PRINCETON – It is increasingly popular to think of Europe in binary terms. French President François Hollande is constantly flirting with the idea of building a new Latin bloc, in which Spain and Italy would join France in the struggle against fiscal austerity. In this vision, Latin superiority consists in a more expansive view of the state’s capacity to secure incomes and create wealth, and less of the “Protestant” obsession with the individual’s work.
The proposal is not altogether new. As the Italian philosopher Giorgio Agamben recently emphasized, it appeared at the beginning of the postwar era. In August 1945, a French intellectual, Alexandre Kojève, submitted to General Charles de Gaulle a sketch for a new foreign policy, based on a Latin “third way” between Anglo-American capitalism and Soviet-Slavic Marxism.
But there are even older variants of the French vision of Europe. In the middle of the nineteenth century, the French Emperor Napoleon III actually created a Latin Monetary Union, which included Belgium, Italy, and Switzerland. Napoleon saw the scheme as a potential basis for a single world currency.
The British economist Walter Bagehot replied at the time that there would probably be two competing world currencies, which he termed Latin and Teutonic. By Teutonic, Bagehot seemed to mean the Protestant world: the United States, recovering from the Civil War, Germany, and Britain. He had no doubt about which vision would win out: “Yearly one nation after another would drop into the union which best suited it; and looking to the commercial activity of the Teutonic races, and the comparative torpor of the Latin races, no doubt the Teutonic money would be most frequently preferred.”
The modern tendency to regard economic differences in terms of religion was stimulated by Max Weber’s reflections on the Protestant work ethic. But that interpretation is clearly unsatisfactory, and cannot account for the dynamism of the deeply Catholic world of Renaissance Italy and Flanders.
A better way to understand economic differences is to view them as a reflection of alternative institutional and constitutional arrangements. In Europe, that difference stems from two revolutions, one peaceful and wealth-enhancing (1688 in England), and the other violent and destructive (1789 in France).
In the late seventeenth century, in the wake of Britain’s Glorious Revolution, when Britain revolted against the spendthrift and autocratic Stuart dynasty, the British government that was formed after William and Mary assumed the throne adopted a new approach to debt. Voting budgets in parliament – a representative institution – ensured that the people as a whole were liable for the obligations incurred by their government. They would thus have a powerful incentive to impose controls on spending to insure that their claims could be met.
This constitutional approach limited the scope for wasteful spending on luxurious court life (as well as on military adventure), which had been the hallmark of early modern autocratic monarchy. The result was a dramatic reduction in the British state’s borrowing costs and the emergence of a well-functioning capital market, which caused private borrowing costs to fall as well. Representative government, and its logical outgrowth, the democratic principle, became part of the classic model of good debt management.
The alternative model to British constitutionalism was ancien régime France. Official bankruptcy, a regular occurrence, required prolonging maturities on state debt and reducing interest payments. But this solution raised the cost of new borrowing, so France began to consider the British model. The problem was that the imitation was imperfect.
After the conclusion of the American War of Independence, instead of returning to the old model of default, which had been applied as recently as 1770, the French elite did everything it could to avoid that outcome. Fearing that the system was fragile, the government opened its coffers in 1787, bailing out private investors who had lost in an immense speculative scheme to corner shares in a reorganized East India Company.
But there was an immediate problem: the existing tax system had reached its limits, and no more revenue could be raised without ending time-honored privileges and immunities. In the end, the only viable course was massive confiscation – the creation of biens nationaux as the basis for the issuance of state debt. But that measure, instead of restoring financial calm, led to an escalation of expectations regarding what the state could and should do, and exacerbated social tensions.
Adherence to the principle of non-default produced the French Revolution, the lesson being that political systems will collapse if they take on too much debt and try to pay at any cost. The situation was the reverse of Britain. In France, there was no adequately functioning market that differentiated among risks. The state’s commitments became incredible as it absorbed losses produced in the non-functioning market.
The French experience exacted a high long-term price: French society was poorer relative to Britain in the century after the Revolution. But the French Revolution also produced a powerful and attractive myth of social transformation. Far from discrediting the flawed approach to debt management, the “nation,” which succeeded absolutist monarchy as the basis of political authority, remained wedded to statist solutions.