Last week, the renowned European think tank Bruegel published a study, which clearly shows the disastrous effects of the European austerity policy on the lowest levels of the population and young people respectively. This failed economic and budget policy approach has not only worsened the living conditions of millions of people, but is almost certainly also responsible for serious long-term consequences, given the fact that a “lost generation” seems to develop.

Whilst the heads of government of Spain, Portugal or Ireland have been announcing the end of the economic crisis (which is probably also linked to electoral considerations), it is clear that Europe will doubtlessly suffer under the legacy of the crisis for a long time to come. In their Study, Zsolt Darvas and Olga Tschekassin of Bruegel argue that the European austerity policy has sustainably promoted poverty in Europe and worsened inequality.

Welfare spending in Europe relatively stable – risk of a “lost generation”

The Southern European states too – with the exception of Greece – have avoided cuts to welfare spending (in contrast to other budgetary items). A fact, which especially benefits older people. However, financial support for families and education spending were rather reduced or increased only on a very small scale. In combination with the rampant youth unemployment in Southern Europe, this would create a “lost generation”, which due to a lack of practical experience would also find it difficult in future to integrate into the labour market. This would also entail demographic consequences as this hopelessness was also reflected in the birth rate; apart from that, children of “poor” parents had a far lesser chance with regard to education or securing high quality employment.

Strong North-South divide in Europe with regard to poverty

Whilst over recent years, it has been possible to notice a certain convergence of the “new Member States“ to Western Europe with regard to the proportion of poor people (“severe material deprivation”), the poverty rate gap between Northern and Southern Europe has been widening since 2009. Eurostat has ascertained that in 2013 Bulgaria, Rumania and Hungary were still the countries with the largest share of “poor” people. However, the trend was on the decrease at least in the two Balkan states, whilst Greece, Cyprus, Italy, Portugal, Ireland and also Great Britain have been recording strong increases in the number of “poor” people and meanwhile show worse indicators than Slovenia or the Czech Republic. Spain appears to be a positive exception, whilst Austria is among the “model students” in this respect.

Transition from labour to consumption taxes is a particular burden for low earners

The recommendation of the European Commission to lower the tax burden on labour income and to increase consumption taxes such as the value-added tax (VAT) instead, was acted on by 16 EU countries. Whilst income taxes are in general progressively scaled, the VAT develops a regressive effect: as a result, low earners bear a particularly high burden as their entire income flows into consumer spending liable to VAT and because the tax rate is at the same level for people with a high income. Hence, such a tax policy favours inequality. Taxes on property, which might counteract this development, were only “developed” in three EU countries.

In the course of the tax reform, demanded by the Austrian Trade Union Federation ÖGB and the Austrian Federal Chamber of Labour AK, Austria essentially refrained from increasing VAT.

Consolidation policy in Southern Europe inevitable – however, premature in the North

Whilst the authors share the belief that it was inevitable for Greece to face fiscal consolidation measures, they criticised the “how”. One should have proceeded at a slower pace; however, above all, the rich North should not have adopted austerity measures at the same time. This had been counterproductive as the economy of the entire continent would suffer as a result and in addition, it had not been necessary in case of Germany or Austria, as demonstrated by the example of the USA or Japan. In all these countries, the confidence of investors and financial markets had persevered during the crisis - in spite of increased debt levels.

The bank rescue packages, which cost European countries about EUR 600 billion, could have been “cheaper” had one involved creditors. This would have provided financial room for manoeuvre for urgently needed investments, which have, as has been proved, the highest “multiplier effect” on economic growth. The AK too recently at an event in Brussels came out in favour of a “Golden Rule of Investment” for EU state budgets to realise sustainable projects for the future and to boost the economy. Professor Achim Truger prepared a respective economic study.