AUSTERITY POLICIES IN THE EUROPEAN UNION (EU) since 2009 have contributed to making citizens €3000 a year worse-off, according to research from the New Economics Foundation (NEF) and Finance Watch, published on 4 November. The new report also finds that European governments today are spending €1000 less on public and social services per person than they would have, had austerity not been implemented.

After the 2008 financial crisis, the EU introduced stricter fiscal rules that define limits to government borrowing and spending, in an attempt to reduce the levels of government debt. This included a reinforcement of the rules to bring government deficits under three per cent of GDP and debt-to-GDP levels under 60 per cent. EU member states attempted to follow these rules through cuts to public spending and cancelling planned public investment. The report finds that this has left Europe less resilient to economic shocks like the Covid-19 pandemic and the Russian invasion of Ukraine.

The EU responded to the start of the Covid pandemic by putting its rules limiting public spending and borrowing on ice. On 9 November, the European Commission will publish its roadmap to change these rules, as part of a broader review of the EU’s economic governance framework. This will determine the rules for government borrowing and spending once the emergency measures introduced to deal with Covid-19 and Russia’s invasion of Ukraine are relaxed at the end of next year.

The research finds that austerity policies in the EU, brought in following the 2008 financial crisis, have led to a permanent scarring of incomes, and cuts to spending on infrastructure and vital public services. Low levels of gross domestic product (GDP) growth led to a fall in tax intakes for governments, increasing government debt. Major European governments that were prevented from vital public spending as a result of these EU rules experienced lower levels of growth over the last decade, the research finds. The report finds that countries like Greece and Italy that pursued greater austerity and cuts to public spending ended up with higher government debt levels.

The report finds that the impact of austerity on disposable incomes differs greatly across the EU. In Germany incomes only dropped one per cent compared to the pre-2008 trend, while incomes in Finland and the Netherlands were 15 per cent to 16 per cent lower. Of the countries analysed, Ireland and Spain were hardest hit, with average incomes dropping by 29 per cent and 25 per cent respectively.

Polling commissioned by NEF and Finance Watch and conducted by Censuswide earlier this year found that two out of three Europeans polled agree that rules around spending should be changed to allow governments to spend more on education, health, social care and jobs. Seventy per cent of people reported concern about the effects that reintroducing austerity could have. However, 70 per cent of respondents also reported concern about rising government debt. The report argues that restrictions on public spending are not the answer to these concerns, as countries which implemented harsher public spending cuts ended up with higher debt levels.

The report finds that, had EU member states not implemented austerity policies following the 2008 financial crisis:

  • The average EU citizen would be €2891 better off.
  • Governments would have invested €533 billion more in infrastructure, including domestic and renewable energy resources which would have protected European families from dramatic energy price rises.
  • Governments would be spending an extra €1000 per person on social sectors like education, health and social care.

Frank Van Lerven, programme lead of macro-economics at the New Economics Foundation, said: The last decade of austerity policies have damaged European economies and stopped our living standards from improving. An obsession with debt and deficit reduction neither boosts economic growth nor keeps debt low. Instead, austerity has held European countries back from their potential, so it is vital the EU’s next proposals match financial responsibility with commitments to improve living standards and halt the climate crisis.”

Ludovic Suttor-Sorel, research and advocacy officer at Finance Watch, said: Ensuring public debt sustainability is important. But the EU’s excessive focus on public spending reduction to reach arbitrary debt thresholds depressed economic activities in many countries, resulting in higher debt-to-GDP levels. Worse, it has made us poorer and underfunded our economic, social and energy social infrastructures in the decade following the financial crisis, leaving Europeans more vulnerable to the skyrocketing cost of living. The Commission has the opportunity to change course and empower national governments to make qualitative investments and reforms towards a greener and stronger Europe.”

* Read the report, Europe’s fiscal framework here.

* Source: New Economics Foundation