The establishment of the European fiscal framework transformed the global financial shock of 2008 into a self-made economic crisis and an unnecessarily prolonged recession.Rather than scaling up transformative environmental investments that simultaneously foster a strong recovery, improve energy security, and raise living standards, a policy “Austerity has won. Our analysis shows that household incomes of European citizens have fallen by less than €3,000 a year since the global financial crisis, with two-thirds of respondents agreeing that EU fiscal rules should change to allow governments to increase spending on education , health and social care and work.
While implementing harsh austerity policies during a deep recession runs counter to mainstream economic theory, EU governments have followed this path, resulting in permanent damage to incomes, lower capital expenditures and cuts in social spending. Although entirely political choices, they marked these as necessary. There is little public political debate about whether a different approach to fiscal policy could lead to better prospects for social, economic and environmental prosperity. Even more prescient is whether the decision to prioritize debt and deficit reduction over investment jeopardizes the goal of net-zero emissions and makes Europe more vulnerable to energy price shocks. In fact, the Covid-19 lockdown amounted to a further step backwards in the principles that underpinned austerity. The EU’s fiscal framework should make us question the use of past rules if they can be ignored at a critical moment.
Too often, key decisions about the EU’s fiscal framework are either made behind closed doors or left to technocrats. Public voices are often excluded from important decisions affecting their economic futures and day-to-day livelihoods.
To help better understand public opinion, inform policymakers, and understand the lived experience of Europeans, the New Economics Foundation and Financial Watch conducted a cross-country survey, providing data from a representative national sample of 5,000 citizens of Denmark, France , Germany, Ireland and Italy. The survey involved several questions on EU citizens’ perceptions of austerity policies and the EU’s fiscal framework. This brief examines the findings in light of recent macroeconomic analysis of the impact of austerity policies on household incomes, capital investment and climate goals, as well as broader social spending.
We found that, in the context of European austerity, citizens’ household income fell by less than €3,000 and spending on public and social services per capita fell by €1,000. In addition, an investment gap of more than 500 billion euros hinders accelerated action on climate change and other investments to make the economy more resilient to shocks. Our survey shows that 70% of Europeans are concerned about the possible impact of renewed austerity policy, mainly due to the negative impact of austerity policy on these countries.
However, 70% of Europeans are equally concerned about rising debt levels. This is important because our analysis shows that the fiscal rules that led to tightening have not been successful in reducing debt. If the EU is to address its citizens’ concerns about debt, austerity is not the answer. Conversely, stronger social spending is more in line with European views, with 64% agreeing that EU fiscal rules should change to allow governments to increase spending on education, health and social care, and employment.
The timeliness of our investigations and analysis is designed to help policymakers propose directions for a review of the EU’s economic governance, including the EU’s fiscal framework, the Stability and Growth Pact and subsequent fiscal legislation, ahead of the European Commission’s publication of an orientation paper. The review will determine the rules for government borrowing and spending once a waiver that allows for increased spending, triggered by the Covid-19 crisis and Russia’s invasion of Ukraine, closes by the end of 2023. Without deep reforms, the government could be forced to implement austerity policies again. However, our cross-country survey shows that even Germany, known for being the most fiscally frugal country in Europe, clearly wants more fiscal flexibility.
Based on our findings, we believe that over the past decade, Europe’s policy approach to deficits and debt has not been grounded in economic reality, and as our polling results show, this is likely to go against most European interests. Austerity and overly strict fiscal rules are ultimately a political choice, not an economic necessity. The policy choices and mistakes of the past cannot be repeated; rethinking around the fiscal framework is urgently needed. Lessons from the Covid spending plan can provide a model for tackling the current energy and environmental crisis.
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