Throughout the financial crisis in Greece and the EU the dominant argument in favour of austerity has always been along the lines of, ‘painful decisions and sacrifices must be made in order to secure a recovery’. Aside from the fact that those making the ‘painful decisions’ have  rarely been the ones actually hurt by them, it is growing increasingly apparent that the basic premise of the statement – that a recovery will come if only sufficient reforms and cuts in social spending are made – appears to be false.
To the increasing body of evidence that supports this conclusion today was added a comprehensive report by the International Labour Organisation. The report, World Social Protection (full pdf), provides an overview of social protections in countries worldwide and includes a thorough assessment of responses to the financial crisis over the past five years.
As the report notes, particularly in Europe from 2010 onwards, the primary response to the crisis has been the implementation of policies of fiscal consolidation or austerity. However according to the report this amounted to severely misdirected policy:
“The sovereign debt crises in Europe turned public attention to government spending, as if it were this that had caused the crisis. However, government debt and deficits were symptoms of the crisis, not its cause. Rising debts and deficits at this point resulted from bank bailouts to rescue the financial sector from bankruptcy, stimulus packages, and lower government revenues due to the slowdown in economic activity…Yet fiscal consolidation focused on deep cutbacks to public policies and shrinking the state as the main way to fix the deficit, calm the markets and revitalize the economy; following this logic, the European social model was depicted as unaffordable and burdensome, which ultimately reduced competitiveness and discouraged growth.” (page 128)
The effect of this misguided policy approach was to transfer the cost of the crisis from financial institutions onto taxpayers, a cost that they are still paying today, according to the report.
Many governments have curtailed government consumption and investment and also reduced social benefits, thus creating a vicious circle: reductions in infrastructure investment and public sector wages, as well as cuts in social security, further depressed aggregate demand in the economy, in consequence reducing the demand for labour, and thus in turn increasing unemployment, reducing revenues from income taxation and narrowing the available fiscal envelope, thereby adding pressure to further reduce social transfers. The cost of adjustment has been passed on to populations, many who have now been attempting to cope with fewer jobs, lower income and reduced access to public goods and services for more than five years.
As is well known by now, at the same time that prospects to recover from the crisis were being hindered, huge numbers of people have been pushed (and still are) into poverty by a combination of high jobless rates and an unraveling of the social safety net:
“At the time of writing this report, there are large groups of people, many of them formerly in the middle class, living in conditions of poverty or near-poverty in HICs [High income Countries]; this situation is most evident in the crisis affected countries of Europe, where in 2012 there were 9.5 million more poor people than in 2008 and child poverty was reported to be increasing at an alarming rate.”
The report notes that in 2012 in the EU 123 million people, or 24% of the population were at risk of poverty or social exclusion, up from 116 million in 2008. In 2012, 800,000 more children were living in poverty than only four years prior and that figure is almost undoubtedly larger today. According to an Oxfam report cited by the ILO an additional 15-25 million people face the prospect of poverty if fiscal consolidation continues over the next decade.
Greece, of course, is among the countries that have seen among the worst effects of these policies given the dramatic levels of unemployment and the fact that the social safety net was never among the strongest in Europe to begin with. “Poverty in Greece rose to a historically high level, exceeding 35 per cent of the population in 2013, inflicting intense human suffering as many families found themselves unable any longer to access the basic necessities for a life in dignity.”
The report also notes the unravelling of health care in the country which it says has led to increases in ‘mortality and morbidity,’ and a situation the Lancet, calls, “a Greek public health tragedy.” Such effects pose long-term threats for the country and its populace.
The ILO report contrasts the current experience of Greece and other crisis countries with that of Nordic countries who in the face of economic crises have protected social spending not as a luxury but as a necessary tool to return to economic growth. Such a move to ring fence social spending in Finland is credited with protecting the country from the major economic crisis it faced following the fall of the former Soviet Union in 1990. In 2010, the report notes, “without social protection transfers and tax measures, 32.2 per cent of the people of Finland would have found themselves in poverty, as opposed to the 7.3 per cent of the population who actually were in poverty that year.”
Yet as was shown yet again by the recent comments of German Finance Minister Wolfgang Schauble, who once more demanded Greece abide by the austerity dictates of the troika or consider leaving the Eurozone, the current leadership of the EU – and particularly Germany – remains doggedly insistent on austerity as the only conceivable course of action, an approach that looks increasingly like it is based on rigid dogma rather than any sort of sound evidence-based underpinning.