It all started with the global financial crisis in 2008. One of many, we would say, however this one differed in many ways from the previous crisis. The collapse of US merchant bank Lehman Brothers have spread not only across the west side of globe but east as well. One of the targets devastated the most after the breakdown of US giant bank was Europe and European Union especially. Having members of European Union affected means having the big Troika involved and forced to implement accordingly for a bailout of these countries.
The global financial crisis stroke hard in Europe, it caused all countries suffering long term or short term consequences. It was necessary to find an appropriate solution in short period of time. The austerity measures seemed to be the light in the dark Europe was searching for. The term “austerity measures” generally refers to the economical measures of a country undertaken in order to cut spending and budget deficit. (Poinasamy, 2017, p. 2) Nonetheless, austerity measures involve far more complex actions than just tax increase for the sake of public debt.
From the period of 2008 until 2011 the European Commission approved “€4.5 trillion in aid to the financial sector, the aim was bailing out banks such as Lloyds TSB in the UK and Bayern LB in Germany. Some banks that haven’t bailed out directly from aid such as Barclays, Deutsche Bank and Santander have found the way out through certain state interventions.” (Cavero and Poinasamy, 2017, p. 6). Another issue that took place was within the market of EU. The plan was primarily set to raise the demand and investments which would therefore keep the competitiveness in life (Cavero and Poinasamy, 2017, p. 6). This was one of the ways to handle market oriented issues.
Since the end of stimulus program in 2010, certain countries such as Greece, Portugal, Ireland and Spain were obliged to engage in austerity measures while UK on the other hand was one of the countries that willingly undertook austerity measures because they believed it was an essential move to make in order to maintain a balance of budget in time of difficult economic conditions. Despite having austerity measures implemented, the British government would still have to spend more than it received in the form of taxes. One would ask, does the austerity even work then? What austerity actually means is the reduction in the structural deficit of government, regardless of fluctuations in economic cycle deficit will rise and fall just as economy contracts and expands. Thus British government marked the deficit of 9,3 per cent of GDP during the first year but the term austerity was still applied since it had marked the deficit of 11 per cent of GDP in the year before. (Buttonwood, 2017)
The consequences of austerity were felt not so long after the implementation of measures. Unemployment rate had risen significantly and gap between poorest and richest started to widen deepening already huge inequality. Soon, the poverty spread across the EU. In the period between 2010 and 2014 majority of EU countries were faced with huge loss of jobs mostly in public sectors and vital public services. This unfortunate measure came out as a result of cut in public spending. Ireland for instance had cut public spending by 40 percent of its GDP. Twenty percent cut was noted in Baltic States, 12 percent in Spain and around 11 percent in the UK. (Cavero and Poinasamy, 2017, p. 8).
A devastating fact is that women were outstandingly affected in the form of jobs. Contributing 69 per cent of all EU public sector jobs, women faced a great redundancy. In Greece 25 per cent cut was recorded in public sector, 20 per cent in the UK and 10 per cent in Romania and Portugal. Not to mention that cuts were focused on education, health and social work, sectors known as dominated by females. (Elomäki, 2012, p. 4, 5)
The unemployment in EU countries began to record intimidating rates after 2007. It was expected that unemployment rate will jump, however no one could predict that in four to five years it will triple and even more, quadruple in countries such as Greece, Spain and Ireland. With this rate of unemployment generally, one has to understand that youth unemployment rate grows to even higher scale. Portugal, Spain and Greece again, averaging 42, 56 and 59 per cent accordingly in youth unemployment depicted the notion of austerity measures. (Cavero and Poinasamy, 2017, p. 10-11)
All measures undertaken for the purpose of economic growth, reduction of debt and the government deficit actually triggered the opposite effect in other fields such as social security. The substantial importance of this issue is tightly connected with already cut public sector services, social transfers, and collective bargaining which are of incredible importance for the struggle against poverty and inequality. Namely, if social security budget faces a cut after all, the poorest class will face enormous difficulties to even make a living since they are restrained from all other services. (Cavero and Poinasamy, 2017, p. 9)
Certain European countries coped with the crisis by implementing regressive taxes instead of progressive. They did so by giving the raise to VAT taxes or value added taxes which would therefore affect the poorer rather than rich. Now why would a country implement such measure if it doesn’t work for the budget deficit is a question worth asking. The regressive taxation proved to be less effective than reduction in public expenditure however some countries such as UK believed in brighter side of regressive taxation which promises reduction in unemployment. With the implementation of regressive taxation, certain big corporations enjoy being low taxed and eventually offer new job opportunities which country lacked in huge amount prior to regressive taxation. (Buttonwood, 2017)
Spain however was one of the countries that maintained progressive taxation. Spain is known as one of the countries with the highest rate of unemployment in Eurozone. Its GDP growth during the crisis was firmly based on labor-intensive sectors, which were noticeably affected by recession and caused a great amount of job loss. The government budget in Spain was not only affected by the increase in public sector expenditure, but mainly from the reduction in public revenues. Another hidden issue that played perhaps crucial role in reduction of government revenue would be the black market. Tax avoidance, tax evasion or any other kind of tax fraud had a great impact on government revenue. Alongside the “housing bubble” which is term that refers to an end of significant revenue period in Spain and beginning of decrease period, tax fraud consists the core of government decline in revenue. Overall these two factors present the major part of Spanish deficit. (Monastiriotis et al., 2013, p.21-22)
That crisis can bring down even the fastest growing economies, we have been assured with the Irish case. The public dept in Ireland can be directly related to the decision brought up in 2008 which guaranteed all private liabilities of its leading national banks. Soon after the decision was brought up, Irish public debt has dramatically increased, to be more precise from 40 per cent of GDP ratio it heightened to huge 120 per cent. In order to bailout the banks, Ireland engaged in austerity measures particularly focused to their export sector as it was considered, and still is, as a crucial attribute. As well as Spain was stroke by the housing bubble in crisis, so the Ireland was by house price-inflation that made it even more difficult to overcome. This kind of inflation knocked out the tax base and consequently has taken out entire 50 percent of employees from income tax pool. Between 2008 and 2009 Ireland reached the number of minus 18bn in government revenues. Unemployment rate rose rapidly and the scenario began to seem similar to Spanish or even Greek one. However, what Ireland successfully managed to do was keeping income tax rate at the same level. It didn’t succeed in it by introducing another tax but rather by a raise in VAT and property tax. Fine Gael party brought to a resolution the property tax based on the value of property and its contribution proved to be pivotal. (Monastiriotis et al., 2013, p. 9, 11)
Irish economy in the past few years experienced a true revival, recording 1,1 per cent, 8,5 per cent, 26,3 per cent and 5,2 per cent accordingly of GDP rate growth from 2013 until 2016, making it outstanding in Eurozone. (Kennedy, 2017). Austerity measures were effectively coordinated at Irish coast. Yet Ireland is an exception when we discuss austerity program in European or non-European countries and their bail out.
Certain countries out of the European spectrum have also experienced harsh times applying the instructions given by European Troika, all in hope for the increase of employment, investments and salaries. Countries of Latin America and Africa experienced long term growth of inequality and poverty by adjusting to measures of austerity during the 80’s and 90’s. It is even corroborated by IMF lately that these measures inflict more damage than benefit. (Cavero and Poinasamy, 2017, p. 16), (Elliott, Inman and Smith, 2017).
The costs are huge and progress is depressive in comparing to launched measures. Systems failed to provide necessary needs for citizens and many people who used to have a normal life are nowadays living on the streets. What is worst is that poor bear the heaviest burden again.
- Kennedy, E. (2017). Irish economy outpaces euro zone peers with 5.2% growth in 2016. [online] The Irish Times. Available at: http://www.irishtimes.com/business/economy/irish-economy-outpaces-euro-zone-peers-with-5-2-growth-in-2016-1.3003894 [Accessed 11 Jun. 2017].
- Monastiriotis, V., Hardiman, N., Regan, A., Goretti, C., Landi, L., Ignacio Conde-Ruiz, J., Marín, C. and Cabral, R. (2013). Austerity measures in crisis countries — results and impact on mid-term development. Intereconomics, 48(1), pp.4-32.
- Buttonwood (2017). Cite a Website – Cite This For Me. [online] Economist.com. Available at: http://www.economist.com/blogs/buttonwood/2015/05/fiscal-policy [Accessed 11 Jun. 2017].
- Cavero, T. and Poinasamy, K. (2017). [online] Available at: https://www.oxfam.org/sites/www.oxfam.org/files/bp174-cautionary-tale-austerity-inequality-europe-120913-en_1.pdf [Accessed 11 Jun. 2017].
- Elomäki, A. (2012). The price of austerity – The impact on women’s rights and gender equality in Europe. 1st ed. European Women’s Lobby.
- Poinasamy, K. (2017). THE TRUE COST OF AUSTERITY AND INEQUALITY. [online] Available at: https://www.oxfam.org/sites/www.oxfam.org/files/cs-true-cost-austerity-inequality-uk-120913-en.pdf [Accessed 11 Jun. 2017].
- Elliott, L., Inman, P. and Smith, H. (2017). IMF admits: we failed to realise the damage austerity would do to Greece. [online] the Guardian. Available at: https://www.theguardian.com/business/2013/jun/05/imf-underestimated-damage-austerity-would-do-to-greece [Accessed 11 Jun. 2017].
Author: Djordje Terek, student of American College of Thessaloniki in Greece.