Last Tuesday, September 17 European finance officials agreed on a change to the region’s budget policies that would ease the austerity measures currently in place. Austerity can be defined as measures taken by a government to reduce its expenditures and budget deficits. Unprecedented austerity policies were put in place beginning in 2009 to ease the overwhelming budget deficits that came as a result of governments spending huge sums of money to stimulate their struggling economies. This change comes in response to criticism that the required budget cuts are making matters even worse in countries whose economies and labor markets are already crippled.
The change in budget policies will have the most impact on Spain, but officials add that Ireland, Greece, and Portugal will also benefit from the change. Spain, among other European nations with inflated budget deficits, has argued that its high deficit is the result of the economic crisis and not careless government spending and low taxes. Currently, it is unclear what the change will entail. It should be noted that the change still has to be formally approved by the EU’s senior finance ministry officials and a decision is expected to be reached by next week. As of right now, it seems very likely that the change will be approved.
Some argue that austerity will work for the European Union if all countries with budget deficits actually exercise it. Jeffrey Dorfman argues, in an article in Forbes, that many countries in the European Union that have claimed to be participating in austerity programs have actually increased spending over the last four years. According to Eurostat, from 2008-2012 Spain has increased spending by 13.3%, Greece by 8.3%, and Portugal by 5.8%. Out of the eight countries that have actually practiced austerity, only two have experienced relative GDP growth that is below the EU average from 2008-2011. Poland, Lithuania, and Bulgaria are all in the group of countries that has implemented austerity policies and are first, second, and fourth respectively in the relative GDP rankings for the EU.
Economic struggles in Europe have brought about disputes on the correct way to stimulate these economies. Proponents of Keynesian economics and proponents of austerity measures continue to clash on this topic and it will be truly interesting to see which policy, if any can lift Europe out of its current economic slump.