Europanic – the Lessons of History

If you want to know if Euroland is going to survive the current market turmoil, don’t ask an economist. Dismal scientists can tell you all about ‘optimal currency areas’ (Euroland is not; nor however, is the United States) and they can shed some light on fiscal sustainability (answer: it depends) but they cannot say much of any use about the fundamental question: whether or not the citizens of Europe are willing to cough up the money through taxes or accept the painful cuts in public spending needed to pay off their debts and restore prudence to the public sector budget. For a real answer, you would be better off asking a political scientist.

At first glance, with riots in Greece and protests in other countries signalling public reluctance to settle their bills, the Euro looks pretty shaky at the moment. The real test, however, is whether the taxpayers of the richer, more prudent nations, like Germany, are willing to pick up the tab for dealing with the problems posed by the troubled poorer Eurozone nations. We think there are clues to what that answer will be in Europe’s political history.

Nearly 300 years ago, two of Europe’s great nations, France and Britain, found themselves mired in debts, largely because of the costs of wars with each other. Indeed, creditors had so little faith in getting their money back that the govenment bonds of these two countries were trading at a fraction of their face value. Both countries turned to the printing press and the new-fangled financial innovation of paper money for their economic salvation, resulting in the Mississippi Bubble in France and the South Sea Bubble in Britain, which both popped in 1720.

The responses of the two govenments to this financial meltdown were, however, completely different: the British government stitched together a messy compromise that compensated the investors in the scheme and rescued the nascent capitalist system; the French government abandoned paper money entirely and allowed the economy to sink into the mire. To be fair, the British had been experimenting with paper money for longer and had seen how, properly managed by the Bank of England, this financial innovation could be socially useful, whereas the French had gone for a ‘big bang’ inspired and led by the de facto Prime Minister, the Scotsman John Law.

Dig a bit deeper, however, and the wisdom of the British response was the product of the political settlement made at the time of the Glorious Revolution of 1688, which ended the conflicts of the 17th century. Compromise, debate, even politeness, were the fundamental values of this new politics in Britain, as protection against another slide into civil war. France’s way out of civil strife, by contrast, had been through the absolute monarchy of Louis XIV where politics was a bitter struggle between factions within the court. By the time of the Mississippi Bubble of 1720, Louis XIV had shuffled off this mortal coil and the throne had passed to his son Louis XV, with whose backing John Law and his supporters had been able to push their financial scheme to massive scale in a few short years. When the scheme failed (following a botched attempt to devalue the paper currency, incidentally), Law’s faction was left out in the cold and his rivals simply trashed his economic innovations.

The backers of the Euro should take cheer from this story because the politics of the Eurozone today resembles more that of Britain 300 years ago than of France at the same time. The European Union has always seen itself as the enlightened, rational solution to the conflicts that racked the continent in the first half of the 20th century. It is a community that is used to compromise and sacrifice to keep the group together, for fear of the consequences if they do not. That solidarity is being sorely tested at the moment but the politics will probably hold.

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