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Comparing European and American Debt Crises

July 5, 2011
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When talking about the euro, commentators cannot help themselves from comparing the euro to the other major currency, the US Dollar.  In fact, we examined this tend to compare the two currencies over a year ago in the blog Comparing the Dollar and the Euro.  Since then, the comparisons have continued, and recently NPR had an interesting one.  Simon Johnson, a former chief economist at the IMF and now a professor at MIT talked about how the United State government under the Articles of Confederation was actually very similar to the EU of today.

While the decision making structure of the Articles of Confederation was much simpler than the EU under the Lisbon Treaty, in both cases basically unanimity was required for important decisions.  Also, the US government back then could issue currency, but it could not collect taxes, just like the EU now.  This offers a cautionary tale for the EU, because the Articles of Confederation lasted only eight years before it was replaced by a much more centralized Constitution.  If 13 states quickly decided that it was necessary to transfer many of their powers to a federal government that they had just won through the Revolution, one must wonder about the prospects of the European Debt Crisis creating a more unified Europe.

Even though most commentators had decided that the European integration was probably going to rest on its laurels after the Lisbon Treaty, there is already talk of creating a “European Finance Ministry” in order to create a much more centralized fiscal structure to follow the centralized monetary system of the euro.  While this idea is currently not getting much traction in Europe, especially in Germany, Finland, et al, the Greek drama still has a few acts left.  From an American point of view, if things do get worse for the euro and fiscal centralization is seriously proposed, does the EU have a James Madison, Alexander Hamilton, and John Jay (i.e. the authors of the Federalist Papers) who can convince European voters that it is necessary?  After all, the Constitution had plenty of Anti-Federalists trying to defeat it as well.

On a comparison closer to this blog’s home, Indiana University, I also recently learned that Indiana once had its own debt crisis.  As Comparing the Dollar and the Euro mentioned, one leading European think tank argued that it is possible that a Greek default would not lead to contagion, as nine American states defaulted in the 1840s, yet the system survived.  One of these states was Indiana.  The Hoosier State had borrowed heavily to finance canals, tollways, and railroads to develop the state, but with the Panic of 1837, it was forced to privatize the canals, etc.  The current Greek story is in fact very similar to Indiana’s, and it holds a cautionary tale.  Indiana was so shocked by the crisis that it re-wrote its constitution and banned the sale of state bonds.  As a result, while Indiana is basically debt free (like most states, which have balanced budget requirements), the state has often not been able to finance capital improvement projects.  Perhaps it could be a similar story for Greece?

European Debt Crisis Webinar

In order to help American K-12 teachers learn about the economic crisis in Europe and what it means for the US, the EU Center will be sponsoring a free webinar on The European Debt Crisis and Its Implications for the US.  The webinar will help explain how this crisis formed, potential outcomes, and how this crisis can affect the US.  The event will occur at 3:00PM Eastern Time on Wednesday, July 13th.  Teachers from anywhere are invited to participate and they can receive one professional growth point for the event.  While the event is free, registration is required by completing the online form available here.  We hope to see you there!

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