By late 2009, Greece’s national debt had grown so large relative to the size of its economy that
lenders had lost confidence in the Greek government’s capacity to service it. Fear of a Greek
default led to contagion – Spain, Italy, Portugal, and Ireland were all subject to the disapproving
glare of frightened lenders. The crisis caused seismic disruption in Europe and the rest of the
world.
The International Monetary Fund, the European Commission, and the European Central
Bank reluctantly offered Greece bail-out loans – but with strings attached. To get the money,
Greece had to agree to austerity measures. In this context, austerity means tight fiscal
policy – that is, higher taxes and/or lower government spending to shrink Greece’s annual
budget deficit.
1 . Using your knowledge of the impact of the government’s budget on the equilibrium level of
real GDP, and your understanding of the effect of the economy on the state of the
government’s budget, explain why austerity measures usually result in less improvement in
the government’s budget position than policymakers had hoped for. Be sure to define what
we mean by ‘the government’s budget.’
ANSWER
Austerity measures in Greece
Koulouris et al. (518) defined austerity as a method used to reduce spending, and an
increase in the economy is attained in the financial sector. Also, austerity is identified as the
actions taken by the government to minimize expenditures to develop a structure that can reduce
the growing budget discrepancy. In late 2009, for example, Greece national debt was almost the
same as the economy size, and due to this, lenders had defaulting fears, which caused a massive
crisis in Europe. The Central bank of Europe and the international monetary fund collaborated to
persuade Greece to implement austerity technique so that they can be given funds. Under this
perspective, austerity was an economic strategy, and apart from Greece, other countries applied
the austerity technique (Koulouris et al., 521). The measures aimed to impose the budget
discrepancy that was caused by higher levels of the past actions by the administrations to
increase the financial stand to manage the 2008 international recession and massive credit crisis.
The austerity measures are accompanied by results that impact the national level of gross
domestic product equilibrium. Through the reduction of the efficiency and quantity of services
provided to these nations, a country experiences less flow of money that impacts the gross
domestic product, and this causes the society to receive less money allocation to aid disliked
decisions within the communities. The main focus of the government budget is its expenses and
incomes for a certain period, usually one year, and it is primarily the amount of money spent by
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for that specific period of one year. In Greece and other countries within Europe, their budgets
caused an enormous discrepancy, which made them incorporate an austerity approach that
minimized their debts. According to Koulouris et al., (525), Austerity measures significantly
affected these countries by changing their financial basis.