The economic mechanism of Europe is jammed – The Property Chronicle
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The economic mechanism of Europe is jammed

The Historian

“The economic mechanism of Europe is jammed.”  – J M Keynes [1] 

The Dutch finance minister Wopka Hoekstra is somewhat brazen. Like his German counterpart, he caused consternation across the Union by rejecting a ‘Coronabond’ – a scheme for raising finance for EU countries tackling the coronavirus crisis; a scheme that would have lowered the cost of debt for many countries. A conservative German economist, who had earlier rejected the concept of shared liability, predicted that unless the Union came up with a common crisis bond, he foresaw a “grim future for the EU”.  Michael Hüther told the German daily Tagesspiegel that “it’s not about financing dams in central Italy. It’s a question of life and death.”   

But if Mr Hoekstra cares little about questions of life and death, he does care about the financial interests of his former employer, Shell. In a gesture of solidarity with Shell’s shareholders, he recently scrapped a 15 percent dividend withholding tax, lobbied for by the company, and resented by the Dutch public.   

Elevating the interests of markets over those of the electorate is not an unusual characteristic of today’s politicians. And it was ever thus. For Europe has been here before.  

Once before the continent faced questions of life and death, the threat of a Great Depression and the rise of right-wing authoritarianism.  Once before, at a critical moment in history, the powerful nations of Europe, Britain and the US, had the opportunity to pool liability, to jointly back bonds that would save millions of lives and ensure the continent’s recovery from crisis. Just as with Germany and the Netherlands today, so then: a potential backer of those common bonds, the United States, rejected the opportunity. The consequences were to be disastrous for Europe, for the US and to lead ultimately to another World War.   

Keynes’s plan for the reconstruction of Europe, drafted initially on ‘the back of an envelope’ was first submitted to the British Cabinet in April, 1919. His Scheme for the Rehabilitation of European Credit aimed primarily to raise the finance that Germany and both defeated and victorious debtor nations needed to pay for food and investment.   

Keynes proposed that Germany would issue bonds. Former enemy nations would guarantee the German bonds severally and jointly, in certain specified proportions. The US, UK and France would guarantee 20% each.   

In proposing a scheme for joint liability, Keynes’s concern was not primarily for Germany, but for European recovery. “The economic mechanism of Europe is jammed” he wrote. His proposal would ensure “the good faith of the world as a whole is pledged for the carrying out of a scheme the sole object of which is to set on its feet the new Europe.” [2] 

His plan to “set on its feet the new Europe” can be briefly summarised as follows: Germany (and other defeated nations) would issue £1 billion in bonds. The bonds would pay 4% and would permit the prostrate Reich to raise finance to pay most of what it owed in reparations and debt”   There would be a 1% sinking fund to retire (repay the principal) by 1925. 70% of the money raised would go to reparations. 30% was for reconstruction. The Bonds would have priority over all other German obligations. The League of Nations would impose penalties or foreclosure if Germany defaulted.   

Unbeknown to Keynes, but recently revealed by the American historian, Eric Rauchway, US President Wilson’s letter of rejection of The Scheme was drafted by the Chief Executive of J P Morgan, Thomas W. Lamont – described by his son in a biography as ‘The Ambassador of Wall St.’  When Wilson expressed a preference for “postwar lending going through “the usual private channels” it was the voice of the usual private channels speaking about its own desirability.” [3]   

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