Charlemagne

1789 and all that

The history of fiscal federalism may offer the Euro zone some lessons

Feb 11th 2012 | from the print edition

TRYING to coerce a group of sovereign states to follow common rules is ultimately doomed. Leagues and confederacies are like feudal baronies: breaches lead to anarchy, tyranny and war. That was Alexander Hamilton’s case for a strong American federal government. After the adoption of America’s constitution, Hamilton became treasury secretary. The federal government assumed the war debts of the ex-colonies, issued new national bonds backed by direct taxes and minted its own currency. Hamilton’s new financial system helped transform the young republic from a basket-case into an economic powerhouse.

Does Europe, in its chronic financial crisis, need such a “Hamiltonian moment”? The European elite is looking across the Atlantic for ideas. There is little danger, as Hamilton put it in the Federalist papers, of returning to “bloody wars in which one half of the confederacy has displayed its banners against the other half”. But there is a surging resentment in creditor and debtor countries, and the risk of collapse. As a type of confederation, the euro zone struggles to take decisions, and to impose austerity and reforms on recalcitrant members like Greece.

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Nicolas Sarkozy, the French president, has spoken vaguely of the need for European federalism. Angela Merkel, the German chancellor, envisages a step-by-step process to “political union” but offers little detail. Some in Germany talk of one day changing the constitution to allow more transfers of power to Brussels. Citing Hamilton, the German council of economic advisers last year proposed that euro-zone national debt exceeding 60% of GDP should be pooled and paid off over time. The European Commission thinks this one-off plan could presage jointEurobonds.

Outsiders, notably the perfidious “Anglo-Saxons”, are accused of plotting to destroy the euro. But the opposite is often truer: the criticism from America and Britain is that the euro zone lacks the integration needed to save the currency. In Davos recently David Cameron argued that successful currency unions had vital features in common: a lender of last resort for the state, economic integration and flexibility to deal with shocks, fiscal transfers and collective debt. “Currently it’s not that the euro zone doesn’t have all of these; it’s that it doesn’t have any of these.” The most passionate Euro-idealist could not have put it better.

The euro zone is not about to make a great federalist leap. America in Hamilton’s time was a young, post-revolutionary republic. Its founding fathers had the prestige to refashion the nation to confront military and economic threats. Hamilton’s assumption of state debt was contentious: virtuous states did not think they should pay for lax ones. Allowing speculators to make fortunes from the junk debt they had bought, often from destitute revolutionary warriors, rankled. Sounds familiar? Yet for Hamilton, assuming the debt was a necessary price of liberty.

Europe, by contrast, is an older and more diverse place. America created political union followed by fiscal union. But Europe is doing things backwards, creating the euro partly in the hope of fostering political union. So fiscal integration is being pushed not to preserve freedom and a new nation, but to save a failing currency. In any case the embers of Europeanism are dying. French and Dutch voters killed the proposed EU constitution in 2005. Inter-governmentalism is the new fashion. Who among today’s mediocrities could pretend to be a new Hamilton?

Still, the study of America’s history—and that of Canada, Brazil and even Germany—offers lessons. A new booklet by Bruegel, a Brussels-based think-tank, looks at America’s public finances. The reforms of 1789 were followed by a “no-bail-out” policy in 1840 that forced some states into default. The Federal Reserve was set up in 1913 to act as lender of last resort. The 1930s slump led to much-expanded federal spending under Roosevelt. American states are now constrained by balanced-budget rules, but the federal government borrows hugely to bolster demand.

In the euro zone, each country is responsible for its own finances, within specified limits on deficits and debt. The no-bail-out rule was meant to ensure that markets kept up the pressure. But the markets at first ignored the risks and then panicked, threatening to bankrupt even solvent states. Weak sovereigns weaken the banks, and vice versa. The European Central Bank is barred from lending to governments (though it is doing a lot to sustain euro-zone banks). Austerity stunts growth.

The wrong lesson?

The euro zone has, in effect, tried to create America’s no-bail-out doctrine of 1840 with neither Hamilton’s federal structure nor Roosevelt’s counter-cyclical tools. Euro members are walking on a wobbly tightrope without a safety net. When the storm has blown they have found themselves tied together by the financial markets, meaning that if one were to fall, all would risk doing so.

A rescue fund has been improvised, though it is not big enough for the largest debtors, such as Italy. Tougher fiscal rules, with monitoring and penalties, including a new treaty requiring members to adopt balanced-budget rules, will strengthen the confederal set-up. But as Hamilton might have predicted, deeper intrusion into national policies may in time mean growing strife.

The euro zone will not become the United States of Europe any time soon. But it needs to consider elements of fiscal federalism to deal with its biggest weaknesses. A European-level bank deposit-guarantee scheme could avert bank runs. A one-off pooling of debt could arrest the run on sovereigns. Even without a big budget, a European unemployment-insurance scheme could be created to help deflect asymmetric shocks. Germany wants tough rules? Look at Brazil’s measures of 2000, including the threat of jail for breaches of fiscal rules. The euro zone has much to learn from others.

^{Economist.com/blogs/charlemagne}

from the print edition | Europe

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1789 and all that

Feb 16th 2012, 16:28

When it comes to what book can bring ideas to save euro zones, another suggetion is Francis Fukuyama’s “The Origins of Political Order: From Prehuman Times to the French Revolution” which displays how the element, including history, evolutionary biology, archaeology, and economics, of the present political system evolved until 1789.

At this moment when Euro zone may reschedule its economic plan, the notion of structural reform and sovergienty should be re-checked whether Germany and Frnace want to yield to the big think or choose the way to keep their inner interests. After the end of Hundred Years’ War, the rise of single nation, including both political and ethnic group concerned was pervailing for the strengthening king’s power. The international order contain the build-up of self-respect and union of group, both of which were usually put forward to discuss in order to improve the civilization. During this period, although there were some wars and conflicts, overall, the advance in Europe was processing toward the next period, another evolution of political structure after 1789.

And the silmilar to the situation, nowadays Germany and France face the dilemma of union and individual existence. Of course, it is hard of war happening for the present financial crisis, but the diminished degree of the former steady system, before the Euro was born, may lead to the failure to financial progress.

Meanwhile, the embarrassment may solve by means of financial interference. The talk of expanding trade between EU and China can soothe this difficulties, like this week’s meeting of the president of the European Council Herman Van Rompuy and China’s prime minister Wen Jia-bao with the president of People’s Bank of China Zhou Xiao-chuan for credit crisis spreading across Europe. In technique aspect, Renminbi’s appreciation or depreciation against U.S. Dollar can be seen as the possible manipulation of dealing with Euro zone’s credit crisis, with the strategies of balanced and beneficial trade between China and Europe.

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這篇筆者回答得牛頭不對馬嘴。如果把法蘭西斯.福山的著作拿來提財政邦聯主義的問題是很牽強的，不過也沾到了一點邊邊。這個主義本來是美國開國功勳漢密爾敦拿來希望有個強大的民主美國，並拿來解決美國獨立戰爭以來的外債。而這是否適用於當年的歐盟呢？這時又要拿出英國和歐陸的政治想法和文化異同，缺乏貨幣整合機制，又如2005年荷蘭和法國公民否決了歐盟憲法。弱的主權體導致弱的金融體系，因此歐盟沒有辦法有效的靠歐洲中央銀行以經濟力，雖然這銀行作了很多金融措施提高影響力，但是各國我行我素的自利仍然高過聯合的想法。是否會反而讓德國有更大的限縮措施以致於歐盟等於德國全面執政呢？這也是有弔詭的真命題。