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Europeans have interesting titles to read at the beach. AP Photo
Europeans have interesting titles to read at the beach. AP Photo

August reading as euro chiefs get nicely browned off

In August, Europeans head for the beach. The continent shuts down on the assumption nothing of consequence will happen until everyone returns, suitably tanned, in September. So, what should Europeans be reading beneath their sun umbrellas?

In August, Europeans head for the beach. The continent shuts down on the assumption nothing of consequence will happen until everyone returns, suitably tanned, in September.

Never mind America's subprime crisis of August 2007 or the European monetary crisis of August 1992: the August holiday is a venerable tradition. So, what should Europeans be reading beneath their sun umbrellas?

Milton Friedman and Anna Schwartz'sA Monetary History of the United States belongs at the top of the list. At the centre of their gripping narrative is a chapter on the Great Depression, anchored by an indictment of the US Federal Reserve board for responding inadequately to the mounting crisis.

Friedman and Schwartz are generally seen as reproving the Fed for failing to react swiftly to successive waves of bank failures in the 1930s. But a close reading reveals the authors reserve their most scathing criticism for the Fed's failure to initiate a concerted programme of security purchases in the first half of 1930 to prevent those bank failures.

That is a message the European Central Bank's (ECB) board members could usefully take to heart, given their announcement on August 2 they were ready to respond to events as they unfolded but were taking no action immediately. Reading Friedman and Schwartz will remind them it is better to head off a crisis than rely on one's ability to end it.

A second recommendation is another account of the crisis of the 1930s, Charles Kindleberger's The World in Depression, 1929-1939. (Vacationing officials may detect a pattern in this summer reading) Kindleberger's point is that avoiding a crisis - and when failing to avoid one, successfully exiting from it - requires leadership.

Specifically, it requires leadership by a country with the power of the purse and the willingness to use it. The problem in the period between the two world wars, as Kindleberger recounts it, was the reluctance of the leading power, the United States, to provide the leadership and financial wherewithal to resolve the crisis.

In Europe today, reunified and reinvigorated Germany is the only country capable of assuming this role. It could agree to swift bank recapitalisation, a banking licence for the European stability mechanism and a more expansionary ECB policy.

If Germany provided that kind of leadership, other countries would be quick to follow. Europe's crisis would then be well along the path to resolution. Germans sunning themselves on Greek islands, one hopes, will be inspired by such reading.

For different reading, European leaders could take along Ron Chernow's biography of Alexander Hamilton. Hamilton was a colourful character, born out of wedlock, raised in the West Indies and the captain of an artillery company in America's revolutionary war. More to the point, as George Washington's Treasury secretary, he crafted the bargain that successfully rationalised the US states' debts.

Hamilton made the case that the federal government should assume responsibility for their liabilities stemming from the costs of financing the war.

He identified a source of revenue - the tariff - that could be devoted to this end and he rendered the bargain politically palatable by making clear that if state governments accumulated additional debts and again got into trouble, they would not be bailed out a second time.

European officials will argue their problem is more difficult. Not only does Europe lack a federal government but there is no desire to create one.

A close reading of Hamilton's accomplishments, however, will remind European leaders there was an equally deep aversion to federalism in the early US. It took politicians with vision and diplomatic skills to craft the political entity that emerged after independence.

Finally, European leaders should consider adding to their book bag Barbara Tuchman's The Guns of August. She describes how a series of individual decisions, all of which seemed sound when considered in isolation, had the unintended consequence of leading Europe into the First World War.

No one is predicting war in Europe today. But what is true of international diplomacy - that a series of seemingly reasonable decisions can have cataclysmic consequences - is equally true of international finance.

Europe is dangerously close to financial meltdown. The continent's leaders, while relaxing on southern Europe's crisis-ridden shores, should take Tuchman's message to heart.

* Project Syndicate

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