In the European Debt Crisis’s latest development, Italy is attempting to reshape its government in the wake of its massive national debt. UCSB political science Professor Benjamin Cohen spoke to the Daily Nexus about the nature of the debt crisis, governmental change and the merits of austerity measures.
Former Italian Prime Minister Silvio Berlusconi recently relinquished his government position to renowned economist Mario Monti after failing to address the nation’s rapidly growing debt.
The continually increasing debt skyrocketed to $2.6 trillion — 120 percent of the country’s GDP — and prompted bond traders to demand steadily higher interest rates for Italian Bonds. Monti is in the process of forming a new government with experts equipped to deal with Italy’s financial woes.
According to Professor Cohen, international financial markets sought Berlusconi’s resignation due to his inability to adequately manage the administration’s spending.
“The markets had lost confidence in his government and its ability to do any of the things that it promised to do, that the markets are demanding,” Cohen said. “Italy’s borrowing costs would have gone out of sight if a change had not have been made.”
Cohen said the change in leadership reflects the economic sector’s influence in the political sphere.
“The reality is that the markets now rule,” Cohen said. “We now have something that we call capital mobility, that is to say, the ability of money to move quickly into or out of a country or currency, and it has given financial markets, collectively, enormous amounts of power. The decentralized decision making process of the financial markets now dominates governments when it comes to managing international capital controls.”
The market’s power over state affairs undermines the nation’s political integrity and hampers public input, Cohen said.
“It is very questionable to have a situation in which the market actors can veto the policies of governments that were democratically elected,” Cohen said. “It is also undemocratic in the sense that it violates the one person, one vote rule. In this case it is one dollar one vote; the people who have billions and billions of dollars in the market are more powerful than you or I would be with a few dollars in the market.”
Monti, a Yale University graduate and former European Commission member, has frequently turned to economic experts without political ties to help create the country’s new government.
Cohen said the fledgling Prime Minister’s inexperience with politics could challenge his attempts to reconcile the government’s finances.
“[Monti] is a very highly respected economist but he is not known for his political skills and Italy has a highly complex political system,” Cohen said. “It is going to be very difficult for him to twist arms and accomplish what the markets are looking for. It would require a real decision by the political leaders in Italy to put the collective interest before their party interests and their personal interests and I am not confident about that.”
According to Cohen, the ‘collective interest’ refers to austerity programs — cuts to social services such as health care, pensions and other state funded programs.
Although the measures are necessary for individual governments, Cohen said the policies are detrimental to prospects for a world-wide economic recovery.
“Regrettably, in a crisis more [austerity measures] are what is required,” Cohen said. “But it is making it very difficult to achieve any significant recovery in the global economy. For a country that is in the midst of a crisis and is facing the kinds of economic pressures that Italy is facing, there is very little choice, and that goes back to the issue that markets are determining policy now.”
Cohen said austerity measures will only exacerbate the country’s economic stagnation.
“We got into this situation because of high levels of debt at the personal level, at the corporate level and at the government level,” Cohen said. “Each of these major components of the economy are now cutting back in order to redress their balance sheets, which means that there is no source of stimulus, no source of growth to spur the economies and when governments also engage in austerity measures it just makes things go from bad to worse.”