The current issue under debate in Europe is whether the European Union will take on the sovereign Euro bonds of countries (states) as a supra-national or a supra-state agency.

I guess now is the moment of truth for Europe. The decision is not economic, but highly political. The day before, central banks stepped in to provide dollar liquidity. This decision, however, was in fact window dressing. Political issues require political solutions. As time has been wasted, Europe’s banking crisis has turned into a political crisis. The markets have been waiting for a political decision from European leaders. There appear two roads ahead: either European Union countries will engage in a deeper federation all together or will take their own paths individually. Just as the case was in the United States of America almost 220 years ago. Back then, the federal state took on the debts of states and thus instituted its sovereignty. It appears that this is the point at which Europe has arrived step by step. History is in a way repeating itself. Lately, Europe has been waiting  for its Alexander Hamilton to prepare Europe’s “Financial Plan.” If so, the new capital city must be somewhere near Berlin. Let me tell you how things appear.

The American Declaration of Independence dates back to 1776. When the independence war came to an end, the main matter of debate was who would pay back the debt received from Europe to finance the war. States like Maryland, Pennsylvania, North Carolina and Virginia paid their debts back on their own. Other states, including Massachusetts and South Carolina, still had substantial amounts of debts to repay. States which paid their debts in due time did not want to shoulder the burden of those that did not. They were therefore against the imposition of federal taxes. After fierce negotiations that lasted six months, the will to coexist overweighed the financial debate. It was agreed that the federal government should undertake the debts of states. Meanwhile, however, measures that would enable the federal government to inspect the financial affairs of states were introduced, thereby exerting its control over them. Second, it was agreed to move the capital away from states in debt and near to Virginia, which was not in debt. If it had not been for the debt crisis, the capital of the US could have been New York instead of Washington.

Now, let me emphasize some points about Europe’s debt crisis. The current issue at debate in Europe is whether the European Union will undertake the sovereign Euro bonds of countries (states) as a supra-national or a supra-state agency. Europe made a fundamental decision in this respect, intentionally or not, when the Greek crisis emerged in  early 2011. I personally believe that the difficulties regarding breaking the Eurozone played a role here, too. Greece was not left to its fate. Thus, Spain, Portugal and Italy were put under warranty automatically.

The second point: When undertaking the debts of Greece and the following countries, the European Union did not put forth a set of measure that would limit the “budget right” of respective countries or discipline their fiscal policies. The budget right is a highly political right. The political aspect here is about how to distribute the public budget expenditures among the people. If the outcome of the budget as a technical document, that is, the size of budget deficit, affects all individuals adversely, the budget right can be limited to technical purposes. This is exactly what the US did  220 years ago. The rising concerns about Germany’s borrowing capacity must be read from this perspective.  If measures are taken for individual countries, is Germany to guarantee debts? This is the question raised nowadays.

Here is the third point: Germany was among the first countries to violate the Stability and Growth Pact and the Maastricht Criteria established to prevent a public finance disaster. Germany was among the triggers of the process that today is dragging Europe into a debt crisis. Will Europe manage to develop a strong federation out of the debt crisis as the US did? The question relates to an issue beyond fiscal policy coordination. The question is highly political. Let us wait and see if the debt crisis will make Brussels the capital city.

This commentary was published in Radikal daily on 02.12.2011