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Piga: “La lezione del Tennesse per salvare l’Europa” (ENG)

di Gustavo Piga

To get a quick understanding of the euro-greek history one is bound to go back in time.

You could do it the way economist Karl Whelan does in his blog, sharply dissecting the last 7 years of mistakes by all parties involved, especially the ones that were supposed to provide a solution, European so-called leaders, at various degrees of the decision-making ladder:

By early 2010, it became increasingly clear that … a Greek sovereign default at this point was not something the euro area’s leaders would countenance. By March 25, 2010 loans to Greece from the rest of the euro area and the IMF were announced and by May a fully-formed bailout fund for the euro area, the European Financial Stability Facility (EFSF), had been put in place. Despite, Greece’s completely unsustainable debt position, private creditors continued to be repaid over two years with these debts replaced by loans from European countries and the IMF. By the time Greece’s debt to the private sector was restructured in 2012, its economy was in ruins and the remaining unrestructured debts to the “official sector” were clearly unsustainable. The return of gunboat diplomacy had been set in motion.


A Greek bail-out was not needed, he argues, and the fact that we did allow for one is the tragic reason of why we are where we are today, with a euro-greek crisis close to explosion.

Now, it turns out that another country, the USA, involved in creating a credible and long-lasting monetary union, handled a similar situation better, much better. By understanding how it worked it out, we might in the process figure out more clearly the reasons of the current standstill. Some United States financial history is therefore needed, bear with me. We have to go back in time, in Tennessee, 1872. The (US) state of Tennessee is at the time facing tough repayment problems with its public debt. It will take 12 years to sort it out and this is the short tail of what happened and why and how it ended.


Why did the problems of Tennessee’s government budgets arise?

Let us first go back to 1850, quite a bit of time before the crisis erupted. Just like many other States of the US, Tennessee launches itself in a heavy program of public investment to sustain productivity in its local economy, mainly through the development of railroads. Differently from other States, however, it goes at it by borrowing money in the market and lending it back to private railroad companies in exchange for collateral such as stock, bonds and contracts of those same companies.

Until 1865 everything runs smoothly: loans were largely well-allocated and the cost of debt was compensated by interest revenues from companies. Then everything unravels: following the first crisis due to the end of the Civil War and a series of loans to the wrong companies, fraud and corruption, the State of Tennessee finds itself as the owner of valueless paper credit and collateral.

Cumulated debt rises to very high levels. All of a sudden, however, between 1872 and 1883, it halves from 40 to 20 million dollars. What had happened?

Yes indeed, default.

The Democratic Party of the time – dominant across Tennessee – was divided across two party-lines: the State Credit Wing – favorable to debt repayment to creditors (internal and external to the State) and the Low Tax Wing – favorable to save a heavy burden to local taxpayers. Well, it turns out that taxpayers won and default occurred, with a loss for the creditors, including New York bankers and all those United States citizen that had taken the risk to lend to Tennessee.

The then President of United States, Ulysses Grant, did not care that much of the internal drama of Tenneesseans. He actually did the right thing: leave it up to Tennessee citizens to decide what to do with the debt, even if a potential default would have somewhat endangered the already full pockets of a few rich bankers in the state of New York.


Two lessons here are to be drawn for a case, today’s Greek one in the euro area, that looks a lot alike the case of Tennessee in the XIX century: letting democracy work, however imperfectly, is the only solution that keeps societies united. Intervening from above, with little electoral mandate, is bound to make disaster more likely, as it did in the European case. But it is never too late: listening to the desires of Greek citizens, who insist in wanting to remain in the euro but at a pace that is compatible with non disruptive and too  much an abrupt and painful change, might prove to become the trick that will save Europe and Greece alike.

Oh, and by the way, let us not forget lesson number 2.

You might have not noticed but it is also true that the the thought never crossed the mind of President Grant to “ask” for small and unproductive Tennessee to leave the dollar union!

He probably knew better than that: as Prof. Whelan has aptly reminded us for Greece (“pushing the Greek government further than their current position will generate infinitesimally small financial gains for European citizens while risking a Greek exit threatens unquantifiably large potential costs”) the cost of a political disruption would have largely outweighted any small gain for a few rich lenders. He kept Tennessee in the (ultimately) successful project of the US since he was aware of a basic truth: that a union becomes a Union with capital U only when you keep the weakest part of the chain tied to the rest.

No little lesson for our desperately unsuccessful European leaders.

Information on Tennessee taken from “A Financial History of Tennessee Since 1870” by James E. Thorogood.