Austerity summary

The recent financial crisis, which began in the United States back in 2007, hit Europe hard. Many nations are still struggling to recover, and there are some who think they know the best policy for getting the European economy back on track. This policy is called austerity.

Austerity, however, isn’t a one-size-fits-all solution. Though often effective when a single institution finds itself in crisis, it’s a dangerous policy when applied to a nation.

Austerity is the process of reducing spending by issuing budget cuts, the goal being to boost an economy’s competitiveness and inspire confidence in its businesses.

But we can already see evidence that austerity on a national level fails and weakens the economy, especially when it’s applied to multiple countries at once. Spain, Portugal, Greece, Italy and Ireland are all cases in point.

To understand why this is so harmful, imagine that your family has gone over budget. In such a situation, it makes sense to cut back on spending until things return to normal. But imagine that every household in the state did this at the same time. Money would cease flowing into local businesses, and stores and employers – burdened with expenses of their own – would begin to suffer.

To weather the tough times, businesses would need to take out loans and lines of credit, creating even more debt – debt that they’d be unable to pay off until the households in the state begin spending money again.

As you can see, this situation benefits no one – and it’s exactly the situation that austerity applied on a national level gives rise to: citizens spend less, the economy shrinks and debt grows.

Furthermore, it’s the members of the lower classes who get hit the hardest.

When budgets are cut, it invariably hurts welfare programs, unemployment benefits and the people who rely on social programs to get by.

In times of austerity, the average struggling worker always suffers more than the banker who caused the crisis.