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Austerity Measures: Is It The Right Solution To Euro Crises?

Posted in Finance Articles, Total Reads: 6358 , Published on May 09, 2012

This article determines the effects of austerity measures taken by Europe. Article focuses on partly on euro crisis and how it was started. Here, it tries to develop some understandings of austerity measures and short term and long term impacts of them on Euro crisis as well as world economy. It analyzes austerity measures taken by different countries and try to infer the feasibility of these measures taken by EU. It uses some researches done by economists and organizations. It focuses on some social and economic problems that can arise due to short term view of European countries. EU is taking austerity measures as a weapon to fight with debt crisis. They are focusing on one part of these austerity measures that is reducing fiscal deficit and debt by ignoring the complete picture of it. The article tries to give the complete view of these measures, whether they are fruitful or not.

Austerity measures are a phenomenon that has been spread over globe after the Greece debt crisis. Austerity measures are combination of reduction in cash benefits, reduction of public service and expenditures, increasing government revenue by imposing more direct and indirect taxes so that government can be able to achieve its balanced budget deficit. Greece debt crisis forced it to take austerity measures to get assistance from European Union and IMF. Greece, a country which joined Euro currency in 2001, has been soared his debt up to such extent that its debt is 113% of GDP, which is not acceptable according to Maastricht treaty.

After revealing Greece’s huge pile of debt and budget deficit, credit rating agencies scrutinized other countries of Europe- Spain, Portugal, Italy, and Ireland. Results of this investigation were really shocking and most of the countries were highly indebted, and that became the matter of concern for creditworthiness of EU. Hence, to maintain creditworthiness and sustainability of euro, EU decided to take some austerity measures to curb deficits and debt from unacceptable to acceptable range.

Effectiveness of austerity measures is a question that is not answered yet. By looking in history, estimation of effectiveness of austerity measures can be done but it would not provide a fair view of current situation as economic and social conditions have been changed much over the period. Over the past 30 years, thirty advanced countries have taken austerity measures 173 times, and sometimes results of them were good as well as harsh for society and economy. For instance, Latvia, is a European country, was growing very fast (average growth of 10 %) during 2004-2007.

In 2008, global recession hits its growth and government took some austerity measures that resulted in increased unemployment rate of 17.7 % and GDP contraction by 17.7%. Although, some other countries got benefited by austerity measures but benefits obtained by austerity were short term.
Austerity measure and Euro crisis.

Europe’s policy of fiscal consolidation is looking very lucrative but its long term implications can be so bitter that they can’t imagine. The world has faced great recession in 2008-2009, after that economic recovery is going on since 2010. In such a critical time, crisis in Europe is not bearable, and actions taken by EU to save its member states have been criticized by many organizations (like IMF and UNICEF) and economists. The argument, they put forward is austerity measures taken by EU are flawed and have short term orientation.

Taking austerity measures when world economy is going through deep crisis can have detrimental effects. According to IMF, Fiscal consolidation policies taken by EU are nothing but creating a bubble for double dip recession. It increases unemployment rate, inequity, and reduces income of households. A fiscal consolidation of 1 percent of GDP reduces inflation-adjusted incomes by about 0.6 percent and raises the unemployment rate by almost 0.5 percentage point. It effects both short term and long term unemployment. Hence, OECD countries which already have high long term unemployment rate will have to suffer more.

Even countries like France, Italy, Germany, and Japan have high long term unemployment rate after recession of 2008. Inequality grows whenever austerity measures are taken by any country. Economic pie can be distributed among wages, profits, and rents.  Austerity measures cut the slice of pie going to wage-earners. For every 1% of GDP of fiscal consolidation, inflation-adjusted wage income typically shrinks by 0.9%, while inflation adjusted profit and rents fall by only 0.3 %. Hence, wage earners get heavily impacted by austerity measures in comparison to others in society that resulted in inequality. Europe is facing this problem as it has taken high austerity measures to reduce his fiscal deficits and debt to GDP ratio.

Some European countries like Greece and Spain are going through the consequences of austerity measures taken by European Union. Recently, Spanish students protested against education budget cuts by government, and union members in Greece protested against Greece government for reduction in minimum wages by 22%. Some other long term threats of  austerity are for children and poor households. According to UNICEF, in the world of problems of food, fuel, and financial shock, austerity measures are becoming new threats to children and poor households. They are fighting for their survival, nutritional growth and other rights.

Some other key effects of austerity measures are, determined by EUROMOD team (According to ISER (Institute for Social & Economical Research), EUROMOD is a tax-benefit micro simulation model for the European Union (EU) that enables researchers and policy analysts to calculate, in a comparable manner, the effects of taxes and benefits on household incomes and work incentives for the population of each country and for the EU as a whole.),reported in the research "The distributional effects of austerity measures: a comparison of six EU countries".

Key findings of this report explore the effects of austerity measures in six countries of EU (Ireland, Spain, Greece, Estonia, Portugal, and UK). Effects of austerity measures are progressive (progressive pension and public pay cuts, and progressive tax increment) in Greece, UK, Spain, and regressive/flat (benefit cuts at low incomes) in Estonia and Portugal. Team head for EUROMOD, Holly Sutherland, said that “It is striking how national priorities differ when choosing who should contribute most to austerity. In Portugal the poor pay a higher proportion of their income than the rich. In five of the six countries older people have been largely protected at the expense of children. In Greece it is the opposite.”


After analyzing all findings of researches on austerity measures and its effects on Euro crisis and whole society of Europe, we can easily infer that most of the effects of austerity are long term and are detrimental to social and economic situations. By applying these measures, EU are just targeting on short term fiscal deficits and debt to GDP ratio.

They are missing the long term implications of these measures. Many researcher and economists have said that EU’s austerity measures are nothing but a new danger for world economy that is just coming out of great recession.  Europe is trying to put crisis of few countries on the shoulders of whole world. Euro crisis is the problem that is originated because of some week policies and culture of spending in European countries.

Countries like Greece, Ireland, and Spain did not follow the guidelines of EU, and landed themselves and Europe in a deep crisis. Now, they are in hurry to correct these mistakes by taking some austerity actions which would affect the society and common people. Austerity measures are nothing but transferring the crisis from one period to another. Victims of austerity measures are poor household and workers of country. Instead looking for short term solution Europe should try to get some other solutions.

This article has been authored by Abhishek Rajpoot from IIM Rohtak.

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