The document summarizes the effects of austerity policies implemented in Greece and Spain in response to their sovereign debt crises. It finds that austerity led to rising debt-to-GDP ratios, high unemployment, and increased poverty in both countries. Alternative policies such as fiscal stimulus and social investment were proposed but faced feasibility constraints due to the countries' ties to the Eurozone. The implications extended beyond economic issues to challenges for the European Union itself.

1. Graham Scott
IPE Research Paper
The financial crisis of 2007 led to the sovereign debt crisis of 2009 for Southern
Europe. Using various research works that have analyzed the austerity policies
implemented by the International Monetary Fund, the European Commission and the
European Central Bank (the Troika), this paper examines how these policies have
affected economic conditions in Southern Europe. Specifically, Spain and Greece are
examined as two countries both affected by austerity policies, but in different economic
contexts.
Before analyzing the bitter medicine of austerity policies, it is important to
understand how Spain and Greece became sick in the first place. Contrary to popular
thought, Spain was not an irresponsible borrowing machine. In 2007, there was actually
a public surplus of two percent, and public debt rested at only 36 percent of GDP (Conde-
Ruiz and Marin 2013). One of Spain’s main weaknesses was its reliance on the housing
market. Conde-Ruiz and Marin explain, “that the collapse of the housing market was
responsible for the destruction of almost half of the jobs lost during the crisis,” (2014,
21). In an attempt to recover from the demolition of a large sector of its economy, Spain
embarked upon a strategy of fiscal stimulus in 2008 through 2009. Fiscal stimulus
combined with falling revenues resulted in a fiscal deficit of eleven percent in 2009, and
a public debt of fifty-four percent in 2009 (Conde-Ruiz and Marin 2014). The
autonomous regions within Spain were an important culprit to this rising debt,
contributing 35 percent of total expenditures (Conde-Ruiz and Marin 2014). These
independent regions continue to pose a unique barrier to Spain dictating a consistent

2. fiscal policy. Even considering this spending increase, “Spain’s public-debt burden of
around fifty-three percent of GDP means its fiscal position is among the least worrying of
all the economically challenged euro countries,” (Flamini 2012). However, a rapidly
rising deficit brought pressure to limit its debt through austerity measures.
Greece exhibited more severe structural problems leading into the 2007 economic
recession. Guillen and Petmesidou further explain, “profligate borrowing in order to fund
the government budget and current account deficit, in tandem with weak revenue
collection and structural rigidities of the economy, heightened vulnerability to the
international financial turmoil,” (2014, 13). Increased borrowing rates forced Greece into
asking for a bailout package from the Troika. In contrast, Spain’s healthier economic
condition allowed them to avoid the need for a bailout deal.
What specific requirements did these austerity packages put in place? In
exchange for two massive loans from the Troika, Greece implemented a host of
measures. These included raising taxes and VAT rates on the revenue side. In order to
cut expenditures, Greece cut holiday bonuses, tightened pensions, cut public sector jobs
and wages. Finally, market liberalization tactics were implemented, lowering the
minimum wage, and reducing the power of labor unions (Monastiriotis 2013).
Monastiriotis summarizes, “All in all, between January 2010 and January 2013, pensions
and public sector pay have declined by over twenty-five percent on average, effective tax
rates have increased perhaps by more than twenty percent,” (2014, 7).
Spain mirrored many of these changes. In an effort to generate revenue, VAT
rates, and other taxes were increased. 2009 through 2012 saw a cut in public investment
of 60 percent, among other reductions in expenditures (Conde-Ruiz and Marin 2014).

3. Prime Minister Mariano Rajoy furthered the steps of austerity in 2012, by implementing
7.8 billion dollars in tax hikes and 11.5 billion dollars in spending cuts (Flamini 2012).
Spain also joined Greece in reducing worker protection against firings, in an attempt to
encourage private sector growth (Flamini 2012). To summarize, Greece and Spain took
similar steps to dramatically shrink government expenditures, while raising tax revenue.
With an understanding of the conditions that led to Spain and Greece’s sovereign
debt crises, and the austerity measures that were enacted in response, we can now
examine how these policies affected the economies and debt burdens of both Spain and
Greece. Specifically examined will be each country’s debt to GDP ratio, unemployment
rate, and poverty rate.
Spain implemented fiscal austerity measures in 2010. From 2010 to 2015,
Spain’s debt to GDP ratio rose continuously from 54 percent to its current level of 97.7
percent (Trading Economics 2015). Why have austerity measures failed at their primary
goal in Spain? First, austerity measures have only been able to effectively address
government expenditures, bringing Spain below the average Eurozone expenditure in
2011 (Conde-Ruiz and Marin 2013). Instead, the problem remains with revenues, with
Spain taking the largest decrease in revenue of all Eurozone countries (Conde-Ruiz and
Marin 2013). Tax increases have been unable to counter the fundamental flaw that the
majority of Spain’s revenue comes from the housing market (Conde-Ruiz and Marin
2013). In comparison, Greece’s debt to GDP ratio rose from 129.7 percent in 2010, to
174.9 percent in 2014 (Trading Economics 2015). Both Greece and Spain are failing to
see improvements, because their economies are shrinking faster than their budgets.
Monastiriotis reports, “Nobel Lureates Paul Krugman and Joseph Stiglitz have frequently

4. made the rather simple argument that austerity suppresses demand and investment,
negating the benefits of fiscal consolidation,” (2014, 8). Consistent with this theory,
Greece’s GDP fell 25 percent from 2008 to 2014 (Kyriakopoulos 2014). Spain’s GDP
rapidly fell as well. According to Febrero and Uxo, “In the second quarter of 2010, GDP
was 4.6 percent lower than in the first quarter of 2008,” (2010, 1). The connection
between fiscal austerity and falling GDP comes through shrinking public investment and
shrinking household disposable income (Febrero and Uxo 2010). To summarize,
austerity policies discourage spending and investment, which shrinks a country’s GDP.
A decreasing level of debt cannot compensate for a rapidly shrinking GDP, resulting in
debt to GDP ratios in both Greece and Spain rising due to austerity policies.
The most significant impact of the Spanish and Greek austerity packages may
be the unemployment numbers they have generated. Guillen and Petmesidou write,
“Spain lost most: from 2009 to the second quarter of 2014 the economy shed 3.2 million
jobs…which is by far the highest job loss (in absolute numbers),” (2015, 14). In
comparison, “Greece also suffered a huge loss, as about thirty percent of the working
population lost their jobs in the same period,” (Guillen and Petmesidou 2015, 14). Youth
unemployment rose to fifty-seven percent in Greece and fifty-four percent in Spain
(Guillen and Petmesidou 2015). Greece is an excellent case study for demonstrating how
austerity leads to unemployment. Mass layoffs of public sector employees and declining
restrictions against firings in the private sector have led to the current unemployment
crisis in Greece. In fact, Greece’s unemployment percentage has passed the United
States’ unemployment percentage during the Great Depression (Kyriakopoulos 2014).
Rising unemployment has occurred, despite Greece’s labor costs falling “more so than in

5. any other crisis-hit country,” (Kyriakopoulos 2014, 335). Kyriakopoulos explains that
falling wages alone cannot increase private sector competiveness; worker education and
business expertise in respective fields is needed (2014). Of course, austerity measures
that discourage investment in education and innovation prevent truly competitive
economies that will hire Greeks and Spaniards alike.
As might be expected from our results so far, the poverty rates in Spain and
Greece have not fared well under austerity measures. Median incomes fell by thirty-six
percent in Greece and eleven percent in Spain from 2009 to 2013. Moreover, in 2013,
forty-five percent of Greeks and twenty percent of Spaniards fell below the 2009 poverty
line (Guillen and Petmesidou 2015). Policies such as reducing public sector wages,
lowering the minimum wage, and slashing jobs have all led to Greeks and Spaniards
falling into poverty. The traditional European social welfare security net has been eroded
by cuts in government spending, leaving these large groups of individuals with little help
to cope through unemployment or minimal paying jobs. Gerald Epstein explains,
“policies of austerity and the ECB’s commitment to doing whatever it takes to prevent a
financial meltdown has calmed the markets but at the expense of the workers and citizens
who are living in the nightmare of a collapsing social and economic fabric,” (2014, 97).
As the poverty rate figures indicate, the nightmare is alive for far too many Greeks and
Spaniards.
Austerity measures have been tested for their effects on debt to GDP ratios,
unemployment, and poverty rates. In both Spain and Greece, these measures have all
headed in the wrong direction, and austerity has been linked as the cause. Yet, the
legitimacy and weight of criticism is diminished without alternative policy

6. recommendations. These recommendations will be discussed in the final section of this
paper.
One of the main constraints for a Greek and Spanish economic recovery, are their
ties into the Eurozone. First, Greece and Spain are tied in trade to a powerful exporter
(Germany). In turn, Greece and Spain are in trade deficits to challenging competitors.
Secondly, Greece and Spain are wrapped in the constraints of a common currency. This
is partially why austerity did not work in the first place, as “there is no record of austerity
measures being effective in the absence of a free-floating national currency that can
deflate to make wages more competitive and reduce debt payments through devaluation,”
(Hess 2012, 104). These constraints lead those like Gerald Epstein to go as far as
suggesting Greece and Spain exit the Eurozone altogether (2014). In order to avoid a
complete break, Hess says, “moderate inflation and a weaker currency need to be
tolerated,” (2012, 105). In summary, the first main strategy is to shift the monetary union
to favor Southern Europe’s weaker economies.
Secondly, there is a call for a total reversal of austerity policies in exchange for
social investment packages. In direct opposition to the moves taken to deregulate the
labor market, Bruno Palier believes investment in good working conditions with
guaranteed access to professional training will lead to increased productivity. While
fiscal austerity means cutting education funding, Palier pushes for universal high quality
early childhood education to give children of all socioeconomic backgrounds a strong
educational start (2014). At the other end of the educational timeline, Palier states, “it is
essential to give a second chance to young people who left the school system,” (2014,
219). We can see certain applicability here to the unemployment crisis resulting from a

7. Spanish construction market gone with the burst of the housing bubble. Granting access
to retraining would help both Spain and Greece’s labor markets better adapt to changing
economic conditions. The social investment model is not purely theoretical either.
Nordic countries, which have traditionally held Europe’s strongest social welfare
systems, have sustained better economic and social performance throughout Europe’s
recession (Guillen and Petmesidou 2015). The empirical correlation and theoretical link
are there to support the policy of social welfare investment.
The arguments for fiscal stimulus and social investment over austerity are strong.
Yet, are they even feasible options? Remember that Spain was in a better financial
position in 2007, and was able to finance two years of fiscal stimulus spending before
defaulting to austerity in attempt to reign in deficit spending. In contrast, Greece needed
to be bailed out and had to comply with the stipulations of those bailout agreements. A
roadblock to both countries pursuing fiscal stimulus is their tie to the Euro, which
prevents them from printing currency to pay back loans (Epstein 2014). Monastiriotis
concurs, stating; “Taking into consideration the political and credibility constraints that
made an externally financed fiscal expansion… practically impossible leads to the
conclusion that austerity was- in every practical sense- the only option,” (2013, 8). Even
without these constraints, there is doubt that social welfare investment would meet a
primary goal of public debt control. Monastiriotis states, “it is extremely unlikely that
any form of fiscal expansion… would be able to generate the size of the spillovers
needed to halt the rising trend of public debt,” (2013, 8). Even those who support fiscal
stimulus acknowledge the need for increased taxes to generate necessary levels of
revenue (Febrero and Uxo 2010).

8. This paper set out to determine the affects of austerity in Greece and Spain. Our
measures included each country’s debt to GDP ratio, unemployment rate, and poverty
rate. Additionally, we surveyed alternative methods to promote economic recovery in
Greece and Spain. Our results showed that both the Spanish and Greek debt to GDP
ratio, unemployment rate, and poverty rate all worsened under austerity measures.
Franklin Hess concludes, “Economic contraction has been greater than expected; tax
revenues have been less than expected; budget projections have been worse than
expected; and the populace has fought the program’s implementation every step of the
way,” (2012, 104). While the surveyed research was unified in finding austerity
socioeconomically harmful, opinions differed on alternative remedies. Some argued for a
complete change of policy to increase social welfare investment. Others argued that
austerity was a painful but necessary policy. Finally, the constraints of the Euro led to
solutions ranging from a devaluation of the Euro to a Spanish and Greek exit from the
Eurozone.
The implications of large austerity programs stretch beyond economic woes in
Spain and Greece. The fabric of the European Union is being torn as austerity measures
handed directly down from Brussels to Greece generate backlash against integration and
the loss of sovereignty. Spain faces similar protests, although blame on the Troika is less
direct. Not only is the strength of integration being tested, but the direction and goals of
the European Union are also becoming lost. Guillen and Petmesidou summarize, “A set
of values and goals (‘social justice’, ‘equity’ and ‘solidarity’) constitutive of the
European Social Model and defining the basis of European identity seem to be fading

9. away,” (2015, 23). While the future of the European Union remains uncertain, there is no
question that austerity “has proved an utter failure,” (Hess 2012, 104).

10. References
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Intereconomics 48 (January/February): 21-26.
Epstein, Gerald. (2014). “The Eurozone Crisis: Shredding the Post-war Bargain.” New
Labor Forum 23 (May): 95-98.
Febrero, Eladio and Jorge Uxo. (2010). “Constraints and Alternatives for Employment
and Output Growth. Spain during the Great Recession.” University of Castille-La
Mancha Department of Economics and Finance Working Papers: 1-15.
Flamini, Roland. (2012). “The Next Greece? A Sketch of Spain.” World Affairs
(May/June): 39-43.
Guillen, Ana and Maria Petmesidou. (2015). “Economic Crisis and Austerity in Southern
Europe: Threat or Opportunity for a Sustainable Welfare State?” European Social
Observatory 18 (January): 1-24.
Hess, Franklin L. (2012). “Why Austerity Isn’t Working in Greece.” Current History 111
(March): 101-105.
Kyriakopoulos, Irene. (2014). “In the Name of the Euro: What Have the EU’s Policies
Achieved in Greece?” Intereconomics 49 (November/December): 332-338.
Monastiriotis, Vassilis. (2013). “A Very Greek Crisis.” Intereconomics 48
(January/February): 4-9.
Palier, Bruno. (2014). “From Austerity to Social Investment: Europe Needs to Show the
Way.” Revue de L’OFCE (May): 213-220.
Trading Economics. 2015. “Greece Government Debt to GDP.”
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