Monday, 13 July 2015

Greek debt: parallels and contrasts with the US

Greeks who remember the German occupation, according to the BBC, are now talking about another invasion by Germany without a shot being fired.

Greece will, it seems, stay in the Euro. At least for the moment. It will do so at the cost of measures that apparently represent more severe austerity than the terms rejected by Greeks in a referendum just over a week ago. It feels like Greek voters have lost, but German politicians – apparently the fiercest critics of Greece and the harshest in their demands of them – have won.

Merkel may have avoided this destiny so far
But certainly not be being gentle with Greece
This reminds me of how the United States dealt with a similar crisis, when it faced debt problems not unlike those of Greece within the Eurozone.

The original constitution of the United States was deeply unsatisfactory, giving almost no power – certainly no power to raise funds – to the national government, and leaving most authority in the hands of the States. It became increasingly clear over just a few years that the situation was untenable and something with a more serious Federal government at its centre would have to be set up.

A Convention met and drew up the Constitution of the United States that we know today (though at that stage without any amendments, of course). George Washington became the first President and, among an all-star cast of Ministers, he appointed Alexander Hamilton as his Secretary of the Treasury (Minister of Finance).

Now there’s little on which I agree with Hamilton, particularly his views of popular sovereignty, but that’s for another debate. On finance, he was something of a wizard. And one of his first major measures concerned what came to be known as Assumption – not a religious moment, except for those whose God in Mammon, but the initiative by which the Federal government would take over the debts incurred by the individual States in fighting the War of Independence.

That was great news for Massachusetts and South Carolina, which were saddled with heavy debts (viz Greece) but not so good for Virginia and North Carolina which had cleared most of theirs, and didn’t appreciate having to pick up the tabs for the others (viz Germany). There was a battle royal. James Madison, destined to become the Republic’s fourth president, was a Congressman at the time and led the campaign against Assumption. He defeated the proposal.

The story has it that Alexander Hamilton met Thomas Jefferson, then Secretary of State but destined to be the third President, in the street outside Jefferson’s house. He was distraught and Jefferson invited him in. Hamilton explained that without Assumption, certain States would be driven towards bankruptcy, and also the Federal government would be shown to be powerless to face up to dealing with a financial crisis (viz the Eurozone).

What’s more, Hamilton maintained the apparently paradoxical view that the Federal government would be accepting a “national blessing” by taking on the debt: it would oblige it to collect taxes and establish it as creditworthy (viz the Eurozone again).

Jefferson was a close ally of Madison’s and increasingly an opponent of Hamilton’s. But he allowed his then-colleague to convince him, and took it on himself to win Madison round.

The two allies came up with a compromise solution: Madison would not block the question of Assumption coming up again in Congress; he would vote no, but would not speak against the proposal. That’s what happened, and Assumption was adopted, over the silent opposition of Madison.

At the time, the US had a population of under 4 million. Even the UK had 8 million, and France 20 million. GDP was around $200 million, corresponding to about $4.5 billion today – when US GDP is about $17.7 trillion. The US was, in other words, a minor sideshow in geopolitics back then; today it is the wealthiest and most powerful nation on Earth.

There is no need for Europe to aspire to that status. European nations have been massive global players in the past, and places like Amritsar or Algiers testify to how badly that went. But it strikes me that Europe needs to get its act together if it is only to defend its status in a world increasingly dominated by huge nations, such as the US, China and Russia.

The success of the US wasn’t naturally entirely down to acceptance of Hamilton’s proposals on handling debt. But they certainly contributed: they set up the notion of the Union has owing a duty to all its components, and therefore being more powerful than any of them, capable of playing a full role on the world stage.

So the US passed its test over Assumption.

I’m not sure the Eurozone has done anything like so well over Greek debt.

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