Wednesday, 21 December 2011

Solving the Euro - We need Thomas Jefferson to have dinner with Alexander Hamilton

European leaders have failed to fix the Eurozone crisis: the latest stop gap is yet more borrowing. I am pleased that we are not providing any more IMF Bailout funds, but disappointed that the European leaders have still failed to use their own funds, which are held by the ECB, to resolve this crisis.
One American story tells the proper approach:
- in 1790 America had just ended its civil war, and the fledgling government faced huge debt. Everyone had overspent, with many states issuing promisory notes that were worthless [sounding familiar??]
- To reestablish confidence and halt the slide the American Chancellor Alexander Hamilton proposed a one time assumption of all state debts by the government. Initially he was rebuffed by the southern states in particular, who were less in debt than the north [again sound similar - just reverse north and south], with the result that the Assumption Bill did not pass
- Then on June 21st 1790 Thomas Jefferson invited Hamilton to dinner. Hamilton went despondent but noticed James Madison and others had also been asked. The result was the most famous dinner party in history: the deadlock was resolved by compromise - the assumption tax was agreed to with the ASmerican version of the ECB taking all the debt, and the northerners agreed to move the USA capital from Philadelphia to the banks of the Potomac = Washington DC, in 10 years time.
- the deal worked and boosted the economy, with various clever schemes added on to boost tax revenues and cover interest payments [another present Euro failing]
- The First Bank of the USA, as Hamiltons new bank became known, then also became a lending bank, in Dec 1791, thereby kickstarting commercial lending for business [would that not be nice to see!]
- Sadly there is no soldier statesman in Europe like Jefferson, Washington or Hamilton but the example is there for all to see:
FIRSTLY: use the European Central Bank as the bank of the last resort to absorb all debt - it has the firepower to do it. This will stop the Euro crisis and boost confidence, albeit there is an inflationary side effect.
SECOND: cut Euro spending, and ease debt repayment interest rates and provide innovative taxation abilities to Euro countries to stimulate the economy and get money coming in - the successful example of Ireland's low corproation tax is but one good pointer.
If the Euro collapses then sadly we are all affected. We must hope that Merkel, Sarkozy and the Italians know their history....