3.4 Employment

Despite the hard measures taken to date, Greece will run a budget deficit of €17 billion in 2011, according to IMF projections, which is 7.6 percent of GDP. Ireland launched the periphery’s first aggressive austerity program in 2009, yet in 2011 it is projected to run a €14.8 billion deficit, equal to 11 percent of GNP. In both these countries, sharp cuts to investment budgets have been offset by rising costs of unemployment and other social benefits. (Boone & Johnson, 2011)

Greek Statistical Office provided data on unemployment in the country at the end of the last month of 2011: this is a record figure for the state – 21 percent. Per month increase in unemployment was a tenth of percent. For the year as unemployment rose to two and a half percent - to 17.3 percent. The number of unemployed Greeks exceeded one million thirty three thousand people. Young people all over have come under attack: residents of Greece at the age of fifteen to twenty-four years, half were lost.

“European politicians are struggling to find a model country to show that a policy of austerity evaluates, while the first priority must be the solution to the problem of extremely high levels of unemployment”.

The idea that fiscal austerity triggers faster growth in the short term finds little support in the data. Fiscal retrenchment typically has contractionary short-term effects on economic activity, with lower output and higher unemployment. A budget cut equal to 1 percent of GDP typically reduces domestic demand by about 1 percent and raises the unemployment rate by 0.3 percentage point. (Leigh et al., 2010) Austerity leads to a decline in consumer and investment demand, the persistence of high unemployment and a fall in GDP growth. Austerity policies that the state has to spend in agreement with international lenders (the International Monetary Fund and the European Union) in exchange for their financial assistance in overcoming the debt crisis played a crucial role in increasing the level of unemployment. To provide financial assistance has not led to an improvement of the economic situation in the recipient countries and donor policies prescribed austerity strengthened unemployment and social tension, which further undermines investor confidence in their obligations.

Throughout the euro area unemployment rate is higher only in Spain where she has exceeded 23 percent. Throughout the euro area as a whole, the unemployment rate in recent years also breaking records: for the year the number of unemployed Europeans increased by one million two hundred thousand people.

Parliamentary elections in Italy ended, but the results did not lead to the return to power of centre-left, to count on financial market participants. Now in Italy there was a stalemate - the electorate, which is understandable, showed its disagreement with the austerity measures that have led to the recession and high unemployment.

4. Conclusion

In conclusion, it can be said that fiscal austerity measures have a largely negative impact on the economy in the short-term. GDP, income and demand will decrease, while at the same time unemployment will increase. Furthermore, the soothing effects of a depreciated currency and lower interest rates will not offset the negative impacts of fiscal consolidation. This is especially true in times of a recession, where many countries try to cut their spending at the same time. Furthermore, effects of fiscal consolidation could also be soothed by an increased money supply and by further lowering the interest rate. However, as interest rates are currently really low, a further decrease will not have the positive effects, such as increased investment, that would be hoped for. (Leigh et al., 2010) Overall, this is not to say that government shouldn´t carefully watch their spending and try to maintain sustainable deficits. Fiscal austerity is important, but consolidative measures should not be implemented during a recession, as they will just lead to a further worsening of the situation.