Poor and under Pressure: The Social Impact of Europe‘s Fiscal Consolidation

Written by | Monday, June 15th, 2015

Zsolt Darvas and Olga Tschekassin (Bruegel)

The European Union is battling serious social problems. The number of the materially deprived people, the unemployed, and the children living in households of the unemployed is high. Recent research demonstrates that fiscal consolidation has mad considerably more significant negative impact on the economy during recession than during expansion. Lay-offs in the public sector, cuts in some budget expenditures, or the increase in taxation all have impact on employment and household incomes. Long-term unemployment erodes one’s capability to participate in the labor market, which undermines the long-term growth potential of the country. According to the indicator of severe material deprivation, the gap in the EU between the East and the West is closing, while between the North and the South is widening. The highest level of poverty in Europe has been in Bulgaria, Romania, and Hungary.

The premature fiscal consolidation in certain EU countries had pronounced side effects, e.g. the deterioration of the cyclical position of the economy. This points to different economic needs in Member States. In countries, where budget deficits are extraordinarily high and public debts are growing fast, there is no alternative to fiscal consolidation and the only question is its pace and composition. In other EU countries, where the fiscal situation is within reasonable limits, fiscal support would only come in a period marked by the deterioration of the cyclical position of the European economy. In the latter countries, the fiscal consolidation, performed in 2009 and 2010, was premature.

The economic crisis has generated the growing generation gap. Concerning the social expenses, elder people were protected the most during the crisis whereas expenses for families and children were lower. Another negative impact on the youth stemmed from the reduction of budget expenditures for education. The countries, which were most severely hit by the crisis, are now faced with the prospect of a ‘lost generation’ that could in turn negatively affect the long-term economic growth on the whole continent. New strategy is needed – one that would soften the negative impacts of financial consolidation and improve the social conditions in the EU. The strategy should include a better utilization of the European financial framework, greater effort to boost the demand, and a revision of national tax and benefit systems.

(The study can be downloaded here)

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