Most of the earliest skeptics of a borderless European union—with 17 member states sharing the same currency—are still alive and enjoying renewed respect. The Euro zone is barely a dozen years old and already its “fundamental flaws” are supposedly tearing it apart. America has proven, however, that fundamental flaws needn’t be fatal.
In the torturous evolution of the American economic union, The Economist finds hope:
“America began life as a fiscal basket-case. The federal and state governments were deeply in arrears on loans taken out to finance their war for independence from Britain; federal debt traded at 50 cents on the dollar, state debt for 20 cents or less. Alexander Hamilton, the first Treasury secretary, considered it vital to America’s economic health to re-establish faith in the national credit. He proposed in 1790 that the federal government assume the states’ war debts and then arrange a new schedule of payments and interest to refinance all of the republic’s unpaid bills. Holders of the restructured bonds would be encouraged to exchange them for capital in a new central bank that would issue a uniform currency to unify the states’ financial systems.”
“Foreshadowing the rifts within Europe today, Hamilton’s plan was deeply divisive. Virginia and other southern states that had paid off their debts resented being asked to pay taxes to bail out the others. Hamilton at one point feared for the future of the union if his plan did not pass: “Our credit will burst and vanish; and the States separate, to take care every one of itself.”
“For the first century of America’s existence, the federal government’s presence was minuscule. Its total expenditures were usually less than 2% of gross domestic product (compared with 25% now), not much different from the European Union’s expenditures today as a proportion of the EU’s GDP, and the overwhelming share went to national defence. America did not become a transfer union until the New Deal of the 1930s.”
The Economist recalls that the US carried on through the 19th century without a true central bank and as a consequence suffered repeated banking panics and depressions. Nevertheless, it matured as an integrated economy.
“For all the shortcomings of America fiscal and monetary institutions, capital and labour did move freely from state to state. When one state suffered higher unemployment, its people left for better opportunities in another. By one estimate, the north-east and south-Atlantic regions’ share of the labour force declined from 93% in 1800 to 52% in 1860, while the Midwest’s share grew from less than 1% to 23%.”
Click on: www.economist.com/node/21541836
The Economist concludes on an optimistic note:
“Today, Europeans remain far less mobile than Americans, despite the EU’s free market in labour. This is probably the result of linguistic and cultural barriers and of inflexible labour laws. The ultimate lesson of America, then, is that what holds an economic union together has less to do with fiscal and monetary institutions than the desire of its people for closer political cohesion. That is an example that Europe is struggling to emulate.”
Americans learned to trade their labor and their goods and services with one another—to trust each other in the same market—while being divided on their governing institutions and, for instance, on whether women and blacks could be equals, whether children can be sent to work, and whether Roman Catholics or Baptists would go to Hell.
In an age of great and divisive abstractions, America was a jerry-rigged joke. The European Union unites less divided people. It already knows what institutional reforms are needed, and still remembers being bloodied by the alternatives.