Need for European Social Compact Renegotiation; Redemption Fund Proposals Recall Alexander Hamilton Precedent for Legacy Debt - Virginia was the "Germany of its Day"
Continuing to expect a global growth recession with global GDP to grow at 3%, BNY Mellon Chief Economist Richard Hoey expects that stronger countries in Europe may begin to exit the recession by later this year, while Southern Europe is likely to remain in recession throughout 2012 and most if not all of 2013.
"While some observers fear a full-scale global recession, we believe a global growth recession continues to be more likely, given the beneficial drop in energy prices and the easy monetary policy prevailing in most parts of the world except Southern Europe," Hoey says in his most recent Economic Update.
The weaker countries in the Eurozone face fundamental problems with eroded competitiveness and excessive debt, according to the report, facing a major task to become "credibly solvent" and thus lower their financing costs. "Both the overall Eurozone social compact of the balance of contributions and responsibilities and the domestic social compact within many European countries need to be renegotiated," Hoey says.
Hoey recalls a legacy debt precedent by citing Alexander Hamilton, who founded The Bank of New York in 1784. Hamilton negotiated a compromise to successfully restructure the legacy state debts at a dinner table in 1790 with Thomas Jefferson and James Madison, two leaders from the financially strong state of Virginia, "the Germany of its day," writes Hoey.
"The current proposals in Europe for a 'redemption fund' to deal with the excessive legacy debts in Europe have some resemblance to the successful efforts of Alexander Hamilton in 1790, 222 years ago," Hoey concludes. "Such a redemption fund would not be the solution to the Eurozone problems any time soon. However, if a new Eurozone social compact of contributions and responsibilities can be successfully renegotiated, it could make it financially credible."