Monday 24 October 2016

Learning from US history in the fight to save the EU

Published 16/06/2016 | 02:30

Ireland may view with concern what the EU and the Eurozone might get up to if Britain secedes.
Ireland may view with concern what the EU and the Eurozone might get up to if Britain secedes.

Asworthless as a Continental. Americans still say that, apparently, although few may realise they are talking about the paper dollars printed to pay for the War of Independence more than 200 years ago.

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Money has a long memory. It is not just the Germans and their ill-fated Reichsmarks. Will people one day have a quip about the worth of Greek debt, as well as Greek gifts? But as the Germans find themselves in the unwanted, and unwonted, role of founding fathers of the United Money of Europe, they may ask themselves if there is anything to be learnt from those who founded the United States of America.

Many people have wondered why that question has not been asked more often. The story of the creation of the US dollar is the story of the creation of the USA itself, whereas the story of the creation of the euro is….well, what?

As that unanswered, largely unasked question looms ever larger, it should perhaps prompt more attempts to find what lessons can be learnt from the monetary history of the USA.

One such is a paper from Jeffry (stet) Frieden, Professor of Government at Harvard University, published by the Bruegel think tank in Brussels. The first thing that leaps out is that, compared with the turbulence of that US history, Europe ain't seen nothing yet.

Until the 1840s, every US state could issue its own currency. Confusingly, all were called dollars, but there the similarity ended. Some fiscally cautious states backed their currency with sufficient reserves; others did not.

A currency market developed, trading within what was a single political federation. New York dollars sold at face value, Tennessee dollars at 90 cents, and so on. There were no takers for the currencies of Mississippi and Michigan.

Rampant state currency issue was possible because, under President Andrew Jackson, the fledgling US central bank had been abolished. No wonder Jackson is a hero to the Tea Party tendency of today's Republican Party. No wonder either, that it all ended in the Panic of 1837.

Europe has started the other way, with a central bank but no political state. This is completely new in history; summed up in the aphorism that there have been countries without currencies (think Ireland pre-1979) but, until the euro, never a currency without a country.

Its creators can point to 1830s America to show the difficulties facing a single market with a multitude of currencies, whether with the same name or not. Its critics can point to the difficulties, then or now, of a single currency in a diverse union.

In particular, one size never fits all. As Prof Frieden says, the two histories both involve the conflict between fast-growing states with a need for credit and more developed ones which want stable debt and sound money.

There are also those who are merely irresponsible and it is not always easy to separate the need for easy money from the desire for easy money.

EU creditor countries find it hard to make that distinction. As for the US, while I was aware that the Civil War was not just about slavery, I had not thought it was partly creditors versus debtors.

It was a period of rapid potential growth for the Southern states, as the mechanised cotton industry developed.

They wanted more expansionary, pro-debtor policies, while more industrialised northern states favoured effective centralisation of monetary and financial policies. (How odd that such divisions are so often on a north/south basis).

The national dollar - the greenback - was established during the Civil War after the South had seceded and could no longer object. Ireland will view with concern what the EU and the Eurozone might get up to if Britain secedes and can no longer object.

But perhaps the most pertinent lesson for Europe from the US crash of 1837 is that several states defaulted or renegotiated their debt. There was no bailout.

Europe was supposed to have learnt that lesson, but chose not to apply it. It is easy to forget that rescuing troubled members of the single currency was against the rules. In the event, rescuing the troubled banks which had lent to the troubled members was deemed more important.

Americans had recognised the risks of inter-state banking with no bailouts, and then forgot them. The principle that the banks must look out for themselves had to be abandoned in the face of the imminent collapse of huge, global, inter-connected banks.

The US is still wrestling with that problem, for which history is no guide. In Europe, the no-bailout rule is back on the Eurozone's books, at least partly, but the plans for avoiding future taxpayer rescues of banks lack credibility.

We have instead plans to stop them going bust. The biggest change from the euro crisis has been to the ECB. It was not supposed to be a bank regulator or a lender of last resort - both common functions for a national central bank - but now it is both.

Ireland is testimony to that. Controversies still surround the conditions the ECB imposed on its emergency loans, while new ones flare over its regulatory restrictions on mortgage lending (albeit devised and administered by the Central Bank of Ireland).

This is a different history from that of the US but the same forces are involved and they cannot be wished away. Prof Frieden quotes Mark Twain; "History does not repeat itself, but it does rhyme."

Like many American political observers, he is scathing about Europe's failure to come to grips with the consequences of its gigantic monetary project.

The EU is unique, and everything is being tried for the first time but, as he says, any union depends on the standing of its central authorities. The mishandling of the euro debt crisis has left that standing perilously low.

It took the USA 80 years to square the moral hazard of guaranteeing federal debt with a credible no-bailout rule for states. It is still the stuff of daily politics, having returned in different form.

Europe's rulers refuse to have any union-guaranteed debt and rely on incomprehensible rules and the actions of a central bank with no clear remit to prevent future member state bankruptcies.

Europe does not have 80 years and cannot preserve the union by force, as Abraham Lincoln did. It needs to learn from others' experience, and do better, but this does not seem to be the case.

"The inability to come up with a serious approach to unsustainable debts has sapped the EU of most of its political credibility," Prof Frieden says.

This day week, we may well see the stark truth of that assertion.

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