Europe: A New Age of Austerity?

On October 10, new French Prime Minister Michel Barnier proposed a budget with €40 billion in spending cuts and €20 billion in tax increases. As governments draw up their fiscal policies for the upcoming year, this return to austerity measures is not only affecting France, and is occurring all over the continent.

Midway through June of this year, the European Commission announced the start of an “excessive deficit” procedure for seven of its member states: Belgium, France, Italy, Hungary, Malta, Poland, and Slovakia. For these countries, this procedure entails keeping budget deficits below 3% of gross domestic product (GDP) and public debts below 60% of that same index. To abide by these new fiscal goals, several governments are turning to austerity.

Austerity measures seized the region over a decade ago, following the Great Recession of 2007-2009. In 2010, David Cameron, the then British Prime Minister, stated that “the age of irresponsibility is giving way to the age of austerity,” perfectly encapsulating the dynamics of a time plagued by a decline in economic activity and a rise in government debt. In fact, from 2010 to 2014, austerity was often linked to lower GDP. Moreover, a 2022 study conducted by the New Economics Foundation found that decreases in government spending tied to austerity policies made European citizens €3,000 a year worse off. Because of these effects, experts say that austerity is not the most efficient solution to recession. Many of these experts highlight the United States’ 2009 stimulus programmes as a more effective response to such crises.

Beyond the debates surrounding its efficiency, austerity has also been criticised for its human cost. The shrinking of welfare, healthcare, and education programmes makes austerity measures a source of general discontent and lower quality of life. At the individual level, studies point to austerity policies having a negative psychological impact affecting mental health and behaviours. As a result, countries which have adopted austerity experience an increase in suicide rates and medicine shortages.

While today’s economic situation is not identical to the Great Recession, some parallels remain evident. The high costs of expensive health measures alongside a stagnation of economic growth associated with the Covid-19 pandemic, coupled with the strain that the war in Ukraine had on the global and, more pertinently, the European economy, led to a global recession whose effects are still observable today. While economic activity has picked up, we are still flirting with recession, which explains the increasingly drastic economic policies of several European nations.

European Commissioner for Economy Paolo Gentiloni has argued that a return to austerity would be a mistake, yet recent policy suggests that European states, both members of the EU and others, are ignoring this advice. On October 16, the BBC reported that Rachel Reeves, the finance minister of Great Britain, was favouring tax increases or budget cuts, or both, worth £40 billion. This represents a departure from Reeves’ prior assurances that there would not be a “return to austerity.” The final details of the British budget were announced October 30, and confirmed a raise in taxes by that figure.

Meanwhile, cuts in government spending can also be seen in the budget plans of other countries like Germany and the Netherlands. The latter’s decision to reduce development aid by €300 million, as part of a larger €2.4 billion budget cut, has been the object of particular criticism.

In Italy, the country with the highest deficit amongst the seven reprimanded by the European Commission, Giorgia Meloni’s government presented on October 16 a budget plan for 2025 which adopts similar austerity measures. It proposes spending cuts, with a lower limit on each ministry’s budget as well as an increase in the taxation of banks.

The alarming rise of this genre of fiscal policies is nonetheless contrasted by countries such as Poland that are taking an alternative route. Poland’s budget proposal, drafted in August, includes increases in spending for welfare programmes, pensions, and public wages. With military and defence spending also forecasted to be at an all-time high, Poland has not followed the rest of Europe in its path towards austerity.

Economists say that if there is one thing the 2009 recession taught us, it is that austerity leads to stagnation. Yet European governments are in danger of repeating the errors that allowed the continent to fall behind the American economy after the Great Recession. In November, the EU’s guidelines for countries in excessive deficit will be published. They will serve as a prediction of the continent’s economic future, revealing if Europe has learnt from its mistakes.