A report by Stephen Findler from Brussels in this morning’s Wall Street Journal:
The euro crisis is a story of a breakdown in the mechanisms meant to manage national relations within the currency union. Its future hangs on how—and whether—these broken mechanisms can be refashioned.The entire article is well worth reading by anyone who care’s about Europe’s future, free markets or economic institutions more generally.
In a speech to a conference in Munich last week, the Princeton University historian Harold James suggested that one of the central questions is how the 17-nation currency bloc handles its excessive debts.
The British-born professor offered a tale of two revolutions: Britain's so-called Glorious Revolution of 1688 and the French Revolution of 1789. The first was peaceful and wealth-enhancing, the second violent and destructive, leaving French society poorer than Britain's for more than a century.
So in the British case, not reneging on debts was a principle associated with the development of legal security, representative government and modern democracy—lessons taken on board by the founders of the U.S.
In the French case, the state took on too much debt and then tried to pay at any cost. The state lost credibility and, unlike in Britain, no private market developed to distinguish between risks.
On the face of it, the euro zone combines both these cultures of debt. Germany sees itself as the upholder of a set of rules that attempt to enhance governments' credibility, by limiting their borrowings and placing appropriate risk on the shoulders of private-sector investors.
On the other side of the coin are serial defaulters such as Greece, which according to authors Carmen Reinhart and Kenneth Rogoff has spent more than half of its existence since independence in 1829 in a state of default.
His message for the monetary union is that it needs rules—but rules that are interpreted flexibly. He drew some further history lessons for the euro.
Lesson One: Indecision leads to poor choices and policy paralysis.
Lesson Two: Finding a clear answer to a crisis is more difficult when there are conflicts over distribution of wealth and income—as now between northern and southern Europeans.
Lesson Three: Solutions become harder when economic arguments have been used to justify integration. That means when growth falters, the credibility of the project crumbles.
Latest in a series of outsourced economic commentary in a time of economic hardship