The Mutualization of Sovereign Debt: Comparing the American Past and the European Present

Abstract

This study identifies commonalities between two historical incidents of debt assumption -in the United States in 1791 and in present-day Europe. By comparing the interests and behaviour of key players in these two incidents, we find three major parallels: first, in their strategic interactions, parties both for and against debt mutualization raise arguments based on notions of fairness and morality; second, in both historical episodes we find harsh rhetoric levelled against private creditors, who are derided as greedy speculators; third, bargaining is an essential element of the debt assumption process. Bargaining is directed toward limiting or expanding the scope of debt assumption. Further, bargaining typically leads to some form of conditionality imposed in order to increase the chances of the debts being repaid or to ensure benefits accrue to the parties assuming the debt.

Shaking Off Burdens – Debt Relief and Moral Intuitions

“…Madrick (), documenting the role of self‐interest in finance from 1970‐2010, cites the greed of individuals and financial institutions as a driver of the Latin American debt crisis of the early 1980s. Connecting the recent European debt crisis to earlier history, Steinbach () notes the common ways that rhetoric was used to portray lenders as greedy speculators. Knight () notes the prominent anti‐capitalist narrative amongst Greeks who blame the troika for socioeconomic hardships, while, during 2015 negotiations, a headline in Germany's top‐selling daily newspaper read “No More Billions for the Greedy Greeks” (Huggler, ).…”

Political Science and the Eurozone Crisis. A Review of Scientific Journal Articles 2004–15

“…Using a comparison between the United States in 1791 and present‐day Europe, Steinbach () deals with the moral hazard problem caused by debt mutualization in response to a crisis. The role of Germany as an indirect beneficiary of the Greek bailout (as Greek banks are to a large share German‐owned) is highlighted.…”

“…Germany is subject of a case study dealing with the country's willingness to provide financial assistance to crisis countries (Bonatti and Fracasso, 2013). Instruments for (automatic) financial stabilization are discussed under the construction narrative (Dullien and Schwarzer, 2009;Mourlon-Druol, 2014;Steinbach, 2015), but there is only one article especially dedicated to a proposal for Eurobonds (Hild et al, 2014). Eurobonds are mentioned in a number of other articles as well, but only in passing.…”

Corporate reconstructions of federal macroeconomic government institutions compared: USA then, Europe Now

“…However, it was not until Roosevelt's April 1938 fiscal turn, following the 1937 recession, that the orthodoxy of balancing the budget as the basic guideline for fiscal policy was profoundly challenged, within both the administration and the corporate community. In both cases, a minority within the corporate community was instrumental in bringing about a change of views (Collins 1981;Stein 1969, chapters 6 and 8). The key individuals in this respect were Beardsley Ruml and Paul Hoffman, who would play a leading role in the Committee for Economic Development, the corporate lobby that dominated post-war economic policy (Mizruchi 2013, chapter 3;Domhoff 2013;Stein 1969, chapter 9 8 ).…”

“…The strand of the comparative federalism literature that is most relevant for my purposes is work that looks at American political-economic and institutional history in an attempt to draw lessons for contemporary Europe (Bordo et al 2011 ; Frieden 2016 ; Henning et al 2012 ; Kirkegaard et al 2018 ; Schelkle 2017 ; Steinbach 2015 ). Much of this work was commissioned by EU institutions or influential think-tanks—an interesting point in that it speaks to the frame through which European officials themselves think about the macroeconomic and institutional issues facing the EU.…”