Breaking News From 1790
The individual countries have widely different cultures. Labor mobility is limited. The larger states don’t want to be on the hook for their profligate smaller cousins. Does this describe the dilemma facing the modern European Union? No, it’s the situation that Alexander Hamilton grappled with while running the Treasury of the newly formed United States.
Then, as now, the union was facing credit issues, debt issues, and a lot of skepticism as to whether it could hold together. Then, as now, the main problem was political rather than economic or financial. Then, as now, outsized personalities performed on a world stage, and their solutions would have global implications.
Of course the specifics differ immensely. Hamilton addressed 18th century problems with 18th century tools. Jean-Claude Trichet of the European Central Bank faces a debt crisis brought about in part by a global interconnectedness that Hamilton, Jefferson, and Washington could hardly imagine. Still, the parallels are striking.
In 1790 Hamilton wanted the Federal Government to assume the States’ debt and establish its own credit. One proposed for today’s EU is for the ECB to assume the member countries’ debts. But assumption carries with it moral hazard and political difficulties.
In 1790, the solution came from a compromise. It’s easy to say that this will be the answer now, but it’s hard to see what the compromise might be. One thing is certain: a united Europe is in everyone’s interest. Let’s hope Europe’s leaders are up to the challenge.
Douglas R. Tengdin, CFA
Chief Investment Officer
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