As European nations continue to spiral deeper into economic recession and political turmoil, debt crisis solutions have become a hot topic of international debate amongst economists and government officials throughout recent elections in France and Greece.
According to political science professor Benjamin Cohen, the ongoing crisis is largely the result of irresponsible loan borrowing in the “eurozone” driven by a period of low interest rates and worsened by the vulnerability of a common currency. Although many European countries have been affected, Cohen said Portugal, Ireland, Italy, Greece and Spain carry the heaviest burden.
“These countries were able to borrow large amounts of money at relatively cheap rates and so they overindulged,” Cohen said. “Either the governments themselves overindulged or their private sectors overindulged.”
Encouraged by the financial promise of booms in various sectors, such as housing, Europe’s pattern of borrowing and spending has left much of the region struggling with rising unemployment rates and budget deficits, according to Cohen. As such, Cohen said debt-ridden states must now look to the country that holds the most wealth within the EU.
“We have to understand that the leadership here is a matter of who has the money,” Cohen said. “At the moment, there’s only one country that really has the money, and that is Germany.”
While French President-elect François Hollande plans to collaborate with German Chancellor Angela Merkel to discuss possible debt solutions, Cohen said Germany’s approach of high taxation and little government spending could exacerbate current conditions.
“Austerity simply digs a deeper and deeper hole,” Cohen said. “With austerity policies, growth is reduced. When growth is reduced, tax revenue is reduced, so they have to impose even more austere policies and they get into a vicious cycle. Some have called it a ‘suicide spiral.’”
The severity of German policies also clashes with Hollande’s fundamentally Socialist following within the French Parliament, according to Cohen.
“Most likely, [Hollande] will introduce some measures of stimulus and more spending,” Cohen said. “In his campaign, he promised to create new jobs in the public sector and he has also promised a tax on the wealthy.”
According to Cohen, increased spending could boost morale in France as the influence of German policies has triggered political turmoil and widespread discontent within many EU states.
“When governments impose austerity measures, it means that people are thrown out of work and they have less income to spend,” Cohen said. “They feel poorer, and indeed they are poorer, and that’s where the discontent comes from. German ideology leads to serious discontent in these countries where German ideology has been imposed.”
Cohen said Greece’s violent riots and protests illustrate public frustration with the debt crisis as the nation struggles to organize a stable and effective government.
“Why should we be surprised if we see discontent in Greece, where the unemployment rate is something like 22 percent?” Cohen said. “Even in France the unemployment rate is 10 percent. There’s clearly a lot of discontent, and it’s justified because these governments have said they have no choice but to enforce these policies.”