Ambiguity is essential to diplomacy. Henry Kissinger and the Chinese leaders, both masters of the craft, famously agreed that “there is only one China, and Taiwan is part of that China”. These words could be read in one way in Taipei and Washington, and quite differently in Beijing. Paving the way for normalisation of diplomatic relations between China and the US, this verbal dexterity helped change the world.
Ambiguity has been central to the European project. The European Union is built on what Cass Sunstein, the US legal scholar, describes as incompletely theorised agreements: it is often possible to reach consensus on a course of action even if there are different reasons for and objectives behind such action. The evolution of monetary union in Europe was an incompletely theorised agreement. For Germany, it was a means of extending the economic discipline of the Bundesbank to more profligate trading partners. For France, it was a way of putting European monetary policy under greater political, and particularly French, control.
But the skill of the statesman is to distinguish situations in which ambiguity makes coexistence possible from those that will make the future more troublesome. In this respect, politicians who have steered world affairs through the financial crisis have not served us well.
Mr Kissinger and his counterparts in Beijing’s Great Hall of the People understood that their formula was likely to endure because it was not in anyone’s interests to test its real meaning. But markets rarely provide this comfort. The scale of global capital flows means that political rhetoric is always likely to be challenged by market participants. Such challenges make politicians angry, which is why they regularly denounce speculators and demand control over rating agencies. But there is little chancellors, presidents and premiers can do about it.
To expect that one entity will underwrite another’s debts is a dangerous form of ambiguity, as the parents of feckless children have discovered. It is likely that the status of the guarantee will be put to the test and that the guarantor will ultimately pay. This encourages irresponsible borrowers and lenders to explore the limits of the patience of the guarantor.
With Fannie Mae and Freddie Mac, markets believed the US Treasury stood behind their liabilities, although the Treasury denied it, and the companies exploited the opportunity to assemble absurdly inflated balance sheets. When trouble hit, the market assumption proved right, at great cost to taxpayers.
But the obvious lesson has not been learnt. There is ambiguity about what part of the liabilities of banks should be underwritten by governments, with the practical consequence that governments often stand behind all of them. The ambiguity over the role of the European Central Bank prompts a question over whether eurozone member states are jointly and severally responsible for each other’s debts. It is clear what the answer to this question must be, since there is only one answer that could, or should, be acceptable to taxpayers or the constitutional court of Germany or is consistent with continued fiscal autonomy for member states.
European politicians prefer not to consider that question. The most dangerous form of debt-related ambiguity would allow some European institution to leverage its balance sheet, borrowing from private markets the money that member states would refuse to provide if they were asked directly.
Whatever the formal status of these liabilities, in reality they would be underwritten by the credit of national governments. As with Fannie Mae and Freddie Mac, the money could not be raised on attractive terms otherwise. Kingman Brewster, another great American academic and diplomat, said: “If I take refuge in ambiguity, I can assure you that it is quite conscious.” Lesser leaders seem to sleepwalk into ambiguity.