Abstract
There is a fundamental disconnect between the public discourse about sovereign and external debt in comparison to private domestic debt. The latter is predominantly viewed through a Humean lens, which sees economic morality in terms of contingent social institutions, justified by the valuable goods they realize; while sovereign and external debt is viewed through a Lockean lens, which sees property, contract, and debt as possessing an intrinsic moral quality, independent of social context or consequences. This chapter examines whether this Lockean perspective on sovereign and external debt is compatible with the dominance of Humean approaches to the domestic economy. It considers and rejects the most plausible argument for reconciling these views, which emphasizes the different qualities of cooperation in the international and domestic economies. It further argues that many standard objections to a Humean approach to sovereign debt suggest, not the Lockean approach, but rather a Hobbesian international moral skepticism. Concluding that the Lockean approach is unmotivated, this chapter instead advances a Humean account of sovereign debt and default. It shows how taking seriously the demand for institutional justification and the idea of persons and peoples as free and equal provides an account of the duties of states—whether creditors, debtors or third parties—in sovereign debt crises. It further examines the implications of each approach for democratic choice about sovereign default.
Revised version of the original published article “Debt, Default, and Two Liberal Theories of Justice” by Oisin Suttle, German Law Journal 17(5):799–834
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Notes
- 1.
Locke (1988 [1689]), p. 285; Nozick (1974), p. 150.
- 2.
Locke (1988 [1689]), p. 277. Lockeans can most plausibly invoke Kant for this claim, although Nozick understands the self-ownership argument as similarly expressing a Kantian injunction against instrumentalizing persons. Nozick (1974), p. 30.
- 3.
Thus, in Locke, our natural right to appropriate depends inter alia on a claim about what is necessary for persons to make use of the world. Locke (1988 [1689]), p. 286. Further, the proviso to leave “as much and as good” introduces a potential, if quite limited, consequentialist constraint. Id. p. 291; Nozick (1974), p. 178.
- 4.
We might equally label this second tradition Hobbesian. Given both Hobbes’s moral egoism, and his appropriation by international relations realists, however, Hume seems a more suitable namesake.
- 5.
See generally Hume (2000 [1738]), § 3.2; Hobbes (1996 [1651]); Bentham (1843), § 1.8; Rawls (2001). p. 114. Kant’s recognition of property as relational, and in consequence deriving from social contract, most clearly places him in this category. Kant (1999).
- 6.
They do not deny, of course, that economic rules serve important moral functions, making human society possible, but deny only that they have force or content apart from their function in particular societies. See, e.g., Hume (2000 [1738]), at §§ 3.2.2.12, 3.2.3, 3.2.5, 3.2.6.6. Admittedly, some Humean liberals’ accounts of liberty lead them towards a middle-ground. See generally, e.g., Dworkin (2000).
- 7.
This comes out clearly from Rawls’s discussion of the basic structure and the need to continuously adjust basic institutions to ensure that they realize social justice over time. Rawls (1996), p. 265.
- 8.
See generally von Hayek (2001); Friedman (2002), pp. 12–20. By contrast, while I focus on right-leaning Lockeans, who identify the intrinsic morality of the economy with property and contract, there are also leftist Lockeans, who ground egalitarian prescriptions in the intrinsic moral quality of particular relations. Consider, most prominently, Marx’s concerns with exploitation and alienation. See Kymlicka (2002), pp. 180, 190–192.
- 9.
Recall that Locke understands government as instituted for the protection of property, and hence denies it can have general authority to interfere with property. See Locke (1988 [1689]), p. 360; cf. Nozick (1974), p. ix.
- 10.
This holds as much for deontological left-liberals, such as Rawls, as it does for utilitarian liberals, such as Mill. Recall, Rawls’s basic liberties are themselves products of social cooperation, rather than a remainder of pre-social natural rights. For Hume, there are natural virtues, which we can understand apart from social cooperation; but the virtues of economic justice, including property and contract, are firmly social and conventional. Hume (2000 [1738]), at §§ 3.2.1.17-19, 3.2.2.9-11, 3.2.6.4. Natural rights play a role in Hobbes’s theory, but these are limited to liberty rights in the state of nature. A small residue remain under the commonwealth, but impose no duties on others, whether individuals or the state. Any claim rights, which we can assert against others, are purely institutional.
- 11.
See generally, Keynes (2015 [1926]).
- 12.
See generally, Ruggie (1982), p. 379.
- 13.
See, e.g., Cohen (1981), p. 6. Many would argue these stories have again diverged since 2008 and that austerity policies pursued in various countries represent the prioritizing of property and contract at the expense of liberal equality and indeed social stability. This may be true, but for my purposes the more important point is that these domestic policies have continued to rely on both individual and social arguments for their legitimacy. Recall, for example, prominent invocations of the ostensible inverse correlation between sovereign debt and economic growth.
- 14.
A comprehensive overview of these public debates, and the different moral claims invoked therein, is beyond the scope of this chapter. I have included examples of the kinds of discourse with which I am concerned. As examples, they are open to challenge on their representativeness. It would require another paper entirely to rebut these. I can only hope the points made here will sound familiar to anyone who lived through, and paid attention to, Europe’s public debates since 2008, including on the Fiscal Compact, banking union, Eurozone bail-outs and, most dramatically, Greek sovereign default.
- 15.
See, e.g., Steward and Smith (2015) (quoting German Finance Minister Wolfgang Schäuble’s insistence that “we must say that the reasons, the cause for the difficult journey to be undertaken by Greece, that the reason for this is to be found in Greece, and not outside Greece, and definitely not in Germany”). Piketty (2015) (providing contemporary criticism of this aspect of German public discourse).
- 16.
See, e.g., Hollande (2015) (quoting French President Francois Hollande’s statement that, “Of course Greece must honor its commitments. But they are not contesting that … What Greece is asking for is flexibility—that’s understandable”).
- 17.
Ipsos European Pulse (2015) (finding, in the immediate aftermath of the Greek referendum, sixty-one percent of Europeans agreed that austerity was harming the Greek economy, while seventy-three percent believed Greece should still repay all debts); Ipsos Public Affairs (2015), pp. 6, 10. Admittedly, the latter judgment referred to the risk of other countries defaulting, and so is not a pure case of the Lockean perspective. Nonetheless, the overall impression is not of citizens understanding debt as a social institution serving shared purposes.
- 18.
It is perhaps no coincidence that David Graeber opens his book criticizing the moralizing of debt with an anecdote about sovereign lending. Graeber (2011), pp. 1–4.
- 19.
There are ongoing debates between cosmopolitan and anti-cosmopolitan liberals about how far their domestic theories commit them to egalitarian or other economic duties beyond the state. Rawls himself, for example, denies economic egalitarianism is appropriate across borders. However, his international view remains Humean in its underlying structure. Rawls (1999), p. 37; cf. Pogge (1994), p. 195.
- 20.
Hobbes (1996 [1651]), pp. 124–125, 147–154, 200; Kant (1991 [1793]), p. 73; (1999), pp. 136–138; Hume (2000 [1738]), § 3.2.6.
- 21.
See, e.g., Rawls (1999 [1971]), p. 10.
- 22.
Rawls (2001), p. 50.
- 23.
In fact, Rawls understands cooperation in two distinct senses. The first explanatory sense sees cooperation as the source of, and prerequisite for the production of, social primary goods, including the basic liberties and economic goods. The second normative sense understands social cooperation as free cooperation on fair terms for the rational advantage of each participant. This chapter focuses, in what follows, on the first explanatory sense. Samuel Freeman has argued against the extension of Rawls’s difference principle internationally on the basis that the international system is not cooperative in the second, normative, sense. Freeman (2007), p. 266; cf. Sangiovanni (2007), p. 3. As this argument does not support the Lockean approach that I challenge, I do not discuss it here. Cf. Abizadeh (2007), pp. 318, 318–358 (criticizing Freeman’s work).
- 24.
Rawls (2001), p. 50.
- 25.
Nozick (1974), p. 185.
- 26.
Rawls (1999 [1971]), p. 62.
- 27.
It is for this reason that, pace Nozick, Rawls understand social primary goods as being society’s to distribute.
- 28.
For a discussion of the extent to which Rawls’s theory is based on participation, rather than luck egalitarianism, see Freeman (2007), p. 111.
- 29.
Barry (1982), pp. 232–233.
- 30.
Suttle (2014), pp. 1059–1060.
- 31.
Of course, it is possible another ship could have extracted the oil, or that this ship could have extracted other oil elsewhere, but what matters is that these goods and profits were produced through cooperation of both drillship owner and territorial state. That I could have cooperated with someone else does not alter the fact that I actually cooperated with you, giving you a claim on our joint production. An alternative line of thought emphasizing the marginal contribution of particular cooperators and the possibility of replacing them with others leads to Gauthier’s contractarianism rather than Rawls’ contractualism. See generally Gauthier (1986).
- 32.
Similarly, the territorial state’s claim on the oil still in the ground is distinct from its cooperation with the drillship.
- 33.
We might distinguish these cases based on the legal form employed. The drillship owner has a property right, while the lender has a contractual claim. Certainly, for Locke, property and promise have distinct bases. However, these questions of legal form are not relevant to my present concern, namely whether the relevant transaction is cooperative in the required sense.
- 34.
The symmetry is unsurprising. We might retell the oil exploration story as involving a foreign loan to a domestic company to purchase a foreign manufactured ship, with the loan being serviced through revenues from the oil extracted.
- 35.
This does not need to imply lenders are unconcerned with repayment, although in practice their main interest may be in a revenue stream rather than a future capital sum. Rather, it is because an appropriate amendment of maturity and interest rate can have exactly the same impact on a lender’s financial interest as a default on principal.
- 36.
See, e.g., Strupczewski (2015) (commenting on the insistence on distinguishing adjusting terms from writing down principal).
- 37.
See, e.g., Merton (1974), pp. 449–470.
- 38.
In this view, the part of the interest covering the lender’s cost of capital or opportunity cost constitutes payment for the temporary use of the capital borrowed, while the risk premium covers any potential loss of that capital.
- 39.
See, e.g., Modigliani and Miller (1958), pp. 263–265.
- 40.
We cannot push this argument too far. It requires a sufficiently stable long-term practice of investment to allow investors to cover risk and capital costs through returns on successful investments. If all or substantially all debtors defaulted, the situation would be more plausibly one of expropriation by debtor peoples of creditors’ assets. That said, this would rapidly undermine the practice of cross-border lending itself. The fact that creditors commonly come to terms with defaulting debtors, who in turn regain access to capital markets, suggests this is generally not the case.
- 41.
This is a difficult distinction to draw in practice. Borrowing to support current expenditure on, for example, public salaries, might still be understood as investment, whether because of public services’ long-term economic value, such as health, education, or because financing these through debt may facilitate capital spending elsewhere in the economy. Non-investment deficit borrowing may thus be largely illusory; but to the extent it exists, this paragraph suggests how we should think about it.
- 42.
Locke (1988 [1689]), p. 293. Long-term trade imbalances and corresponding financial flows reflect surprisingly closely Locke’s account of money as a cooperative institution.
- 43.
- 44.
While Thomas Nagel recognizes this distinction, he nonetheless assumes a Lockean morality will apply in the absence of other duties of socio-economic justice. See generally Nagel (2005), p. 113. Rawls is at least clearer that his quasi-libertarian principles represent a substantive account of justice, rather than the absence thereof. For an excellent overview, see Caney (2005), pp. 125–129 (highlighting the differences between Rawls’s minimalism and genuine skepticism).
- 45.
While Hobbes’s arguments are not the only ones motivating such skepticism, for convenience I label all such views Hobbesian.
- 46.
For the classic statement of this position, see generally Singer (1972), p. 299.
- 47.
- 48.
- 49.
- 50.
See generally Nagel (2005); Hobbes (1996 [1651]), pp. 91–92, 96, 100–101; cf. James (2012), Ch. 3.
- 51.
- 52.
Freeman (2007), p. 304 (highlighting the ways principles of domestic distributive justice may determine policies affecting outsiders). Similarly, realists emphasize how duties to insiders restrict statesmen’s freedom to pursue cosmopolitan goals. Morgenthau (1966), pp. 235–249; Kennan (1985), pp. 205–218.
- 53.
See Locke (1988 [1689]), p. 362; Nozick (1974), pp. 169–171 (on the limits of taxation in the Lockean mode). The Lockean might avoid this worry by suggesting that outsiders implicitly accept limits on economic rights, in line with those applied to insiders, as a condition of participation. The problem with this argument, however, is that it can be applied to qualify the Lockean position in any situation where two views conflict. The Lockean thus saves the structure of his view, but at the cost of any practical significance.
- 54.
Such two-tier protection is already evident, albeit for particular political and historical reasons, in investment treaties and the customary law of aliens’ rights.
- 55.
Consider, for example, how a state’s power to regulate particular property changes when transferred from insider to outsider and the perverse incentives this sets up.
- 56.
While the argument is Rawlsian, it is not Rawls’s own view. Rawls denies that questions of distributive justice arise in the international economy. Two assumptions drive that conclusion, both of which I reject: First, that productive cooperation is substantially limited to the state; and second, that the international system is not itself coercive. See generally Rawls (1999), pp. 105–120.
- 57.
Rawls (1999 [1971]), p. 6.
- 58.
Maffettone (2009), p. 243.
- 59.
Cavallero (2010), p. 16.
- 60.
- 61.
The fundamental assumption that justification is owed to both insiders and outsiders is substantially cosmopolitan. But depending on how institutions and justification are understood, the prescriptions flowing from it may leave significant room for the autonomy of states as well as for inequalities between them.
- 62.
Suttle (2014) develops in greater detail the points in the foregoing paragraphs.
- 63.
- 64.
- 65.
Freeman follows this line to argue that the institutions of the international economy “supervene upon” those of particular states, and that there is in consequence no institutional structure to which an international difference principle can be applied. See Freeman (2006), pp. 246–248.
- 66.
For an argument towards this view, see Abizadeh (2007), p. 318.
- 67.
See generally Suttle (2014).
- 68.
See generally Blake (2005).
- 69.
See, e.g., Buchanan (2007), p. 18.
- 70.
It is disagreement on this point that leads Rawls to reject global egalitarianism. Rawls (1999), pp. 108–111.
- 71.
- 72.
For an analogous point, see Meckled-Garcia (2008), p. 245.
- 73.
This paragraph draws on arguments in Freeman (2007), pp. 290, 305–307, 314–317.
- 74.
Recall the suggestion above that justice is about situations where our options are subject to the choice of another: We do not enquire about the justice of the weather.
- 75.
This is important in pre-empting the following objection. We might accept that outcomes in the international economy, as presently organized, are not attributable to definite agents and so not directly criticizable in terms of justice. Yet this might suggest a duty to bring into being institutions that would make such criticism possible. Indeed, this would seem an obvious implication of Rawls’s duty “to further just arrangements not yet established.” Rawls (1999 [1971]), p. 99. But if, as Rawls himself holds, a global state is implausible or undesirable, then there can be no duty to bring such an institution into being. Rawls (1999), p. 36.
- 76.
Some might object that this function can be fulfilled by one or a subset of leading states, coordinated through formal or informal international organizations. I do not deny that such coordinated action is possible in particular instances. But there clearly is not, nor is there likely in the foreseeable future to be, any individual or collective agent able to determine outcomes in the international economy, or international financial markets, as a whole.
- 77.
A similar point might be made in the language of positive and negative responsibilities. For such a strategy, albeit applying quite different standards, see Pogge (2011), p. 2.
- 78.
This does not mean coordination problems are entirely avoided. Clearly, to judge whether a given institution is just, we must consider how its effects interact with those of other institutions; and we might conclude there were duties on various institutions to coordinate, including potentially by constituting new overarching institutions. But we will in all cases be working outwards, from existing institutions and loci of political authority, rather than beginning with a set of desirable outcomes and imagining into being institutions capable of bringing these about.
- 79.
Obviously, in many cases political constraints in individual countries will preclude any effective action. But such cases reflect a failure of will, rather than an absence of agency. Assuming we can identify the changes that are required to the relevant institutions, no agent can claim that they do not know what they must do to bring these about, or that they lack assurance that others will play their part if they do themselves. This analysis would obviously be quite different if members’ respect for EU law were substantially to decline.
- 80.
Of course, in practice, many states are not unitary and many ostensibly liberal states act towards their citizens as members of groups. Whether this constitutes a failure of liberal theory or political practice is beyond the scope of this chapter.
- 81.
Communitarian critiques of liberal neutrality might offer inspiration here.
- 82.
For a detailed account of the arguments supporting EGC, see generally Suttle (2014).
- 83.
What exactly those goals are is an open question, the answer to which will depend on the domestic theory of justice adopted. If that domestic theory is Rawls’s political liberalism, then the list will be very short. Rawls (1999), pp. 34–35.
- 84.
We need not identify this as a separate obligation. Insofar as such institutions coordinate the policies of individual states, the side-constraint on national institutions translates into a side-constraint on non-universal international cooperation. Insofar as non-voluntary institutions have their own executive capacities, the reasons for imposing this side-constraint on national policies will apply equally to international executive capacities.
- 85.
Consider, for example, the ways trading relations with colonies and former colonies were reorganized on a community-wide basis.
- 86.
These costs and uncertainties are painfully illustrated by the UK’s exit vote.
- 87.
On some connections between EU membership and democratization, see Dimitrova and Pridham (2004), pp. 5, 91–112.
- 88.
On the complexities of the Iberian cases, see Fishman (2003), pp. 31–46.
- 89.
The assumption here is that arguments invoking the systemic effects of restructuring and the effects on the financing costs of others involve sacrificing the interests of the already disadvantaged for the benefit of those more advantaged. It does not mean that restructuring cannot be made conditional on policies to ensure it, in fact, leads to the borrower’s effective self-determination. The creditor’s obligation is to facilitate the borrower’s self-determination, not simply to forgive the debt. Concerns for self-determination will also be relevant in deciding how far lenders or the international community can dictate the specific content of the required reforms. This further suggests that, where restructuring is contingent on domestic reforms, we carefully examine whether these are for the long-term benefit of the borrower, or rather serve to deter future defaults by others or to maximize recovery by creditors.
- 90.
On the various mechanisms whereby sovereign debt is enforced, see Panizza et al. (2009), p. 651.
- 91.
We might thus distinguish states that have organized their capital markets and private law with an eye to becoming global centers from those for whom participation in international debt markets is largely limited to offering the state’s own debt, currency reserve activities, and citizens’ purchasing of domestic and foreign bonds.
- 92.
A parallel might be drawn to personal bankruptcy laws, which do not necessarily reduce bankrupts to the lowest acceptable economic position but rather allow them to retain many economic advantages, such as tools of trade. If the function of bankruptcy is to give individuals back control of their own lives, which are continuous both before and after bankruptcy, then it may be necessary to allow them to keep some of the advantages that accrued to them in their “former” life. To do otherwise might be to irreparably disrupt whatever ongoing projects they had, which are central to their continuing agency/identity. Of course, economic rationales can also be offered for these provisions.
- 93.
The priority of self-determination over economic advantage is a function of conceiving self-determination as extending to economic choices. If economic advantage took priority, the upshot would be continuous redistribution from more- to less-advantaged and a consequent denial of any meaningful economic self-determination; see for this problem Miller (2007), p. 68 and Rawls (1999), p. 117.
- 94.
While plausible, this objection finds little empirical support. Bond prices seem largely unaffected by including restructuring clauses. See Becker et al. (2003), pp. 127–161.
- 95.
For a further discussion, see infra Sect. 7.
- 96.
The objection here recalls Joan Robinson’s observation that “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.” Robinson (1962), p. 46. It is no objection to a proposal to say that it would make it more difficult for states to obtain financing, if their needing that financing itself constitutes an injustice for which those in whose name the objection is raised are themselves responsible. Some might object to this allocation of responsibility, but a plausible reply highlighting states’ dependence on international markets, and others’ constitution of those markets through their domestic institutions, supports it.
- 97.
For this point in another context, see Olsaretti (2009). We might further emphasize that, for Humean liberals, economic choice is valued for the goods it in turn realizes. To the extent that imposing the consequences of a choice undermine those goods, the mere fact of being chosen is no argument for it.
- 98.
But see supra note 94 (discussing contrary empirical evidence).
- 99.
For the analogous argument against slavery contracts, see Freeman (2001), p. 105.
- 100.
This is the scenario anticipated in the text accompanying supra note 95.
- 101.
The claim here is that the creditor has facilitated the debtor’s reliance on international funding, and cannot simply withdraw that funding without allowing the debtor some reasonable period to restructure its economy away from that reliance. Cf. generally James (2012), (for an account of the international economy as a practice of mutual reliance on common markets).
- 102.
Although for doubts about how far this insistence translates into practice, see Bulow et al. (1992), pp. 195–234.
- 103.
Whether such constraints fall properly under the concept of justice is not a question I propose here to explore. See generally Cohen (2008).
- 104.
For an example including elements of each, see Buttonwood (2015).
- 105.
In the pre-charter period, the prospect of gunboats in their harbors, foreign seizure of assets and revenues, and similar “super-sanctions” might deter borrowers. In the Eurozone context, unpredictable consequences for the stability of the defaulter’s banking system and their continued membership in the currency union provide further disincentives.
- 106.
For a similar point, albeit invoking a different account of economic justice, see Kumm (2013), p. 605. Cf. generally Goldmann and Steininger, chapter “A Discourse Theoretical Approach to Sovereign Debt Restructuring: Towards a Democratic Financial Order”.
- 107.
- 108.
We might express the same idea by suggesting that decisions by national polities may be internationally legitimate, given available alternatives, without being internationally just. This problem of democratic mismatch is not limited to whether to facilitate default but also such questions as what conditions, as to domestic reforms, can appropriately be attached to bail-out lending.
- 109.
This raises similar problems of democratic legitimacy to judicial review under human rights treaties and domestic constitutions. That said, if we accept these latter practices, I see little reason in principle to exclude similar review against principles of global economic justice.
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Acknowledgements
I am grateful for valuable comments from the editors of this volume, from participants in the workshop from which it derives, including, in particular, Jen Hendry, and from Robert Burrell, and Sagar Deva, who kindly read and commented on earlier drafts.
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Suttle, O. (2018). Debt, Default, and Two Liberal Theories of Justice. In: Goldmann, M., Steininger, S. (eds) Democracy and Financial Order: Legal Perspectives. Beiträge zum ausländischen öffentlichen Recht und Völkerrecht, vol 273. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-55568-2_6
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