The Levelling

by Michael O'sullivan

  Hamilton, were he alive today, would rub his hands at the rebuilding and recrafting that needs to be done. He would scan the great regions (poles) of the world and the shabby shells of twentieth-century institutions like the WTO, and he would wonder where to cut, prune, and replant. We could imagine him making a shopping list of the things that need to be done so that each pole will reach its full potential. This approach might also reflect Hamilton’s gift, which is now a very Western or “Washington” one, of telling people and countries how they should run their affairs.

  Europe

  Were he to stumble on the European Union today, Hamilton might have a sense of having seen it all before. In the late eighteenth century, he was instrumental in helping stitch together the “jarring, jealous and perverse petty states” of what is now the United States.2 His use of federal power, funding, and military resources in facing down the Whiskey Rebellion of 1791–1794 makes the more recent tribulations of the eurozone look tame. As someone with an instinct toward federalism, he might relish the prospect of sticking Europe together. He might pursue two broad avenues, one constitutional and the other financial.

  To take the constitutional angle first: one frequently noted rejoinder during debates on the politics of the European Union is to ask whether anyone has in fact read the EU constitution. Few have. The EU constitution is some four hundred pages long (at seventy thousand words, it is seven times as long as the French and Dutch constitutions), and it is unlikely that many Europeans have read it or that they keep a copy close to hand. Nor are they likely to be aware of the detail in the shorter, though important, Charter for Fundamental Rights. Lawyers and academics will tell us that constitutions are legal documents and as such are long and complicated. Still, long, complex texts like the European Constitution put distance between people and those who govern over them.

  This is one of the ways in which politics today has created a sense of disconnect between insiders and outsiders. There is a small community in Brussels (lawyers mostly) who know the workings of the EU constitution, but the vast majority of EU citizens have little sense of it. From a social and political point of view, it is a disturbing divide because Europeans are losing confidence in the European Union, and as multiple economic and humanitarian crises take their political toll, Europeans are losing their sense of what Europe stands for.

  This is where Hamilton comes in. He would be familiar with the powerful simplicity of the US Declaration of Independence and Bill of Rights, both of which echo the values and recommendations in the Levellers’ Agreements of the People.3 Hamilton, as a key author of the Federalist Papers, actively campaigned in states like New York for the ratification of the Constitution, explaining the practical need for it and the benefits it would create in the long run. His energy and focus are reminders that lofty legal documents, however important they are to a country, need to be brought home to people in a very real way.

  An example that often comes to my mind is the promotion of Eritrea’s 1997 Constitution. According to Professor Bereket Selassie, one of its authors, the key elements of the new constitution were broadcast daily on state radio, in nine different local languages.4 It is a good example of a legal document, a constitution, being communicated in a practical way.

  In this respect, Hamilton might try a few approaches. One thoroughly modern one might be to use artificial intelligence to optimize the constitutions of the various European states and to condense them into one, meaningful page. I have tried but so far have failed in this approach. What I had in mind was to use an algorithm to extract core beliefs and principles from the constitutions of a range of countries and boil them down into a single, short document. Another approach is to follow the work of the Comparative Constitutions Project, whose team has done a much better job.

  A more straightforward tack that a modern-day Hamilton could try is to produce a very short document that highlights the meaning and relevance of the European Union to its many citizens. Constitutions, as legal documents, are often unwieldy from a more popular point of view. In Europe there is a need for something that distills the purpose of the European Union, the characteristics of being an EU citizen, a list of the essential European factors that might be found in common from a Dutch man to a Sicilian woman to a Danish child to a Polish grandmother. One exercise that might help this process along is to have those citizens run pilot projects to discover what they feel they have in common, where they feel they are different, and what policies might, to their advantage, draw them together. In the spirit of the seventeenth century, let’s call it something like the Doctrine of Common Understanding, and the initial pilot project could be based on the participation of a retired Portuguese teacher, a Polish bank clerk, a German policewoman, a Latvian student, an Italian pensioner, and a Swedish nurse. Their goal is to produce, on a single sheet of paper, the answers to the following questions: What do they, as Europeans, have in common? And commensurately, what differences do they have as Europeans? Then we might ask them to stress some common values and aspirations. Finally, they would be asked to note policies that would bring them closer together as Europeans (one example I have in mind is the Erasmus pan-European student-exchange program).

  The answers might start off with the fact that most Europeans have a common history, one that has been marked by wars (including the bloodiest in history), scarred by the rise and fall of empires (nearly every European country—with the exception of Ireland—has had an empire), shrouded in Christianity, and shaped by the passage of monarchy to democracy and autarchy, the rise of learning and culture, and, from the thirteenth century onward, the evolution of great cities. This is an altogether broad and historical view of European identity, and it might well permit the inclusion of countries, such as Russia, that are not considered part of Europe today. The sum total of this historic experience might well inspire citizens to say that they have the following common values: peace (not to have another European war), the influence of the Christian church(es), democracy, recognition of the benefits of social democracy, and free movement of EU citizens.

  Unlike the citizens of large economies like the United States or China, EU citizens do not have a common language. Also, they have very different educational experiences, very strong city or regional attachments, different approaches to doing business and making policy, and varying levels of corruption and transparency in public life. There is, however, a new trend across Europe of mixed marriages and relationships between people from different European countries (and from countries outside the European Union), which is creating the makings of a large cohort of people who, with their children, have a pan-European identity. It may be that this group will be the one to properly flesh out the Doctrine of Common Understanding.

  In addition, clarity is required on the responsibilities and behaviors demanded by the European Union from those who wish to become EU citizens and on the principles that govern the economic management of the European Union. This is a short list and it can easily grow. Hamilton might be tempted to produce essays on the topic, but in an age of social media, he might better opt for a short note that sets out the common factors that define what it is to be “European.”

  With this project in train, Hamilton might turn his attention to Europe’s faulty financial system. Just over a year after the publication of the Federalist Papers (1787–1788), Hamilton was appointed as the first secretary of the US Treasury. The institution that he shaped remains one of the most influential bodies in the world. By analogy, one might say that the eurozone will only be complete once it has its own treasury secretary and once it has found someone of Hamilton’s caliber to lead it. Mario Draghi, the ECB president, is a rare example of a leader who can bring force and direction to an institution in Europe.

  The creation of a super finance ministry, or EU Treasury, by the mid 2020s is one of the stated goals of the European Commission, among a number of other institutional initiatives.5 These are to be welcomed, but they must not be carried out for the sake of
giving politicians greater powers; rather, they should be implemented with a sense for how Europe’s economies work in harmony with each other. With his genius for communication, Hamilton might recommend that Europe’s leaders examine its financial system as if it were a system of pipes. A flow-based view of an economy is an intuitive one, and it has some credence.

  Readers might be familiar with the term “Phillips Curve,” which is based on the research that New Zealand economist Bill Phillips carried out on the link between unemployment and inflation. Well before he was celebrated for this, however, Phillips built an extraordinary machine that pumped colored water through glass vessels in order to demonstrate how money flows around an economic system. Levers in the machine permitted users to simulate the effect on the system of fiscal (budget) policy changes, and such was the intuitive appeal of the machine that major universities like Harvard and Oxford ordered their own versions.

  In today’s algorithmic, QE-driven economies and markets, such a simple contraption might seem well out of place, but given the way the eurozone crisis has habitually reared its head, Hamilton might feel that policy makers in Brussels could do a lot worse than build their own version of Phillips’s machine. Such a device might encourage a much-needed period of introspection into the workings of the euro and might shine light on the areas missed by the European Commission’s rather tame 2015 “Five Presidents’ Report,” whose aim was to outline some of the measures that would complete Europe’s economic and monetary union.6

  In the spirit of Phillips’s machine, picture the eurozone as a system where liquidity passes through nineteen different vessels, at different speeds and causing very disparate pressures in each of them. A few, like Greece, are too weak economically and politically to withstand these pressures.

  More broadly, the example of Phillips’s machine shows that in the absence of counterbalancing mechanisms or safety valves, a common monetary policy can have different impacts on, say, the Portuguese economy and the Finnish one. This much was clear early in the first decade of the twenty-first century when a monetary policy that was set for a recovering German economy granted very, very low interest rates to Ireland and Spain, where banks and consumers then deployed cheap cash with vigor. Hamilton would be familiar with the different behavior of local economies from his experience in late-eighteenth-century America, where local currencies gave way to the dollar and a more centralized tax system took hold. Though he also had to deal with local and state assemblies, he did not have to contend with so many different legal systems, economic structures, languages, and cultural exceptions.

  In this respect, with an eye on the very ambitious plans the European Commission must develop for the eurozone, the engineers of the euro need to figure out how to accommodate a single monetary policy within different economies and financial systems. They need to figure out what works well at a pan-European level and what flexibility needs to be granted at the local level. The commission should consider the chronic Greek crises as a warning to resist the urge to smother its adherents with fiscal uniformity. Instead, it must cleverly redevelop the way the eurozone is engineered so that it is harmonious within its existing member economies and transmission mechanisms.

  The principal suggestion here is to revise the restrictive set of fiscal rules to give more emphasis to a framework where national governments have fiscal flexibility. Importantly, they would be bound by the advice of independent fiscal councils and, through restrictions on debt issuance, bound to run fiscal policies that are on balance countercyclical to eurozone monetary policy (so that when monetary policy adds fuel to the economic fire, fiscal policy dampens it down) and that are economically productive rather than political in their aim. Using fiscal policy to complement monetary policy would help ensure that the eurozone’s economies, especially the smaller ones, like Clinton’s Goldilocks economy, do not become “too hot” or “too cold.”

  In practice, this will demand lots of innovations in the area that policy wonks call “macroprudential policy”—that is, efforts to reduce financial risks to an economic system. For example, if eurozone interest rates were very low by the standards of the Irish economy and produced a housing bubble, the Irish central bank then could increase the deposit-to-loan ratio on mortgages or the finance ministry could increase the tax on property transactions so as to dampen the risk of a housing bubble. In a sign that Ireland has not fully learned the lessons of its housing crisis, it is now enduring its second housing bubble in ten years, with housing affordability very stretched and homelessness a very public social problem.

  Allowing, encouraging, and helping individual states to use policy tools like this would allow them to exist in the eurozone in a more stable way. Such policies could be coordinated by the EU Treasury. Part of its mandate would be recognition that not all eurozone economies are created equal and that many of them behave differently under different conditions (France is less sensitive to fluctuations in the euro than Germany, for example). An EU Treasury with a figure like Hamilton at the top would also give some credibility to the European Union’s policies; the European Union does not lack for rules, regulations, and directives, but it rarely finds the political will to enforce them.

  One of the Hamilton’s triumphs was to persuade individual states (especially wealthier ones like Virginia) that the Treasury should be able to issue debt and collect taxes at a federal level. He might also point Europe down this route. At first, the idea of a pan-European Union tax will face resistance, which may lessen if the need for pan-European public goods becomes clearer. Military hardware projects—in the form of either transport planes or an EU cyberwarfare unit (which would need up to ten thousand personnel)—are among the projects that might attract pan-European funding.

  A less controversial means of raising taxes and spending them in a way that spreads growth across the European Union would be a stabilization levy. This is one of the missing ingredients in the eurozone, and it could be put in place to distribute the gains from countries that benefit abnormally from attractive financial market conditions to those who do not. For example, the policies of the ECB drove German interest rates to historically low levels (about a mere 0.4 percent for much of 2018) and, for some time, into negative territory. Germany has benefited greatly in that it barely pays any interest on its debt because of the ECB’s policy.

  Germans might argue back that Germany gives the ECB its credibility, so it (Germany) deserves a fee in the form of low interest rates. Under the framework of a stabilization levy, the EU Treasury could arbitrate this. In technical terms, it might set a low but less abnormally low neutral rate of interest for Germany, say, 1 percent instead of thirty basis points, and Germany would (depending on the size of its debt) pay the difference to the EU Treasury.

  The EU Treasury (rather than national governments) would then invest this money in infrastructure and other economically meaningful investment projects around the eurozone. An investment council or the board of the European Investment Bank would oversee the investment projects, and potentially the countries that pay the highest surcharges would have greater say over how the capital is invested, outside their own countries. One might think of the same being done in situations where, because of ECB policy, the euro weakens sharply, and companies who benefit, such as large exporters, would pay the EU Treasury a low-euro surcharge, which would then be invested as described earlier.

  This approach would have several effects. First, the ability of such a system to reflate and redistribute in a transparent, economically meaningful way would mean that in a crisis, markets would react less violently toward the eurozone, and interest rates and single currency may not be as volatile. Second, this approach would, in economist speak, help monetize the policies of the ECB, or in plain English, help ensure a real economic impact (arguably less wealth inequality, a greater fiscal stimulus in the periphery countries, and better infrastructure, to highlight a few potential benefits) from policies such as quantitative easing. Third, this approac
h would curb imbalances in capital accounts across the eurozone and to a degree take some infrastructure spending decisions out of the hands of politicians (especially in the periphery states). Hamilton might regard it as a tidy solution, and one that would provide a worthy start to the new EU treasury secretary.

  Large institutions like a treasury are not always known for their encouragement of innovation, but they can use their power to support good ideas. One might be to foster uniformity of policies where they can make a difference. One such proposal would be to harmonize processes, notably the processes involved in setting up a business. The European Union could establish an EU-level process whereby entrepreneurs could adopt an EU template for setting up a business such that it would take the same amount of time to establish a business anywhere in the European Union. This might be one of a number of responses to Brexit and would help shock national governments, such as France’s, into a more business-friendly attitude. As it stands, the World Bank “time to start up a business” statistics vary greatly across Europe: in Belgium it takes four days but in Austria it takes twenty-one days. Of course, setting up a business is only the first and relatively easy stage. The EU entrepreneur template should ideally make the early stages of the life of a business as uncomplicated as possible. Such an approach might well force a more business-oriented approach across Europe and will show the power of the EU Treasury to work around governments on issues like regulation, corruption, and growth. If this approach is taken up and is successful, it might well be extended to other areas, such as legal and justice systems. If one compares the access to, complexity of, and transparency of legal systems across the European Union—from Serbia to Italy to Finland to Belgium—there is potential to harmonize laws across specific topics, such as bankruptcy, prosecution of corruption, and labor laws. This would be a much more meaningful reform than deeper political uniformity.