Monthly Archives: February 2013

Will the Eurozone Collapse? Lessons from the 19th Century

Not a week went by in 2012 without some much-echoed warning about the Eurozone’s imminent collapse. Every election in some European fringe state, every meeting of the ECB board, every phone call by Angela Merkel was interpreted as an event that would either save or doom the common currency. Behind this panic lay the belief, regularly expressed in The Economist’s briefings, that the Eurozone was so flawed in its construction that it either had to choose the path of radical reform and become some form of fiscal union, or break apart.

Surprisingly, the crisis of the European treasury bond markets appears to be over now, and yet the Eurozone has neither collapsed nor transformed itself into a fiscal union. This development defies the logic of everything we have read over the past year. And yet, a look at the 19th century indicates that a breakup of the Euro was perhaps never as likely as most journalists and economists liked to claim.

The Euro is usually portrayed as a bold experiment without precedent. This view ignores the fact that much of 19th century Europe had something of a common currency for many decades: The Latin Monetary Union. Last summer, I wrote a lengthy feature on the union for Die Welt am Sonntag. Those who can read German can take a look at it here: http://www.welt.de/finanzen/article108413049/Schon-1908-tricksten-die-Griechen-beim-Geld.html.

The Latin Monetary Union was formed by Belgium, France, Italy and Switzerland in 1865 and soon included Greece, Spain, Romania, Bulgaria, Serbia and Austria-Hungary. Unlike the Euro, back then the coins of each state could keep their name, but they became mutually exchangeable at a fixed rate of 1:1.

The union soon slid into serious crisis because, guess what, fiscally irresponsible Greece and Italy abused the union’s flawed construction for their own financial gain. I will spare you the economic details (you can read more about it in Luca Einaudi’s “From the franc to the ‘Europe’: the attempted transformation of the Latin Monetary Union into a European Monetary Union, 1865-1873“, in Journal of Economic History, Vol. 53, No.2, 2000), but essentially the coins were based on a bimetallic standard that overvalued silver. Italy and Greece, chronically on the verge of bankruptcy, printed a myriad of silver coins and paper banknotes that soon led to an outflow of coins into the union’s other member states, where they caused inflation.

The states of the south lived above their means, and the fiscally prudent states of the north, in this case Belgium and France, paid the bill. The nature of public opinion in the latter was quite similar to that in Germany today, and Belgium came very close to leaving the union at least once. The union never really worked, and yet it weathered numerous financial crises and stayed intact until World War I. This longevity was due to the fact that a breakup would have cost France and Belgium dearly, since the overvalued silver coins would have immediately lost a lot of value.

Even though the union was dysfunctional and in an almost permanent state of crisis, it lasted for more than 30 years after Belgium first threatened exit and was only destroyed in the wake of the disastrous First World War that took down the old European economic order.

There are many differences between the Latin Monetary Union and the Euro and I do not mean to imply that the Euro will last a long time because its predecessor did. Compared to the Euro, the LMU was a rather loose network that didn’t even apply to banknotes. But what the example of the LMU shows us is that a monetary union can be quite resilient even if it doesn’t really work. As long as the political will is there and the cost of breakup significant enough, we shouldn’t be surprised if it survives without radically reforming itself. It took a World War to break up the Latin Monetary Union, and it may take a lot more than an election victory by Silvio Berlusconi on Sunday to doom the Euro.

 

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Not the first Pope named Benedict to resign

Given how old and frail pretty much every Pope tends to get at some point, it is surprising how rare it is for  them to step down for reasons of bad health. A couple of Papal resignations are known from the middle ages, but none of them had any apparent connection to health. In 1415, Pope Gregory XII resigned in an attempt to end a schism in the church. In 1294, Pope Celestine stepped down after only six months in office, apparently because he didn’t enjoy his new job.

The most interesting case dates from the 11th century. In 1032, a man with the remarkable name Teophylactus of Tusculum was named Pope Benedict IX at the age of only 20. He became one of the most scandalous Popes ever, supposedly holding orgies in the Papal palace on regular occasions. Some sources suggest that he was openly gay.

In 1045, his godfather John Gratian paid Benedict a large sum of money to get him to resign. Benedict agreed and stepped down. But shortly after he changed his mind, returned to Rome with an army and deposed his successor, none other than John Gratian himself (now Pope Gregory VI). Benedict was deposed by the German king Henry III in 1046 but became Pope once again in 1047 after his successor had died. German troops intervened and kicked him out of the Papal palace in 1048, and he was finally excommunicated a year later.

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Mali’s Crisis and the History of State Failure in Africa

The French military intervention in the civil war in Mali has drawn numerous comparisons to the European and American engagement in Afghanistan. In both cases, Western powers sent soldiers into more or less failed states to fight violent Muslim extremists in remote and almost inhospitable areas. The warnings that Mali could become a second Afghanistan echo the fear of a drawn out conflict that cannot be won by conventional means. While the similarities between the two cases are striking, the crisis in Mali is in many ways distinctly African: Its story of state failure is typical of the continent’s post-colonial history.

In his book “States and Power in Africa: Comparative Lessons in Authority and Control” Jeffrey Ira Herbst, a professor of international relations and political science at Princeton University, offers an intriguing historical explanation for why Mali is too weak to control its own territory. His book is based on Charles Tilly’s famous argument that effective states are a consequence of war. In order to beat their enemies in combat, rulers have to collect taxes, raise armies and build up an infrastructure. In other words: War creates a strong incentive to build up a functioning administrative apparatus. This incentive, Herbst argues, was never present in Africa.

In Europe, high population densities created a need for agricultural land and led rulers to constantly fight over territory, which in turn led them to improve their state structures. In contrast, population densities in Africa have always been considerably lower. Fighting over territory simply wasn’t worth the effort in most cases and in this more peaceful environment African rulers rarely had an incentive to create effective state structures. This weakness of African administrative structures persisted through the colonial period. The Imperial powers had divided up Africa amongst themselves and largely refrained from fighting over territory. This lack of warfare combined with the European powers’ desire to run their colonies on the cheap meant that the imperial rulers saw no pressing need to extend and improve their administrative structures. In consequence, Africa’s colonial states had little more than formal control over most of their territories.

Upon independence, Africa’s newly founded states quickly decided to keep their boundaries from colonial times. Their own political and economic weakness and the unwillingness of the international community to tolerate state-on-state military aggression gave African leaders a strong disincentive to attack their neighbouring states. Few African countries thus faced threats from abroad and in consequence war as a state strengthening factor continued to play only a negligible role. According to Tilly, the weakness of African states such as Mali boils down to the fact that their borders have been uncontested.

Tilly’s argument is certainly controversial. Explaining the weakness of African states simply with demography and geography leaves out important ethnic and cultural factors. But his claim that the presence of external threats is crucial to state formation is compelling and can certainly explain part of Mali’s predicament. For decades, Mali’s rulers faced no threat to their territorial integrity from abroad. Aid money was always there to fill government coffers, and staying in power was merely a question of appeasing the urban population and military elites. In consequence, it is not surprising that the improvement of effective administrative structures into the poor north never happened.

The rebellion of the northern Touareg suddenly changed everything. The influx of heavily armed fighters for the first time created a foreign force strong enough to threaten the Malian state. In consequence, the task of creating a strong Malian state has suddenly become extremely urgent. The military coup in the capital Bamako in early 2012 was justified with the need to create a stronger government to counter the threat from the North. While the Putschists did little to actually strengthen the state, their actions indicate that Mali’s elites have realized that something has to change.

Paradoxically, the rebellion posed both an existential threat to Mali and a unique opportunity to reform its state once and for all. For a time it seemed as if Mali’s elites had their backs against the wall and had no choice but to try radical reform. After all, the Malian government in its current form was certainly unable to beat the rebels. The French military intervention has removed the existential threat posed by the Islamist rebels for now, but it has also removed a strong incentive to reform. Mali’s government now knows that it does not have to improve its administrative apparatus to ensure its own survival as long as the French are there to save it. Francois Hollande’s intervention has saved Mali in the short run, but it may well have doomed it for the future.

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