Tuesday 20 May 2014

The Post-Troika Portugal - a view from the past

Richard Sylla’s paper, “Early US Struggles with Fiscal Federalism:  Lessons for Europe?”[1], provides an excellent background regarding European sovereign states and the euro common currency in comparison to the situation of the United States 200 years ago.  The young United States came out of the War of Independence heavily indebted, and it took great effort to put the country onto the financial path that led to economic growth and prosperity.
     From 1781 to ’84 Finance Superintendent Robert Morris made a great effort to bring order to the Treasury but was unable to sort out the prevailing chaos.  There were many tasks that needed to be addressed simultaneously, including stabilizing the public finance, managing the war debt, and establishing a stable currency, a central bank, a complete banking system, a stock exchange, and promoting businesses that could lead production, employment, and exports forward.  These became possible only following the introduction, in 1790, of the financial program of the first Treasury Secretary (Finance Minister), Alexander Hamilton. 
     Congress approved a new Constitution for the Union in 1788, while Hamilton’s proposals called for assuming the individual American States’ debts as a national debt, thereby promoting cohesion to the cause of American independence.  New lending was negotiated and secured to service that national debt, which contributed to global respectability and a national reputation; and a fiscal system with import duties was implemented to balance the needs of the entire financial system.  The Bank of the United States was founded in 1791 with the central-bank function of lender-of-last-resort; the U.S. Mint was founded in 1792 in Philadelphia to provide a stable currency based on the “dollar”; and in the same year the New York Stock Exchange was created to serve the existing corporate structure and nurture the next generation of start-ups.
     The optimist would say that the political parallels with today’s Europe and America’s historical success story predict the way forward for the many independent EU Member States.  The euro zone has a stable currency and there is an issuing central bank.  If a shared public debt was one of the prices of achieving the American Union, shared public debt is likewise one of the prices of achieving the European Union.  And if there are social cleavages in Europe, surely slavery was a greater one in America.  Can European national states take any comfort or hope in these parallels regarding the solution of financial problems?
Sylla’s paper recognizes that in addition to the obvious historical similarities there are also considerable differences.  Europe lacks a European Constitution.  Europe also lacks any constitutional principles on which to construct a shared Union public debt, nor are there any mechanisms compelling the individual states to honor such a notion at all. Moreover, even as late as the 1840s the Federal Union refused to bail out certain financially profligate American states, forcing them to face up to their own responsibilities.
     American cohesion and political will was much stronger in the aftermath of its recently-won independence than it is on the old continent, where bitter rivalry and hostility have been constant factors down through centuries of history. But in the earlier days, lenders were more favorable to the bellicose victors in a new and growing nation, it seems, than they are today in the presence of partner nations who have desires for socially beneficial programs, in peace for several decades.
     Unlike the United States, Europe is an amalgamation of independent nations and disparate governments, lacking the centralized power to define and enforce a common fiscal policy.  This forces each European state to devise its own such policy according to its own needs for servicing its own public debt – as well as according to varying constitutional principles, which may not view public debt commitment in the same way.
     Credibility is also a crucial factor that differs dramatically between a new-born nation and a complex political construct that has emerged largely as the result of the Marshall Plan, following two long and bloody conflicts that were essentially “European civil wars”, which devastated the “winners” and “losers” alike.
     As an independent European state, Portugal has a reputation to defend as well as economic growth targets to reach – in an institutional context that differs greatly from the framework and goals of a common European Treasury.

[1] Comparative Economic Studies, 2014, Spring: 1-19.  I thank Prof. Sylla for allowing me access to the forthcoming paper, and discussion.



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