The Answer to the Eurozone Crisis was Written in 1787

When I last focused on the EU in this blog, I took a look at why Italy doesn't worry me too much.  I omitted Spain from this analysis purposely, because what placated me with regard to Italy just did not exist in Spain despite Spain's lower overall stated sovereign debt-to-GDP ratio.  Since that time, the Eurozone had calmed down, but during my blogging hiatus things once again flared up.  Now, I think it's time to take a much deeper look at the EU and what it all means, because this has become far bigger than an economic question.  More specifically, I am firmly in the camp that sees the Eurozone crisis as a constitutional crisis, not an economic one.  

Since World War II, the European Continent has moved towards a unified economy, without unifying any of the institutions necessary to manage and enforce a centralized currency.  As a political philosophy guy, this is seriously fascinating stuff, as we are witnessing history in the making, while as an investor it's skewed to the scary side of things.  The uncertainty is great, however, for you history buffs out there, the clearest parallel to Europe's present predicament is the United States under the Articles of Confederation.  

As a refresher, the Articles of Confederation governed the United States in the time period between the American Revolution and the Constitution, where States existed as de facto sovereigns and no strong centralized power existed.  In response to growing economic and political failures, and rising social tensions, the leading intellectuals and political figures in young America gathered in Philadelphia to "form a more perfect Union."

Unfortunately, and contrary to the linear path with which history is narrated, the Constitution was not instantly greeted with excitement and acceptance.  As a result, the Founding Fathers had to go to great lengths to ensure its passage, especially in the "core" states of New York and Virginia.  Alexander Hamilton was a particularly important architect of our form of American Federalism and was a key emissary for the State of New York (in fact, he was the only New Yorker to sign the document).  To help get New Yorkers and Virginians to vote "yay" for the Constitution, Hamilton and James Madison wrote what are now known as The Federalist Papers under the pseudonym "Publius."  It's amazing how relevant these papers remain today.  

To be clear, I did not originally conceive of this idea of the EU as the pre-Constitutional US.  I first encountered the parallel in some of Bridgewater's excellent economic research available on the WWW.  Instantly the parallel resonated with me, and as a result, I started re-reading some of the relevant American History.  No one document struck me as more important today than Federalist #15.  It's as if Alexander Hamilton wrote each and every word directed at the powers that be in the EU today. 

Hamilton so adeptly incorporates the political, economic and ultimately the human emotional element into constructing a deeper understanding of the failures of a weak, centralized confederacy of interests.  Interestingly, Hamilton briefly gets into the history of failed attempts at confederation in Europe and their collapse at the hands of individual constituency interests.  Ultimately, he makes it abundantly clear why no sovereign interests can unite without unified institutions that have real powers of enforcement.

Below are a few excerpts from  Federalist Paper #15, entitled "The Insufficiency of the Present Confederation to Preserve the Union" but I urge all interested parties to read the whole thing:

In pursuance of the plan which I have laid down for the discussion of the subject, the point next in order to be examined is the "insufficiency of the present Confederation to the preservation of the Union." It may perhaps be asked what need there is of reasoning or proof to illustrate a position which is not either controverted or doubted, to which the understandings and feelings of all classes of men assent, and which in substance is admitted by the opponents as well as by the friends of the new Constitution. It must in truth be acknowledged that, however these may differ in other respects, they in general appear to harmonize in this sentiment, at least, that there are material imperfections in our national system, and that something is necessary to be done to rescue us from impending anarchy. The facts that support this opinion are no longer objects of speculation. They have forced themselves upon the sensibility of the people at large, and have at length extorted from those, whose mistaken policy has had the principal share in precipitating the extremity at which we are arrived, a reluctant confession of the reality of those defects in the scheme of our federal government, which have been long pointed out and regretted by the intelligent friends of the Union.

...

It is true, as has been before observed that facts, too stubborn to be resisted, have produced a species of general assent to the abstract proposition that there exist material defects in our national system; but the usefulness of the concession, on the part of the old adversaries of federal measures, is destroyed by a strenuous opposition to a remedy, upon the only principles that can give it a chance of success. While they admit that the government of the United States is destitute of energy, they contend against conferring upon it those powers which are requisite to supply that energy. They seem still to aim at things repugnant and irreconcilable; at an augmentation of federal authority, without a diminution of State authority; at sovereignty in the Union, and complete independence in the members. 

...

There is nothing absurd or impracticable in the idea of a league or alliance between independent nations for certain defined purposes precisely stated in a treaty regulating all the details of time, place, circumstance, and quantity; leaving nothing to future discretion; and depending for its execution on the good faith of the parties. Compacts of this kind exist among all civilized nations, subject to the usual vicissitudes of peace and war, of observance and non-observance, as the interests or passions of the contracting powers dictate. In the early part of the present century there was an epidemical rage in Europe for this species of compacts, from which the politicians of the times fondly hoped for benefits which were never realized. With a view to establishing the equilibrium of power and the peace of that part of the world, all the resources of negotiation were exhausted, and triple and quadruple alliances were formed; but they were scarcely formed before they were broken, giving an instructive but afflicting lesson to mankind, how little dependence is to be placed on treaties which have no other sanction than the obligations of good faith, and which oppose general considerations of peace and justice to the impulse of any immediate interest or passion.

...

Government implies the power of making laws. It is essential to the idea of a law, that it be attended with a sanction; or, in other words, a penalty or punishment for disobedience. If there be no penalty annexed to disobedience, the resolutions or commands which pretend to be laws will, in fact, amount to nothing more than advice or recommendation. This penalty, whatever it may be, can only be inflicted in two ways: by the agency of the courts and ministers of justice, or by military force; by the COERCION of the magistracy, or by the COERCION of arms. The first kind can evidently apply only to men; the last kind must of necessity, be employed against bodies politic, or communities, or States. 

...

There was a time when we were told that breaches, by the States, of the regulations of the federal authority were not to be expected; that a sense of common interest would preside over the conduct of the respective members, and would beget a full compliance with all the constitutional requisitions of the Union. This language, at the present day, would appear as wild as a great part of what we now hear from the same quarter will be thought, when we shall have received further lessons from that best oracle of wisdom, experience. It at all times betrayed an ignorance of the true springs by which human conduct is actuated, and belied the original inducements to the establishment of civil power. Why has government been instituted at all? Because the passions of men will not conform to the dictates of reason and justice, without constraint. 

...

From this spirit it happens, that in every political association which is formed upon the principle of uniting in a common interest a number of lesser sovereignties, there will be found a kind of eccentric tendency in the subordinate or inferior orbs, by the operation of which there will be a perpetual effort in each to fly off from the common centre. This tendency is not difficult to be accounted for. It has its origin in the love of power. Power controlled or abridged is almost always the rival and enemy of that power by which it is controlled or abridged. This simple proposition will teach us how little reason there is to expect, that the persons intrusted with the administration of the affairs of the particular members of a confederacy will at all times be ready, with perfect good-humor, and an unbiased regard to the public weal, to execute the resolutions or decrees of the general authority. The reverse of this results from the constitution of human nature.

...

All this will be done; and in a spirit of interested and suspicious scrutiny, without that knowledge of national circumstances and reasons of state, which is essential to a right judgment, and with that strong predilection in favor of local objects, which can hardly fail to mislead the decision. The same process must be repeated in every member of which the body is constituted; and the execution of the plans, framed by the councils of the whole, will always fluctuate on the discretion of the ill-informed and prejudiced opinion of every part. 

...

In our case, the concurrence of thirteen distinct sovereign wills is requisite, under the Confederation, to the complete execution of every important measure that proceeds from the Union. It has happened as was to have been foreseen. The measures of the Union have not been executed; the delinquencies of the States have, step by step, matured themselves to an extreme, which has, at length, arrested all the wheels of the national government, and brought them to an awful stand.

...

Why should we do more in proportion than those who are embarked with us in the same political voyage? Why should we consent to bear more than our proper share of the common burden? These were suggestions which human selfishness could not withstand, and which even speculative men, who looked forward to remote consequences, could not, without hesitation, combat. Each State, yielding to the persuasive voice of immediate interest or convenience, has successively withdrawn its support, till the frail and tottering edifice seems ready to fall upon our heads, and to crush us beneath its ruins.