It is not controversial to propose that humans have come pretty far in the last 225 years. In the 1780s, Britain had a population of 9 million, being a slave-trader was a viable career choice and Australia was, for all intents and purposes, uninhabited. The industrial revolution was still in its early stages, and the closest someone had come to generating electricity was Benjamin Franklin flying a kite in a storm. Safe to say, then, that we have made some progress. However, less progress seems to have been made in in the political sphere, or more precisely, in the construction of governments – political architecture if you like.

Following the Declaration of Independence in 1776, the fledgling United States of America made its first attempt at forming a central government. In November 1777, after a year of debate, the Articles of Confederation were presented to the 13 founding states, and the USA began to function as a federal republic. At least, that was the plan – after just 12 years, it was replaced by something a lot more familiar to us today – the US Constitution.

The original attempt, the Articles of Confederation, succeeded admirably in its purpose of creating an internationally recognised governing body, presenting a united political and military front to the British Empire, and gaining support from foreign powers. With the war won and independence secured, the Articles did not provide sufficient centralised power to form and govern a permanent nation.

Instead, in 1783 there were a group of sovereign states, loosely bound together by common cause and ambition, but not by common policy. The new United States had no president, no executive body, no universal judiciary or tax base – in short, no physical ability to implement its laws. What it did have was the capacity to print currency, and a mountain of debt accumulated by the states during the war.

In the above paragraph, if one replaces ‘war’ with ‘credit boom’, ‘United States’ with ‘Europe’, and ’1783′ with ’2012′, it seems to be a fairly accurate summary of the situation on the continent today: a large debt problem, wilful sovereign nations, and no marshals or executives to enforce pacts or austerity. I don’t want to labour the point, because a) I’m sure I’ve glossed over some important nuances and b) everyone’s probably sick of hearing this. But we have to start learning from our mistakes.

In Europe, this means accepting an increasing homogenisation of fiscal policy – if a country wants to be in the Euro, it has to accept that much of its individual sovereignty will be forfeited. Yet this surrendering of some autonomy would be far outweighed (in theory) by the benefit of being part of a fully functioning greater entity – the Federal States of Europe would be the largest economy in the world.

An argument often brought out is that national identity would be lost, were Europe to fully integrate. I understand that most continental nations have national pride supported by centuries of individuality and independence which characterises them, sometimes unfavourably in the view of other nations. However, Europe has also had millennia of ongoing conflicts, battles, purges, crusades, genocides, and in the last century, two catastrophic wars. The desire to end that destructive cycle is clear – and it needn’t entail a country inhabited by featureless, grey Europeans (or, as we know them today, the Swiss). Again thinking about America, picture a Texan, a New Yorker and a Californian. Can you imagine getting them confused for one another? Add in all of the other states, whose identities not so popularly televised, and
the argument for losing national identity becomes a pretty indefensible position.

The President of the ECB, Mario Draghi held a press conference on Wednesday, in which he commented that many of the players in the markets” underestimate the strength of the political commitment by the euro area member countries. They underestimate the awareness that all of us have of the extraordinary benefits that the euro has brought, in both financial and political terms — in terms of perspectives and in terms of achievements”.

For a fair period of time, our view at 7IM has been that the political will to keep the Eurozone together is far more important than economic issues, and Mr Draghi’s comments only serve to increase our confidence. However, the next important step is that this political commitment manifests itself in decisive action. The USA drew a map for fiscal integration over two centuries ago – it might not be totally accurate now, but it gives European politicians a good place to start.

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And finally… In the county library in Navan, Republic of Ireland, they really take the phrase “better late than never” to heart; over the weekend, a library book that was checked out in 1932 was anonymously posted back through the letterbox. The county librarian has agreed to waive the fine if the person comes forward and explains why the book has been missing for so long. That would seem to give rise to another way of living – break the rules for long enough and you’ll eventually be forgiven when you come forward!

Have a good weekend.

Ben Kumar
Junior Research Analyst
Seven Investment Management Limited
www.7im.co.uk