French President Francois Hollande recently announced that he would
be pushing for mutualizing European debt, a step that Germany, the
Netherlands, and Finland oppose.
There are historical precedents for mutualizing debts. Alexander Hamilton’s assumption of states’ debts in 1790, for example, is often mentioned as a model. There are significant differences, however, between that situation and the one the European Union is facing now. While the United States eventually managed to shape an “American tribe”—though 70 years after Hamilton, a civil war was fought that shaped this new tribe’s eventual features—the notion of a European "tribe" is not on the horizon.
The Balkan tribes are as divided as they have ever been; the Scots want to separate from the United Kingdom; Italy seems to be almost as divided between South and North as it was in Garibaldi's time; and the chances of Greeks, Italians, Spanish, and French intermingling with Germans to shape a European tribe do not seem much better today than they were in preceding centuries.
Public debt is backed by the government's right and ability to tax. The proposed euro bonds would be backed by expectations that EU citizens can create sufficient taxable wealth. I highlight "taxable" because both Greece and Italy create wealth: Just much of it does not pay taxes.
After all, the new paper would be backed by exactly the same thing that any governments' outstanding debt is currently backed by: Governments' right and ability to tax. What happens with such clauses in place is that the EU gives up the right to enforce payment on the seceding members, and that right is transferred to the seceding national governments.
Read more: http://www.american.com/archive/2012/june/eurozone-bonds-learning-from-pre-nuptial-agreements
There are historical precedents for mutualizing debts. Alexander Hamilton’s assumption of states’ debts in 1790, for example, is often mentioned as a model. There are significant differences, however, between that situation and the one the European Union is facing now. While the United States eventually managed to shape an “American tribe”—though 70 years after Hamilton, a civil war was fought that shaped this new tribe’s eventual features—the notion of a European "tribe" is not on the horizon.
The Balkan tribes are as divided as they have ever been; the Scots want to separate from the United Kingdom; Italy seems to be almost as divided between South and North as it was in Garibaldi's time; and the chances of Greeks, Italians, Spanish, and French intermingling with Germans to shape a European tribe do not seem much better today than they were in preceding centuries.
Public debt is backed by the government's right and ability to tax. The proposed euro bonds would be backed by expectations that EU citizens can create sufficient taxable wealth. I highlight "taxable" because both Greece and Italy create wealth: Just much of it does not pay taxes.
Creditors must know that the entity who is responsible and held accountable for the debt is also the entity who has the right to tax and regulate. If the two are not the same, the idea of euro-zone bonds loses credibility.Assume, then, that with the potential euro bonds issue, Greece, Spain, and Italy ("Club Med") would agree to a clause that in case of secession due to lack of performance, the bonds would be exchanged for those of the three national governments. Would creditors buy these new issues at lower interest rates than the Club Med countries are now trading? The answer is no.
After all, the new paper would be backed by exactly the same thing that any governments' outstanding debt is currently backed by: Governments' right and ability to tax. What happens with such clauses in place is that the EU gives up the right to enforce payment on the seceding members, and that right is transferred to the seceding national governments.
Read more: http://www.american.com/archive/2012/june/eurozone-bonds-learning-from-pre-nuptial-agreements
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