlock in Italy’s elections will trigger a flight from risky assets as a political vacuum roils markets. Gridlock in parliament means gridlock in the economy, Alberto Gallo, the head of European macro credit research at Royal Bank of Scotland Group Plc in London, wrote in a client note. The longer the instability lasts, the more the recession can deepen, pushing up unemployment, defaults and bad loans. In the worst-case scenario, the weaker banks could see deposit outflows re-emerge ” The Markit iTraxx Europe Index of swaps on investment-grade companies rose seven basis points to 120, the highest since November 30, 2012.

    Operating through Destiny, Revelation 1:1, Jesus Christ is replacing the Banker Regime of Liberalism with the Beast Regime of Authoritarianism, and with that, Crony Capitalism, in America, European Socialism, in France, and Greek Socialism, in Greece, is being replace by Regional Governance, Totalitarian Collectivism, and Debt Servitude, in Euroland, in fulfillment of Revelation 13:1-4.

    Christ began by unleashing the First Horseman of the Apocalypse, to transfer the baton of sovereignty from nation states to the sovereigns of Authoritarianism, these being regional leaders, regional bodies, and soon coming regional public private partnerships, as presented in Revelation 6:1-2, in May of 2010, with the First Greek Debt bailout, led by Herman van Rompuy and Angela Merkel.

    And Christ is producing from the crumbling two iron legs of global hegemony, these being the UK and the US, a Ten Toed Kingdom of regional governance, where toes of a miry mixture of iron diktat and clay democracy, rule in the world’s ten regions, as foretold in Daniel 2:25-45.

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