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Can Austerity Lead Off The Debt And Crisis? Did It Work In Baltic Countries?

2317 words - 10 pages

Can austerity lead an economy out of a debt crisis and recession? Was it successful in the Baltics?

“Austerity describes policies used by governments to reduce budget deficits during a period of adverse economic conditions.” These policies may include combination of spending cuts or/and tax increases, or a mixture of the two. But does applying austerity helps countries to grow out of debt? The thesis of this essay is that austerity cannot lead an economy out of a debt crisis and recession, due to its negative effect on economic growth, tax revenues (higher taxes - less revenues) and employment (increased unemployment). The failure of it in many countries (Europe, including ...view middle of the document...

But, actually, although several governments have raised tax rates (Italy – in 2011 - new 20% flat rate of tax on income from financial investments, also other tax rate increase), tax revenues have not rapidly increased (e.g. Spain – in 2007 they were 397 543, 2010 – 347 004, 2011 – 344 787). “The large and growing black markets in Greece, Italy, Spain, and even France are a testament to wrongheaded European tax policies.” The third tendency is that the debt has grown, even though countries with austerity policy have cut spending’s. That is due to the fact that the economic growth has slowed down or declined. Cuts could reduce future debt, if GDP would stay stable (debt-to-GDP ratio), but in most countries, where austerity was applied, the Real GDP since 2011 have declined quite rapidly - in the EA17 declined for six straight quarters from Q4 2011 to Q1 2013. Furthermore, for most of the austerity countries it is forecasted, that debt-to-GDP ratio will increase (e.g. Portugal from 94,6 % in 2012 to 106,5 % in 2016). As the austerity requires spending cuts, this lowers the part of GDP’s government spending (GDP = C + I + G + NX), and during austerity also the consumers spending is reduced, due to low wages and high taxes.
Secondly, even though there are countries, like Latvia, which have been considered “successful” model of austerity, due to the social effects and high employment rates Latvia is not a successful model for austerity, and it is also not a model for other countries due to its difference in both debt-to-GDP ratio and also the size of the country. “Latvia enjoyed an average economic growth rate of ten percent a year from 2005 to 2007, but suffered a crash in 2008.” After falling by more than 20%, Latvia’s economy grew by 5% in 2012, performing the best of the 27 nations in the EU. However, the employment growth figures are dismal. In 2009, 13.2% of Latvia’s jobs were destroyed, 8,1% – in 2011, “only returning to tepid job creation of 2.6% in 2012”. The unemployment rates are still quite big, if not even look at the number of emigrants. Even though Latvia’s unemployment rate has reduced (2009 - 19.8 %, in 2013 (June)-11, 3 %), still the net migration rate is high – -2.36 migrants/1000 people. In 10 years about 10 % of people have left, most of them in the last 4 years. Also such social effect of austerity as suicide rate in Latvia is one of the highest among the Europe. Furthermore, Latvia has not got back to the status as it were before crash of 2008. Low wages, increasing emigration, dissatisfaction with government (from 2010-2013 have been to elections of Saeima (Parliament)), high unemployment – it does not look like a “successful” model. But, whether it is or it is not a successful model for austerity, can the austerity measures used in Latvia be applied to other countries? If we imagine, that 10 % of US labor force would emigrate, that means that about 31,707,500 people should be absorbed in other countries. If about...

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