Austerity policies in the Eurozone: What can we learn after the crisis?.

Abstract

In the Eurozone, the financial crisis effects have been hit countries in a different manner. Austerity policies have not been good for everyone and have caused inequality in some groups. Some countries of the periphery have showed more vulnerable, producing alarming figures on output decreases and unemployment increases, particularly those of young unemployment. This compromise the inter-generational aspects of sustainable growth and development. In this paper, we consider an economic framework featuring the use of monetary and fiscal rules within a monetary union. In this scenario, that should be representative of the Eurozone, we will analyse the effects of stabilization policies when dealing with a financial crisis having contractive effects on output. Using data provided by Eurostat, we will perform an empirical application for three sets of European countries: the core, the peripheral, and the Eastern countries. In our analysis, we will also differentiate countries according with their historical unemployment path. We will show the results of stabilization fiscal policies by the supply-side, in terms of output and young unemployment before the crisis, 2007, and ten years later, 2017. The exercises will be performed under different degrees of conservativeness of the central bank, austerity of the fiscal authorities and different levels of public debt. Our results could help us to stablish the conditions under which stabilization policies have would lead to a less inequality outcomes.