Policy Research in Macroeconomics

The self-defeating nature of the eurozone’s fiscal retrenchment policies

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In this paper, we contend that it would take an inordinate dose of audacity from someone to maintain that the adjustment programmes imposed on Greece and executed from 2010 onwards are not responsible for the severe economic slump that the country is experiencing. 

In addition, it should be genuinely acknowledged that the draconian fiscal measures implemented did not achieve the stemming of the debt-to-GDP ratio. On the contrary, the latter became catapulted to excessively unsustainable levels.

 It is an ironic fact that even some of the most fervent supporters of the austerity measures have on occasion, reluctantly perhaps, admitted that various facets of the programmes have been ill-conceived and ill-designed. 

We recall that the Greek GDP deflator was falling for the four years 2012-2015.  In such a debilitating deflationary environment, investment and consumption are held back while the government’s revenue is diminished,  making debt repayment even harder.  The country has been caught in a pernicious debt-deflation spiral, along with a higher debt level in real terms as well as higher real interest rates.

We note that in some other eurozone countries (e.g. Ireland, Portugal) that have undergone austerity programmes, the  “self-defeating” properties of fiscal policy activated by the Adjustment Programmes appear to have been more short-lived in certain respects.  We ask, however, why the “mainstream” definition of “self-defeating” is restricted to the “accepted” macrovariables, and remains silent on questions such as who bears the burden, who reaps the benefits of austerity; is there a rationale for why socio-economic indicators (e.g. poverty rates, infant mortality, life expectancy, emigration of young people, suicide rates etc.) do not deserve to be included in the estimates? 

We further ask whether the true objectives of the fiscal austerity programmes are not ideological, namely to limit the active remit of the public sector by privatizing state functions, to dismantle the welfare state, and generally, to impose a polarizing fiscal policy with redistributive rather than stabilizing aims and consequences.

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