An article written by Bundestag President and former Eurofin hawk Wolfgang Schäuble on April 19 for Project Syndicate, and translated into Italian by Il Sole 24 Ore May 14, is creating shock waves in Italy. Schäuble warns of a “debt pandemic” and calls for supranational financial police measures to force EU member states to go back to fiscal discipline in the post-pandemic phase. In doing so, Schäuble misquotes Alexander Hamilton’s work.
While correctly warning that the ECB monetary policy is threatening an inflationary wave, Schäuble wrongly concludes that the way to avoid that is for member states to cut their national debt, so as to make the ECB asset purchases superfluous.
“When the money supply multiplies like that, without corresponding adequate growth in the volume of goods and services, an increase in the inflation expectations of businesses and households is inevitable.” Thus, “every country must work on itself and strive to maintain budgetary discipline. But one thing is clear: Left to their own devices, members of a confederation of states like the Eurozone are too easily tempted to incur debts at the expense of the community. Balanced budgets are almost unattainable in high-debt countries without external pressure.”
Schäuble then warns Italian Prime Minister Mario Draghi, reminding him that in past conversations, Draghi as ECB president has shared Schäuble’s concerns and will now hopefully act accordingly.
However, the EU should implement a scheme “to take political control of the debt problem,” by adopting a proposal from the German Council of Economic Experts: the European Redemption Pact, an initiative “modeled on Alexander Hamilton’s historic sinking fund, established in 1792 for the then-infant U.S.. The Fund forced the 13 U.S. states “to deposit good collateral, practice budgetary discipline, and reduce their debts.” “That external constraint on fiscal policy – and not the mutualization of individual states’ debts, which is occasionally recommended for the EU – was the crux of the oft-cited ‘Hamiltonian moment.’” [What a shame Hamilton didn’t understand that — he strove mightily for a full year against Jefferson and Madison to win the federal assumption of state debts.]
Schäuble’s longing for punishing “debt sinner” states is inferior only to his travesty of history. First, the EU is not, despite what he says, “a confederation of states.” This makes his entire argument null and void. EU member states cannot be treated as members of a confederation unless you deprive them of any and all sovereignty. Hamilton’s U.S. was a nation with a united people with a common culture, a common history and a common fight for independence, whereas a “European people” does not exist. The EU is formed by peoples with different national cultures, history and languages. A European confederation is not uniting those peoples but is indeed dividing them, making a government of the people, by the people and for the people impossible.
Secondly, you cannot isolate one secondary element of Hamilton’s national credit system from all other elements, including a National Bank with the mandate of supporting national credit (debt), an emphasis on manufactures and a protectionist trade policy.
However, a merit of Schäuble is that by making his hardline proposals public, he puts wind in the sails of national anti-EU forces.
