Tags: Eurozone, United States, UK
In 1781 the then 13 independent states of America put in place the Articles of Confederation. Like the Maastricht Treaty it allowed for the free movement of citizens between states and created a free market for trade. A state-wide form of government (Congress) was also established but with limited powers at that time, in much the same way that the European Parliament currently functions. Significantly, the new US confederation did not have any fiscal powers to control taxation, spending and (crucially) the guaranteeing of the large debts many of the states had amassed during the war of independence from the UK. Many of the states were in poor financial condition and as a result the bonds they had issued had dramatically dropped in value undermining the confidence of investors in the ‘New World’. The newly independent and fledgling states of America were facing their own credit crisis, very similar to what is happening in Europe today, albeit for different reasons.
Whilst there was a pressing need for concerted action from the new confederation as a whole, it’s laws required unanimous consent to allow the revision of the confederation’s powers. In addition there was disagreement between the member states on how to resolve the problems. Some states wanted to form closer economic ties, with stronger states guaranteeing the debts of the weaker ones, whilst others like Rhode Island (similar to the UK today) wanted to maintain its independence. A group of pro-federalist states declared that despite the newly agreed laws requiring unanimous approval, changes could be brought in so long as 9 of the 13 states ratified them. This was too much for Rhode Island who decided to exercise its veto and opt out, as did North Carolina.
The eventual Constitution of 1787 granted the confederation new powers to impose taxes and allow the establishment of an independent central bank. Once it came into effect, the federal government moved quickly to create the bank and to secure the depreciated state debt. This ended the credit crisis and ultimately established the credibility of the infant republic in European financial markets.
When the first Congress met in 1789, there were only 11 states in the union. Ultimately, the other 2 dissenting states caved in under pressure — with Rhode Island entering in 1790 only when Congress began threatening to impose tariffs on its trade unless it abandoned the veto.
These historical parallels with the current eurozone crisis are uncanny. The eurozone members need to achieve fiscal union to establish market credibility and the UK is playing its part as Rhode Island and perhaps ultimately faces capitulation or exclusion from the EU once the federalists get their way.