Europe Recalls Hamilton as Desperation Turns on the Debt
As Europe struggles to contain its debt crisis, the name of an American dead for more than two centuries is being invoked by those who think euro area nations will have to trade some autonomy for fiscal stability.
Alexander Hamilton, the first U.S. Treasury secretary and the face on the ten-dollar bill, offered cash-strapped states in 1790 a deal they eventually couldn’t refuse: The federal government assumed their debts in return for more centralized power. The alternative risked consigning their creditworthiness to “burst and vanish,” and a breakup, Hamilton warned.
Europe can learn from Hamilton, said Paul de Grauwe, a professor at the London School of Economics and two-time Belgian candidate for a European Central Bank post. “His was a first attempt at pooling debt and as with Germany today there was lots of resistance.”
Debate over how much Europe should integrate has gone on for years. It has been given new urgency as first Greece and then others, including Spain and Italy, have faced borrowing costs they cannot sustain, while Germany, with the region’s healthiest economy, has demanded austerity in return for more assistance.
While policy makers are taking baby steps toward closer ties, national self-interest and ideology leave them balking at the United States of Europe, viewed by some as the only solution to the two-year crisis.
“We hear all the same arguments Hamilton did, but he had a project of nation building and we should do something similar” de Grauwe said in a telephone interview yesterday. “It will, of course, be more difficult as you don’t have as much identification with the common project.”
“The Europeans might look to this early history in the United States as a point of reference for what they’re doing,” said C. Randall Henning, a fellow at the Peterson Institute for International Economics in Washington. “They don’t want to replicate what the United States did, but they want to draw appropriate lessons from that and apply them.”
De Grauwe and Henning aren’t alone in bringing Hamilton back to life, 208 years since the soldier-turned-statesman died in his late forties from wounds in a duel with Aaron Burr. Thomas Sargent accepted the Nobel Prize for economics in December with a speech titled “United States then, Europe now.” Robert Zoellick used his final days as World Bank president to advocate a “Hamiltonian Solution” for Europe, a position echoed by hedge fund Bridgewater Associates LP.
Hamilton is relevant today because his methods “frame the choices that are being made now,” Sargent, a professor of economics at New York University, said in a telephone interview. “The only way you’re going to bail people out is if you ensure that you can take control of things, rewrite laws.”
Underpinning the calls for a European Hamilton and his push for fiscal solidarity in return for less sovereignty are parallels which make virtuous Germany a modern Virginia and cash-strapped Greece a latter-day Massachusetts.
It was at Hamilton’s pressing that the federal government assumed and honored the debts of states such as Massachusetts, a precursor of the debate now raging over whether European capitals should issue joint debt to assist those locked out of markets. Hamilton argued that the debt was generated fighting the British and the absolving of it was necessary to avoid defaults and deliver a stronger, more-creditworthy nation. He also pushed for the creation, in 1791, of the Bank of the United States, the forerunner to the Federal Reserve.
International Monetary Fund Managing Director Christine Lagarde, in a Bloomberg TV interview July 3, spoke of a “larger project” in Europe.
“Monetary, banking and hopefully fiscal union later on,” said Lagarde, a former French finance minister.
Just as Europe mulls greater centralization over political decisions and banking supervision, Hamilton won the power for the federal government to oversee the selling of Treasury bonds and impose tariffs to cover the costs of the debt assumption.
A proposal from German government advisers for a redemption fund which would allow sovereign debt exceeding 60 percent of gross domestic product to be pooled and paid off over time mirrors a similar initiative for a sinking fund from Hamilton.
Personalities and their principles matter as much today as then. German Chancellor Angela Merkel wants countries to demonstrate greater budget responsibility before she’ll even consider closer fiscal ties and has sought to put investors on the hook in the event of default. That echoes how Virginia’s Thomas Jefferson and James Madison kicked back at Hamilton’s call for taxes, arguing that some states had repaid much of what they owed and contending his plan to purchase states’ debt at 100 cents on the dollar would reward speculators.
Political compromise was the order of the day for Hamilton. His first assumption bill was defeated by Congress in April 1790, and he only won after he agreed that the nation’s permanent capital could be on the Potomac River near Virginia, not in New York, his home city.
The states that still ran up debts later discovered that bailouts weren’t on tap when the government let them go bust in the mid-19th century, limiting the risk of moral hazard.
“Hamilton saw assuming debts as taking control,” said Garrett Ward Sheldon, author of “What Would Jefferson Say” and a political science professor at the University of Virginia’s College at Wise. “Jefferson thought the states were autonomous. But one thing that hasn’t changed is that whoever pays the piper calls the tune. Today, that’s Germany. We all know that when someone bails you out, they tend to end up controlling you.”
Jefferson later complained to President George Washington of being “duped” by Hamilton into agreeing to assumption, “and of all the errors of my political life this has occasioned me the deepest regret.”
In Europe, some policy makers are paying lip-service to the idea of greater integration.
Leaders last week agreed their permanent rescue fund can directly aid banks once a single financial supervisor is created. A report crafted by officials including European Union President Herman Van Rompuy also sought a “criteria-based and phased” move to joint debt issuance over the next decade. In return, more centralized decision-making would require countries to seek approval before issuing government debt beyond agreed- upon limits.
Euro-area government debt at the end of last year totaled 8.22 trillion euros ($10.1 trillion), a 5 percent increase from 2010, according to European Union data.
Spain’s 10-year bonds declined for a third day today, pushing the yield to 7 percent. Italian bonds also fell, with the 10-year yield rising as much as 10 basis points to 6.08 percent. Ten-year yields of 7 percent forced Greece, Ireland and Portugal to seek sovereign bailouts.
“At the end of the day, if you’re going to save the euro zone you have to” follow Hamilton’s lead, former Citigroup Inc. Senior Vice Chairman William Rhodes said in a June 22 television interview on Bloomberg Surveillance. He is now chief executive officer of William R. Rhodes Global Advisors LLC.
There is still a long way to go. Merkel, 57, says there will be no shared liability for debt in her lifetime. French President Francois Hollande is unwilling to cede sovereignty over budgets. The Italian and Spanish governments led complaints from the so-called periphery that austerity alone wouldn’t solve their problems.
There still isn’t the appetite for a “Cultural Revolution,” in which Europe follows Hamilton’s advice to “think continental,” said Huw Pill, chief European economist at Goldman Sachs Group Inc., in a research note to clients.
While this would offer a “rapid and effective resolution of the crisis,” Pill said the likelihood of it is “low” because authorities are “in thrall to their national political constituencies.”
“Thinking national rather than continental is therefore the most likely result,” said Pill, a former European Central Bank economist.
The Hamilton model “is potentially instrumental,” though “Europe is not America,” said Olli Rehn, European economic and monetary affairs commissioner in a Bloomberg TV interview June 18. “We move in steps.”
A major obstacle is the lack of a Hamilton-like visionary in Europe or a constitution on which a more federal Europe can be built, said Nathan Sheets, Citigroup’s New York-based chief international economist.
“If there is a European Hamilton I’m just not sure who it is,” said Sheets, a former Federal Reserve official. “If I have a criticism of Europe’s handling of the crisis it’s that they’ve never articulated what their vision is to get from today to a happy prosperous future.”
Niall Ferguson, a professor of history at Harvard University, faults Merkel given her economy should lead the way as the region’s richest. “We have a problem in the lack of vision,” he said. “It would have to be a German, so Alex Von Hamilton, and that person just isn’t there.”
There are other differences between the Europe of today and Hamilton’s America, according to John Steele Gordon, the author of “Hamilton’s Blessing,” a 1997 book on Hamilton and the U.S. debt. Finance was much simpler then and the 13 U.S. colonies had more in common than the euro zone members with the same language, law and British tradition. Even after assumption, a civil war had broken out in 70 years.
“I wouldn’t wish a civil war on Europe,” said Steele Gordon. “The differences between Greece and Germany are much greater than those between Georgia and Massachusetts.”
Whatever Europe does, it will have to act soon, said Kim Schoenholtz, director of the Center for Global Economy and Business at the Stern School of Business in New York.
“Europe’s problem is that it’s running out of time,” he said. “The question isn’t whether it’s plausible to imagine a Hamiltonian solution. The question is whether it’s plausible to imagine one that can be organized in the time that monetary union has.”
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