Hamiltonian Solution For Europe

June 28, 2011


Historical analogies are a dangerous tool, but reading about the founding era while watching the European sovereign debt situation unfold it’s hard to avoid being struck by parallels. The Articles of Confederation were, like the European Union, a form of supranational entity that was more than a treaty by less than a state. The Confederation Congress lacked taxing power, and had a cumbersome decision-making structure. And under the Articles, the United States was troubled by a variety of sovereign debt problems that were eventually resolved by the adoption of the US Constitution and the enactment of Alexander Hamilton’s debt assumption plan. And while a Hamiltonian solution to Europe’s current woes is extremely unlikely, I think it would work economically.

What would that look like?

It would start with the recognition that Greece is insolvent. It can’t pay the money it owes. One or two or maybe three other countries also may be insolvent. And the existence of solvency problems in some states is creating liquidity problems for other larger states. So there’s some insolvency, and even though the insolvency is concentrated in a relatively small number of small states it’s a problem for a much broader set of European people. At the same time, if you look at the total amount of sovereign debt in Europe and compare it to the Eurozone’s total fiscal capacity, the debt is very manageable. The Eurozone as a whole is a very solvent, creditworthy entity. So in principle you could consolidate all that outstanding European debt into a single Eurozone-wide debt financed by a modest European Solidarity VAT Surcharge. Then you’d have to severely curtail (if not eliminate) the EU member states’ ability to engage in deficit spending, limiting them to some kind of authority to borrow from a central European entity. The EU itself would become a debt-issuing, taxing entity like a real country.

This would be exceedingly beneficial as an economic matter, taking a problem that’s currently totally intractable and resolving it at extremely modest cost to taxpayers. What’s more, the thinking of the Founding Fathers of the Eurozone appears to have been that the monetary union would be but one step on a path of “ever-closer union.” But obviously to enact my scheme, Nicholas Sarkozy would have to be willing to sign his name to the end of France as an independent nation state. And lather, rinse, repeat for Portugal, Spain, Italy, Finland, Ireland, etc. And as you can imagine, this isn’t going to happen, so….