A multi-country analysis of austerity policies in the European Union

In this paper, we analyse the global effects, i.e., the effects on the world economy, from the austerity policies implemented in the European Union (EU) over the last years. Specifically, we simulate the effects of three alternative policies aimed to get a fall of one percentage point in the EU’s government deficit to GDP ratio, through a decrease in the level of public spending, and increases in consumption and in labour taxes. We examine their effects on the main macroeconomic variables of seven regions of the world economy, i.e., the EU, the US, Japan, China, Asia-Pacific, Latin America and Rest of the World. The empirical methodology makes use of a computable general equilibrium (CGE) model, through an extension of the Global Trade Analysis Project (GTAP) model. The three policy measures led to contractionary effects on the EU’s levels of activity, which were accompanied with changes in income distribution, always detrimental to labour. The effects on the rest of the world, however, were mostly negligible.