Austerity and asymmetries in the fiscal policies of the Eurozone: the case of Southern Europe

Abstract

In this paper, we analyse the effects of several austerity policies implemented by the Southern European countries, i.e., Portugal, Italy, Greece, and Spain on the economies of the European Union and the rest of the world. In particular, we simulate the reduction in one point in the government deficit-to-GDP ratio in each of these countries, through several alternative policies, both from the spending side and the revenue side. The empirical methodology is based on a computable general equilibrium model, which incorporates the backward sectoral linkages and inter-country flows generated by fiscal consolidations. Our results show that these austerity policies were generally more painful, in terms of a fall in the levels of activity and a worsening in income distribution for labour, in the scenarios of tax increases rather than in those based on spending cuts. The effects on the rest of the European Union and the rest of the world were however mostly negligible.Open Access funding provided by Universidad Pública de Navarra. This paper is the result of a project financed by the Instituto de Estudios Fiscales (Spanish Ministry of Finance). The authors also acknowledge the financial support from the University of Castilla-La Mancha through the project 2022-GRIN-34135, co-financed by the European Union via the European Regional Development Fund (O. Bajo-Rubio), and from the Spanish Ministry of Science and Innovation through the project PID2020-GB-C32 and the project PID2023-148185NB-100 financed by MICIU/AEI/10.13039/501100011033 and FEDER, EU (A. G. Gómez-Plana)