Is Austerity an Effective Recovery Measure for the Eurozone?

Abstract: In 2008 occurred the beginning of what was to become the most comprehensive, global, financial crisis in modern time. The recent crisis has been substantial for most developed countries, where almost all Eurozone members have showed negative economic results. Our goal is to determine, with as much accuracy as possible, if austerity contributes to the Eurozone-countries’ recovery process from the Euro crisis. We are measuring austerity by examining the changes in the CAPB (Cyclically-adjusted primary balance)-variable, also known as the fiscal stance. An increase in fiscal stance would mean that the country is heading towards a further contractionary fiscal policy. We are studying fiscal stance in correlation to our dependent variables GDP, unemployment and bank solvency. Our results show that in general an implantation of contractionary fiscal policy decreases GDP and increases unemployment and bank solvency. We are comparing two groups of countries, the GIPSI countries and the Baltic States, where we can see significant differences how our dependent variables are affected by CAPB. Austerity is an effective method for tightening country’s economy deficits and debts during normal conditions. But the measure might become ineffective and counterproductive when the normal economic conditions past and financial turmoil emerges. The general conclusion would be that fiscal stance is not contributing to a country’s recovery process, but with exceptions such as the Baltic States.