2017/01/30 by João Carlos Lopes, João Ferreira do Amaral
Economics, Econometrics and Finance · #Economic Theory and Policy #Fiscal Policies and Political Economy #Global Financial Crisis and Policies
paper · doi:10.1177/1035304616689658
openalex publication_date 2017/01/30 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/25
Abstract The great recession of 2008/2009 had a huge impact on unemployment and public finances in most advanced countries, and these impacts were magnified in the southern Euro area by the sovereign debt crisis of 2010/2011. The fiscal consolidation imposed by the European Union on highly indebted countries was based on the assumptions of so-called expansionary austerity. However, the reality so far provides proof to the contrary, and the results outlined in this article support the opposing view of a self-defeating austerity. Based on a model of the input–output relations of the productive system, an unemployment rate/budget balance trade-off equation is derived, as well as the impact of a strong fiscal consolidation based on social transfers and the notion of a neutral budget balance. An application to the Portuguese case confirms the huge costs of a strong fiscal consolidation, both in terms of unemployment and social policy regress. The conclusion is that too much consolidation in anyone year makes consolidation more difficult in the following year.