Following his victory in the revolutionary war America’s first president George Washington led a group of fledgling states made up of people who had little loyalty to the federal government. They were New Yorkers or Virginians first, Americans second.
His brilliant Treasury secretary Alexander Hamilton understood that the key test of the new union would be whether the Southern states would agree to the war debt that had been built by the Northern states being federalised. Did Americans feel American enough to share state debt?
He faced a titanic battle to get it agreed. Southern Thomas Jefferson opposed it bitterly – seeing good rural folk as being forced to pay the price for the profligacy of money changers in New York. In the words of the hit musical Hamilton:
‘In Virginia, we plant seeds in the ground
‘We create, you just wanna move money around
‘This financial plan is an outrageous demand’
Hamilton ultimately got his way by way of a deal to put America’s new capital on the Potomac. The foresight of Hamilton allowed America to emerge as the greatest economic superpower the world has ever seen, secure the dollar as the world’s reserve currency and make New York one of the largest financial centres in the world. It also meant that American politicians now spend their summers sweltering and their winters shivering in Washington D.C – one of the most unpleasant climates for any major city in North America.
The Coronavirus crisis has forced Europe to face this same Hamiltonian moment. Europe’s union – a fledgling one in historical terms – was forced to decide this week whether Northern Europe would be willing to foot the bill for the recovery of Southern Europe. They had another chance at this some years ago in the Eurozone debt crisis. At that point Northern Europe refused and forced indebted nations like Greece into swinging austerity. This time (free now of the constraints of the United Kingdom and the moral hazard associated with the debt crisis) French President Emmanuel Macron and German Chancellor Angela Merkel have secured a deal that will see an effective transfer of wealth from Northern to Southern Europe.
The European Union will now issue its own debt. A little had been done before for specific reasons, but nothing on this scale or for this broad a purpose.
Europe has agreed that the level of connection and kinship between nations is great enough that it is time to move away from counting the cost of being together.
In the short-term, the relief package that was agreed will not be earth shattering. Much of the money is being recycled and re-allocated. The European commission will issue EURO750 billion in debt between now and 2026. However, the precedent set by the move is huge.
It significantly reduces the risk of a break-up of the Euro – putting to bed the common objection that you cannot have a monetary union without a fiscal one. It also strengthens the role of the Euro as a reserve currency and will make it harder for investors to target the bond markets of Europe’s weaker nations such as Italy.
In the short-term concerns about company earnings and the spread of coronavirus may well dictate the progress of markets. However, in the long-term we could well mark this moment as one which enabled Europe to grow significantly in economic power. It could also be one of the most significant outcomes of the pandemic.
And for what it’s worth it does appear as if the EU has moved on from its break-up with us.
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