Europe’s Articles of Confederation

In his Financial History of the United States (1879), Albert Bolles wrote “Thought but little more than a century has passed since the first Continental Congress met, in September, 1774, the financial history of the United States during the subsequent period is thickly strewn with financial experiments amply rewarding investigation.”

Recent European Union efforts to come to grips with rolling bailout (first Greece, then Ireland, then…), suggests a comparison with the United States under the Articles of Confederation.

The Articles were passed by Congress in 1777 and came into force after they were ratified by Maryland in March 1781, and lasted until the adoption of the Constitution in 1789.  The Articles of Confederation provided for a looser association than the Constitution, with a relatively weak central government dependent on the states for funding.

Thursday night , European leaders approved an amendment to the EU’s constitution (the amendment must be ratified by all 27 union countries) which would establish a new bailout mechanism starting in 2013.  The new mechanism replaces two temporary entities set up in the wake of the Greek financial crisis: the European Financial Stability Mechanism and the European Financial Stability Facility.  What remains uncertain, however, is exactly where the funding will come from.

This has been the sticking point all along.  Germany and some of her northern European neighbors are resisting efforts to provide more financing.  And, in fact, this was the reason for Germany’s attempt to quash the “e-bond” proposal, whereby the EU would issue euro-denominated bonds.  Since obligations would be the joint liability of the EU countries, the more fiscally solvent countries could expect to bear the brunt of responsibility when they came due.

Until the issue of “who pays?” is resolved, Europe will have nothing more than temporary solutions.