Sovereign debt

US national debt clock as at 19 April 2008 (picture Jesper Rautell Balle)

The latest news about the British public finances takes me back to one of the questions asked in the Federal Union membership leaflet: “Why are the world’s poorest countries saddled with unaffordable debts?”

Federalism is interested in the way in which national borders have an impact on public policy, and debt is a good example.

Poor countries lose out because they have to borrow money in foreign currencies, typically the US dollar, rather than their own, which means that the value of their debts can go up and down for reasons unconnected with their own national economic performance (and when it goes up, there’s a problem).

Rich countries on the other hand find it easier to borrow money in their own currency because potential creditors have more confidence that the value of that currency will not fall for some unexpected reason.

The different treatment meted out to the indebtedness of governments of different countries is a good example of where national sovereignty encroaches on real life, and it is also a clear demonstration of the principle of to him that hath shall be given.

One of the consequences of this is that American government policies have an impact on other countries, because they can affect the value of the dollar, but those other countries lack any influence over those policies. An advantage of the euro is that it is accompanied by a large and deep international market in euros, meaning that the Europeans can be insulated from this external effect of American policy. Europe is grabbing some of the American advantage by adopting a common currency.

I had never imagined when we wrote that Federal Union membership leaflet that the UK would be one of the countries that might suffer as a result of the imbalance in how sovereign debt is funded. But then I never imagined that the British banking system would be run in such a risky and dangerous manner, piling all kinds of additional liabilities on to the taxpayer in order to prevent all round disaster. Graham Bishop has analysed the situation in a compelling paper for the new euro website, You can read the paper here.

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