On June 20, 1790, at the “Dinner Table Compromise”, Treasury Secretary Alexander Hamilton cut a deal with Madison and Jefferson. In this great bargain, Hamilton conceded to the Virginians’ demand to have the new capital built in an area along the Potomac River. In return, the federal government would assume the Revolutionary War debts of the thirteen states.
Hamilton finally got what he wanted. He consolidated the debt of the states and replaced it with US government bond, which in turn was financed by a new tariff and the country’s first federal sin tax.
By doing this, our founding fathers put the dollar on the map. It established excellent credit for the government, proved that the administration could handle its affairs and it inaugurated and era of wide prosperity. In short, it was the foundation for the federal economic government of the United States.
History has vindicated Hamilton. With hindsight, there is no doubt that this was a brilliant move. Yet, it took him a lot of persuasion to get it done. A national debt did not go well with the Virginians. Jefferson and Madison were more inclined to reduce the power of the federal government. They certainly did not want to reinforce it with a newly-created shared debt. The southern statesmen also felt that it was unfair to ask the state of Virginia, which had paid off its debt, to chip in again for those who had not managed their finances as well. Further persuasion was needed. Building the new capital in the south was nice, but an additional little bribe would help settle the deal. Virginia thus got a substantial reduction in tax obligations.
Great bargains often include a little bribe. That’s so obvious that Thomas Jefferson did not think it worthy of mentioning in his account of the Dinner Table Compromise.
Fast forward 221 years. This is Europe’s opportunity to make history. The Europeans are facing a similarly decisive decision. The euro is lacking credibility and Germany is now in Virginia’s shoes. President Sarkozy – always in favor of more centralized power – is trying to convince its German counterpart of the benefits of consolidating some euro debt backed by all members.
Is a grand bargain imaginable in Euroland? Can Sarkozy and Merkel rise to the occasion? Will they seize the opportunity to re-launch the euro? Will they become the founding father and mother of the euro? If so, will the euro replace the almighty dollar as the global currency?
Alas, Merkel ain’t no Jefferson.
But let’s dream for a brief moment. Let’s assume that Sarkozy was the reincarnation of Alexander Hamilton (former Prime Minister de Villepin would readily play the role of Aaron Burr who kills him in a duel). Angela Merkel, in the role of Thomas Jefferson who favors decentralized government, also thinks it unfair for Germany to have to pay for the other states’ accumulated debt.
In our dream, Angela Merkel organizes a dinner where she and Mr. Sarkozy eke out a compromise that would give the European currency some respect. Such a deal could include a quid pro quo where Germany finally agrees to euro-bonds backed by all member states in return for substantial cuts in the EU’s agriculture budget. And then, a little bribe in the form of lower contributions to the EU budget to help the Germans make up their mind.
By offering a reduction in EU’s agriculture budget, France would – at last – send a strong signal that they are not in this union only to be on the receiving end. It would also liberate a lot of funds for better use. Spending 40% of EU’s budget to subsidize 5% of Europe’s labor force has never been good economics anyway.
Just imagine what would happen if this dream bargain materialized. Stock markets would be euphoric – this time for more than a couple of days. The euro crisis would be ended overnight. EU’s credibility would be restored and the world economy would breath a big sigh of relief.
It would also help Germany’s image. From being the Grinch, Germany would become a trusted leader. Maybe even a loved one.
Even better, such a deal would more seriously address Germany’s long term concerns. It would give distressed countries a reasonable way out while also enforcing fiscal discipline. Where “automatic penalties” miserably failed, market forces are more likely to succeed.
Let’s assume that Greece, to take a random example, faced prohibitively high interest rates to finance an out-of-control debt. A newly created European Bank would give them a way out of their predicament. It would make money available at a low rate in return for strict fiscal policies. Greece would thus temporarily give up its sovereignty in economic matters in return for affordable debt. Over time, it would then return to the markets and regain independence. The sooner the Greeks reduce their deficits, the sooner market forces would allow for a return to normality.
The benefits are multiple. Greece would be forced to get its act together, but cheap money would make it less painful. Hardship is more tolerable when there is solidarity and some light at the end of the tunnel. Europe would stop being an amalgamation of disparate, selfish countries. European solidarity would go a long way to cement a common ambition. Most important of all, it would work much better than today’s bureaucratic illusionary “automatic penalties”. Market forces have a way to make things happen.
So much for dreams. Today’s reality is very different. Germany has no interest in leading. It is more interested in being righteous. The Club Med countries seem to be doing their best to make them feel that way.
Naill Ferguson could be proven right. In the future, people will say it was Germany that killed Europe.
How can Germany not be tempted to tell Europeans to get lost? It has become the rich uncle everybody comes to for a bit of money.
The question nobody seems to ask is what’s in this for the Germans?
Unfortunately, the present leaders of Euroland are very different from their predecessors. In 1992, Jacques Delors convinced Kohl, Mitterand and Thatcher to build a Europe of free flow of capital, goods, labor and services. It gave Europe a great free market impulse.
These visionary founding grand parents have now been replaced with a new generation of leaders more statist than all the previous ones put together. Free market principles are being replaced by more regulations. Fiscal competition between member states is out. Harmonization of corporate taxes is in. Let’s raise taxes all together!
Europeans are back to their old tricks. Any hiccough in the economy is dealt with by adding new rules and bureaucratic measures. Market forces are not to be trusted, making Margaret Thatcher’s warning of a “narrow-minded, inward looking club…ossified by endless regulations” sound more prophetic than ever.
The latest currency crisis is just an illustration of this. David Cameron was right to walk away from this mess. The Iron Lady approves, I am sure.
In this kind of Europe, stock markets will have a hard time. They will bounce on every announcement that Merkel and Sarkozy are getting together to prepare a summit of European heads of state that will be followed by meetings of ministers of finance to set up committees that will decide on the size of the coming declaration. Then, markets will come back down on the inevitable disappointment.
Resentment against Germany will grow. Social unrest will grow. Brussels bureaucracy will grow. Brussels’ bureaucrats’ paycheck will grow. I am not sure markets will grow.
As a footnote, I cannot resist this masterpiece read in The EuropeanVoice:
A “spokesman for inter-institutional relations and administration , European Commission Brussels”, explains why “suspending the annual pay adjustment for EU officials requires the Commission to show that several legal criteria and case law have been met, relating to serious and sudden deterioration in the economic and social situation, which cannot be gauged by the normal method for calculating the adjustment.” Since the crisis is now four years old, it no longer qualifies as “sudden” and the bureaucrats’ annual payment adjustments ( i.e. pay increase) cannot be suspended…
These guys are good! They deserve their generous, non-taxable salaries!