Austerity and Inequality. The Distributive Effects of Fiscal Consolidation Measures in the Economic Adjustment Programmes of the Eurozone Crisis

Following the inception of the economic adjustment programmes in Greece, Ireland, Portugal, and Cyprus, and the financial sector adjustment programme in Spain, the EU has gotten much criticism for their handling of the social dimension of the crisis through their involvement in the Troika of European Commission, European Central Bank, and International Monetary Fund. One manifestation of this neglect of the social dimension can be found in the levels of economic inequality, particularly income inequality, in the countries that were part of the Troika programmes. Whilst the literature so far suggests that phases of fiscal consolidation correlate with increases in inequality levels, particularly by limiting governments’ redistributive capacities and curtailing automatic budget stabilisers, this paper finds that this was not the case in the programme countries. Especially Ireland, Portugal, and Greece displayed extremely moderate increases and at times even decreases in inequality levels. In assessing the distributive effects of the fiscal consolidation measures, this paper combines the use of real data (EU-SILC) and simulated data (based on tax-benefit microsimulation tool EUROMOD). Additionally, the paper analyses the exact composition and compliance with the programmes. The combination of these approaches allows the conclusions that (1) the fiscal consolidation measures in the economic adjustment programmes had an inequality-reducing effect, which at times was sufficiently large to offset the inequality-increasing effects of the recessions in the programme countries, and that (2) this effect was larger when the Troika curtailed the discretion left to national governments in the development of suitable policy measures, and followed an approach of micro-management and close monitoring. These findings qualify the common view of economic adjustment programmes considerably: conditionality as prescribed by the troika is actually considerate of the social dimension of economic adjustment. However, both the substantive increase in poverty levels, and the discrepancy between the first-order distributive effects of fiscal consolidation measures and the more regressive second-order effects indicate that a more nuanced understanding of the distributive effects of fiscal adjustment programmes is necessary.