Tag: Spain

‘Austerity’ seems to be the buzzword, as more and more countries across Europe make steps towards reducing substantial budget deficits. The UK has implemented £6.2 billion of cuts, with cuts of £50 billion expected by 2015 to tackle a budget deficit of over 10% of GDP. Portugal’s deficit stands at 8% of GDP and this will be tackled with rises in income, corporate and VAT tax, together with spending cuts aimed at halving the budget deficit by next year. Ireland’s austerity package includes public-sector pay cuts of up to 20%, plus reductions in child benefit, tax rises, and several key services facing cuts in employment, including emergency service and teachers. And, of course, we can’t forget Greece, with a budget deficit 12.2% of GDP, a national debt of 124.9% of GDP, and a forecast to remain in recession this year and the next. The Greek economy faces hard times with a huge austerity drive, including 12% civil service pay cuts, a large privatisation programme, and substantial pension cuts.

Greece is already in receipt of a €110bn rescue package. The Hungarian economy has already received €20bn aid from the EU, IMF and World Bank and spending cuts have been implemented, as markets began to fear that Hungary would become the next Greece. Germany is the most recent country to announce austerity measures, including plans to cut €10 billion annually until 2016.

But, what does this all mean? For years, many countries have spent beyond their means and only with the global recession did this growing problem really rear its ugly head. The only way to eliminate the budget deficit and restore confidence in the economy and ensure future prosperity is to raise taxes and/or to implement spending cuts. As the German Finance Minister said: “The main concern of citizens is that the national deficit could take on immeasurable proportions”. Unfortunately, this has already happened in some counties.

Although austerity measures are undoubtedly needed over the medium term in order to get deficits down, the impact of them is already being felt across the EU. Strikes have already occurred in massive proportions across Greece in response to the austerity package and tens of thousand of workers in Spain and Denmark also took to the streets in protest. There was anger from industry, trade unions and the media in response to €86 billion of cuts ordered in Germany between 2011 and 2014. The UK has already seen a number of strikes and more could be to come with further spending cuts in the pipeline. The Public and Commercial Services Union is threatening to re-launch strikes which began in March involving 200 000 civil servants (the action was suspended for the election.) A spokesman said: “If the cuts are anything like what is being suggested, industrial action by the unions is not only likely, it’s inevitable.”

EU governments have announced public spending cuts of €200 billion, together with a €500 billion safety blanket for the euro. Although these cuts are unlikely to have any positive effects for the everyday person for perhaps many years to come, in order to restore confidence and ensure a future economy that is both prosperous and stable, these austerity measures are deemed by many as essential. As Guy Verhofstadt (the former Belgian Prime Minister) said: “We’re entering a long period of economic stagnation. That will be the main problem for years. Europe is the new Japan.”

But will reduced aggregate demand resulting from the cuts lead to a double-dip recession and a (temporarily) worsening deficit from automatic fiscal stabilisers? We wait with baited breath.

EU austerity drive country-by-country BBC News (7/6/10)
Europe embraces the cult of austerity but at what cost? The Observer, Toby Helm, Ian Traynor and Paul Harris (13/6/10)
Germany joins EU austerity drive with €10bn cuts Guardian, Helena Smith (6/6/10)
G20 to endorse EU crisis strategy Reuters (28/5/10)
The Global recovery? It’s each state for itself Guardian, Jonathan Fenby (9/6/10)
Austerity angers grow in Europe AFP (9/6/10)
Austerity Europe: who faces the cuts? Guardian, Ian Traynor and Katie Allen (12/6/10)
Is this the end of the European welfare state? New Statesman (10/6/10)


  1. Are spending cuts or tax rises the best method to reduce a budget deficit? Explain your answer.
  2. What are the economic costs of the austerity packages across Europe?
  3. Who is likely to gain from the debt crisis in Europe?
  4. If austerity packages had not been initiated to the extent that they have, how do you think the rest of the world have reacted?
  5. Using the BBC News article and the Guardian article ‘Austerity measures: who faces the cuts?’, which country do you think is (a) in the best state and (b) in the worst state?
  6. How will you be affected by the austerity measures?

Fears of growing debt problems in the EU have caused global stock markets to plummet. On 25th May, the FTSE was down by 2.6%, Germany’s Dax index fell by 2.34% and in France the Cac 40 was also down 2.74%. Shares across Asia fell, including those in Australia, Hong Kong, Japan and Thailand. On top of this, there are concerns of rising military tensions between North and South Korea. This has only added to the pessimism of investors.

Then came the rescue of the Spanish bank Cajasur by the Bank of Spain, which did little to restore confidence in the world economy. The Spanish deficit has reached 11% of GDP, which is nearly 4 times higher than eurozone rules allow. Spain is also suffering from unemployment of more than 20%, which has led the IMF to call for massive structural reform in the country. The euro has also weakened, as investors sell the currency, because of growing fears of debt default amongst the eurozone countries.

Amid concerns of possible default by Greece, Spain and other countries, the IMF and the members of the European Union have agreed an emergency package of €750 billion (£650 billion). €250 billion comes from the IMF, with €440 billion available as loan guarantees for struggling nations and €60 billion from emergency European Commission funding. We can only wait to see how effective this rescue package will be in restoring confidence in the Eurozone economies.


Global stock markets see sharp falls BBC News (25/5/10)
Spain must make wide ranging reforms, weak recovery – IMF Reuters (24/5/10)
FTSE falls another 2.5% after Europe’s debt crisis sparks fears in Asian markets Mail Online (25/5/10)
IMF raises fresh concerns about the Spanish economy BBC News (24/5/10)
IMF Chief Economists – doubts over Greek aid remain Reuters, John Irish (24/5/10)
Markets still tense over eurozone debt Independent, Ian Chu (21/5/10)
FTSE falls below 5,000 due to eurozone crisis Telegraph (21/5/10)
FTSE plunges nearly 3% in opening seconds (including video) Sky News (25/5/10)
The contagion of austerity BBC News blogs: Gavin Hewitt’s Europe (25/5/10)
Europe debt crisis threatens recovery, OECD warns BBC News (26/5/10)


In graphics: Eurozone in crisis BBC News (24/5/10)
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission (especially sections 1, 6, 16 and 18)


  1. Using a diagram, illustrate why the euro has weakened.
  2. Explain why stock markets have fallen across the world.
  3. What type of reforms are needed in Spain?
  4. What factors are likely to determine the effectiveness of the IMF emergency package?
  5. Are the austerity measures in the Spanish economy likely to lead to the similar outcomes that we saw in Greece, such as widespread strikes?
  6. Discuss the advantages and disadvantages of the rescue package. Does rescue involve a moral hazard?