Austerity Packages in Europe: an overview

1. Austerity Packages in Europe:an overview Presentation prepared for the ‘TURI annual network meeting’ Athens, 14 May 2011 Andrew Watt, Senior Researcher, ETUI Contact: awatt@etui.org

2. The Purpose of the Exercise • Evaluation from national and European comparative perspective • Motivation behind them, their size and time structure? • Composition? Spending cuts or tax hikes? Implications for income distribution? • Groups of society most likely to bear biggest burden of adjustment? • Potential effects on Europe 2020 strategy headline targets? • What role for social dialogue and trade unions in shaping them?

3. Some background information on the Survey • Survey of national experts—many from TURI network • Questionnaires filled in between Nov10 and Feb11 • Responses from 17 countries—88% of EU GDP • Broad representation of member states (e.g. West, East, core, peripheral…) • Packages of measures adopted following credit crunch---incl. before 2010 • Some caveats • Published as ETUI WP (co-authored with Sotiria Theodoropoulou)

4. Objectives, size and timing of the packages • Objectives: • Correct expanded budget deficits following crisis & recession, often in response to higher cost of debt financing • SGP/Maastricht criteria for admission to Eurozone • Conditionality of EU/IMF financial support • Size: • EU27 weighted average: -0,9% of GDP p.a. for 2011 and 2012 • Large national variation: from 1,4 bn € (SE-2011) to 129 bn € (UK) • GR: -37 bn €; IE: -15 bn €; PT: -21.7 bn €; LT: -5.2 bn €; HU: -9.4 bn € • Timing: Mostly 2011-13/14; frontloaded adjustment for crisis countries, starting 2010 or earlier

5. Overview of size and timing of the packages

6. Spending Cuts or Revenue Hikes? • Majority of member states  emphasis on spending cuts • FR, HUN, IE, LU & UK: min 70% of total value of measures • PT, AT, DE, DK, GR: also balance in favour of spending cuts • Evaluation of composition for Income Distribution: • Regressive Packages: PL, IE, CY, DE, LT, ES, GR, DK • Progressive Packages: FR, LU • Neutral/ambiguous: AT, HU, UK

7. Who is paying the bill? • Pensioners and those close to retirement • Public sector employees • Benefit recipients

8. Fiscal Austerity Compatible with Europe 2020? • Employment rate target of 75%---massive risks (austerity, interest rates, commodity prices) on top of pessimistic forecasts • Indications of cuts in public investment spending (HU, UK, IE, LU, AT, ES, GR, DK) • Education and Training: Evidence that cuts in line with other areas or spared altogether • Green growth/Low Carbon economy: shielded from austerity • R&D/Innovation: insufficient info • Poverty & Social exclusion: insufficient specific info

9. Social Dialogue and Fiscal Austerity Packages • Did the design of the package involve social dialogue, enabling the views of SPers, esp. TUs to be heard? • SD in 9 out of 17 countries; yet in 5 out of these 9 TU positions either barely taken into account or no agreement • Positions of main TUs on the government measures? • Mostly negative, except in AT, IT, SK • Alternative TU suggestions: • Protect more vulnerable groups of society by shielding spending on their benefits • Increase share of burden of adjustment for the better-off through higher taxes • Structure measures in a way that employment recovery will not be jeopardised

10. Summary of Main Findings • Still early to robustly assess the full scale and impact of austerity packages. However, • Austerity right across EU, but large national variations • Large frontloaded packages in fiscally constrained MS • Major concerns about their effect on (employment) recovery and consistency with correcting macroeconomic imbalances : reliance on private sector 'confidence' • Emphasis on expenditure cuts over tax hikes • Public sector employees and social benefits recipients most harmed • Europe 2020 objectives at risk? With partial exception of environmentally sustainable growth (missed opportunity) • Indications that social dialogue has either not preceded adoption of packages or has not helped have the TUs’ views taken into account

11. The EU/IMF austerity packages • Bailouts offered to EL (EUR110 bn) IE (80 bn) and Portugal, provided by EU and IMF • High interest rate 5-6% (2-3pp higher than AAA) • Conditional on harsh deflationary austerity policies (spending cuts and tax increases) • Deflation 'necessary' to regain competitiveness • But vicious circle: • Very low nominal GDP growrh plus high interest rates means debt stabilisation requires high primary government surpluses (S = (r-g)D) • Means more austerity and further depression of nominal GDP growth • This frightens investors which pushes up market interest rates

12. The EU/IMF austerity packages - ways out Increasingly recognised that the packages are not working Renewed package imminent in EL Renegotiations in IE Choice : Disintegration or integration Right is calling for end of the euro area (D-Mark fans) Some on the Left also (stiff the bondholders, avoid recession, do an Argentina) EMU is not a currency peg. Emu is worth saving. Integration strategy needed Zero interest rate penalty, convincing financial support, growth and investment path to consolidation, no default, no devaluation