The financial crisis of 2008 spiraled much of the world into economic difficulty, beginning with mass default of US’ mortgage-backed securities and most recently, the dire financial state of the European Union.What reporters have dubbed the European debt crisis “emerged explicitly from the 2008 banking crisis,” confirmed Russell Berman, Stanford professor of comparative literature and german studies with an expertise in cultural politics. He continued, “[Putting] it bluntly, [countries in the EU] have been spending too much money.”
The current debt crisis can be analyzed from two major standpoints; first, a political standpoint analyzing the system under which the European Union functions and second, an economic perspective related to overspending. Although each country in the European Union shares a common currency, each country’s budget is controlled on a national scale, independent of other countries’ budgets. Arriving to a desired consensus by all is difficult due to the different cultural, political, economic and national interests of the various countries that compose the Eurozone.
“Each of the PIIGS [Portugal, Ireland, Italy, Greece, and Spain] has some combination of unsustainably high budget deficits, high government debt, and weak economic growth,” Keith Hennessey, professor at the Business School in Economics in Government, explains in his article Three Layers of the European Debt Crisis.
The economic tendencies of the PIIGS countries have led them to lose credibility with investors who demand higher interest rates on bonds to compensate for the associated risk of potential default. Although these problems have been covered up by Europe’s past growth, current economic slowdowns have highlighted these problems, making them impossible to ignore.
As a result of these crises, countries as well as the European Central Bank have pulled together their intellectual and economic resources to derive combined solutions to cushion the damage of the crisis. President Sarkozy of France and Chancellor Merkel of Germany have shown significant signs of cooperation to find workable solutions for these PIGG states. However, the Germans have pushed for great austerity measures while the French have voiced desires for European solidarity. As Paris and Berlin search for equilibrium, British Prime Minister Cameron has been the skeptic.
“There is a perpetual dance that goes on in Europe. There are appeals to European unity when in fact you have shifting alliances among the national capitals,” explained Professor Berman.
Although countries such as Germany and France show the international public a certain degree of cooperation, future solutions are also viewed from a nationalistic lens. Varying alliances arise depending on the issues at hand. Looking back on the Libya Crisis in 2010, Britain and France cooperated while Germany was the odd man out. Now, the economic crisis in Europe has shown different cooperative ties between France and Germany, leaving Britain aside.
Although the focus has been on the economic damage of the crisis, questions about lasting impacts on other countries such as the United States, or even regarding the relationships between European countries are as pertinent. Britain has withheld from signing any major proposals to fix the debt crisis.
“There has been a long history of Euro skepticism in England. All of the countries in Europe have distinct traditions and Britain has been more jealous in guarding its distinctiveness,” described Professor Berman. Cameron has acted with British national interest, protecting the British finance industry from pending taxation proposals that are likely to be set by Eurozone countries.
Anti-German sentiments have also been felt due to anxieties about German hegemony in Europe. Germany’s desire to push for heavy austerity measures in Europe has promoted criticisms, leading to these contentious allegations.
North and South relations could also be tender once the European Debt crisis settles. Some of these fragile economies could be put under closer control in the future to ensure economic stability and to limit economic failures, diminishing individual sovereignty. These types of skepticism could alter future relations, pushing European countries to be united yet hesitant of their partner countries. Moreover, this may push tender relations past North/South borders and towards a dichotomy between the management of Europe by a ruling political elite and the desire for complete democracy in these countries. The balance between fiscal autonomy and methods for economic reparations will determine the quality of future relations between European states.
News headlines have amply covered the effects of the European debt crisis in Europe. But what about the United States? “If Italian banks fail, leading to the European Central bank failing, the United States could face another recession,” warned Professor Hennessey.
The United States has a direct interest in the European Union related to large export quantities and shares in the European economy. Losses in European banks could create a domino effect provoking even greater losses in our banking system. The United States Federal Reserve has started to implement stress tests on American banks to make sure they are able to withstand a collapse of European banks. Aside from that, there is little more the United States can do but be mentally prepared for a negative outcome.
“In a sense, the fate of the U.S. is tied to the European crisis and whatever resolution comes about. But I don’t think the future of our country is hand-to-hand tied to this crisis. We have enough independence,” Luke Pappas, freshman at Stanford researching the European Debt Crisis, voiced confidently.