The Political Economy of Austerity in Southern Europe

Europe’s response to the sovereign debt crisis in Southern Europe has been premised on the idea that these states can return to growth through internal devaluation and fiscal consolidation. This article explores the distributive consequences of that strategy in Greece, Portugal, Italy, and Spain. We argue that standard measures of poverty do not capture the deterioration in living standards as fully as anchored poverty. Moreover, we show that inequality trends conceal considerable re-ranking within the income distribution: those who were rich in 2012 had got richer in 2009–12, but those who were rich in 2009 lost ground in 2009–12. We find that in all four countries the new poor include significantly fewer pensioners and more unemployed workers, and are considerably poorer than the old poor had been. We demonstrate that there was significant variation in the magnitude and design of austerity, with Italy imposing a far smaller adjustment than Spain, and Portugal achieving less inequality in spite of robust fiscal consolidation. Nevertheless, even when austerity measures were designed to reduce inequality by compressing incomes downward, their second-order macro-economic effects ultimately increased inequality (except in Portugal). In the last section, we explore the political reasons for this variation.