The price of austerity measures


There are huge imbalances within the Eurozone; it’s not just a case of looking at Greece but Italy, Spain, Portugal, Ireland...perhaps not imminent problems but longer term issues associated with lack of growth and need for continuous austerity measures. The big question itself is how much Germany should be adjusting in the opposite direction and how much stimulus it can offer. Although Germany performed better last year it still has a large current account surplus/balance of payments. Theoretically deficit countries should reduce their deficit and surplus countries should try to keep their surpluses in place but the numbers don’t add up.

Austerity measures are a way for governments to reduce their deficit spending however this can often mean increases in taxes to pay back creditors to reduce debt. What is the cost to the man and woman on the street for the implementation of austerity measures?

Using Italy as an example here are some of the results and predicted results of their austerity measures. . VAT is up 1% to 21%. The prices of fuel, clothes, footwear, televisions, computers and haircuts are likely to increase. There are some early indications that Italian businesses may absorb the VAT increase, but others may use the austerity increase to put prices up by more than 1%.

Other less obvious changes to the way VAT is charged are predicted to make life for Italy’s self-employed tougher. Many of Italy’s professionals lawyers, architects and engineers are not employed directly, but paid a fee as if they were external consultants. These fees are often derisory. Italy’s uncertain job market and underperforming businesses ensure that salary levels are kept low. Self-employed employees in Italy do not have the same rights, such as maternity leave, as actual employees.

Austerity measures have often been associated with protest movements. In Greece for example, the austerity package put forth by the EU and the IMF was met with great anger by the Greek public, leading to riots and social unrest. Austerity programs can be controversial, as they tend to have an adverse impact on the poorest segments of the population.

If you are looking at Spain and the Euro, coming up is the Euroland finance ministers' meeting in Copenhagen and the Spanish 2012 Budget. The first will decide by how much the EU bailout fund should be increased; the second will be a pointer to whether or not Spain will need to access that fund. Monetary policy decisions from the Bank of England and the European Central Bank this Thursday are not expected to change the landscape.

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