Austerity in greece what does it mean

Greece's problems began following the Great Recession, as the country was spending too much money relative to tax collection. As the country's finances spiraled out of control and interest rates on sovereign debt exploded higher, the country was forced to seek bailouts or default on its debt.

Default carried the risk of a full-blown financial crisis with a complete collapse of the banking system. It would also be likely to lead to an exit from the euro and the European Union. Wharton University of Pennsylvania.

Or Does it Make Things Worse? National Bureau of Economic Research. Accessed Jan. Cato Institute. The American Presidency Project. World Bank. United Nations. Fiscal Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification.

I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economy Monetary Policy. What Is Austerity? Key Takeaways Austerity refers to strict economic policies that a government imposes to control growing public debt, defined by increased frugality. There are three primary types of austerity measures: revenue generation higher taxes to fund spending, raising taxes while cutting nonessential government functions, and lower taxes and lower government spending.

Austerity is controversial, and national outcomes from austerity measures can be more damaging than if they hadn't been used. The United States, Spain, and Greece all introduced austerity measures during times of economic uncertainty. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Learn About the European Sovereign Debt Crisis The European debt crisis refers to the struggle faced by Eurozone countries in paying off debts they had accumulated over decades. The pre-crisis New Democracy government raised spending and shrank tax revenues to stimulate the economy and maintain its popularity while concealing its deficit from voters and the EU.

The Greek government could not rollover its debt and risked default. Greek banks, which held large amounts of government debt, became precarious.

German and French banks also had invested so heavily in Greece that their stability was in jeopardy. The Greek government and banks were so closely intertwined that a default by one could bring down the other. The sensible solution at this point would have been to compel foreign banks to write off large parts of their Greek investments.

The banks knew the risks when they made their loans and presumably priced that into the interest they charged. The European Central Bank stoutly resisted this, fearing for the stability of these imprudent banks.

Instead, this was money for Greece to send right back to its external creditors. In essence, the international institutions were bailing out their own irresponsible banks but laundering the money through the Greek government. Laying off so many workers and pauperizing pensioners sharply reduced demand, which triggered further lay-offs and wage cuts in the private sector. As the depression deepened , unemployment topped 25 percent.

As powerful as the EU is, however, it was unable to rewrite the basic rules of economics. Rather than recognizing the error of their ways, the international organizations doubled down on austerity, demanding still deeper cuts to government employment and basic public services.

With their economy in free-fall and the EU showing no inclination to reduce the pressure, Greek voters turned to anti-austerity parties. On the right, this elevated the neo-fascist, swastika-flashing Golden Dawn , whose leaders faced charges for killing political opponents.

The majority, however, went to Syriza, a leftist group that pledged to stare down the EU and end austerity.

The EU, however, stonewalled , forcing Syriza to choose between taking Greece out of the EU and implementing further rounds of crushing austerity. France has a debt pile equal to Part of the problem of increasing spending is that it only adds to countries' debt piles, making them vulnerable to future shocks and potential defaults. In Europe too, some countries are more vulnerable than others, economists warn. The lack of sanctions by the Commission has done nothing to bolster its credibility and might have emboldened some governments to feel like it was better to appease and support discontented voters rather than an unpopular bureaucratic institution in Brussels.

One government that seems to be in outright rebel mode right now is Italy. An inconclusive election in March earlier this year saw Italy's old guard of politicians jettisoned in favor of two upstart, populist parties who promised to throw the austerity rulebook out of the window.

Having formed a euroskeptic coalition, the right-wing Lega party and anti-establishment Five Star Movement M5S has proposed spending plans for that look to reverse unpopular austerity measures and reforms as well as more "shock" proposals like introducing a guaranteed basic income.

Italy says the budget will see it hit a deficit of 2. Needless to say, the Commission is irate and has rejected the plans. But Italy's coalition have so far appeared unrepentant, with Deputy Prime Minister Matteo Salvini the head of the Lega party threatening to overturn the EU's "imposed" policies, prompting a showdown with Brussels. In fact, they can create more problems, more debt and more inflation.

It works a lot more to invest in productivity through education, infrastructure and research, but politicians are not inclined to do reforms, they try to sell revolutions. Gallo said there was something of a "selective hearing" approach in Germany and the Commission regarding austerity, however. France and Italy are pushing for more spending and a stronger fiscal union, but Germany and the European Commission appear to have deaf ears. It's not hard to see why voters across Europe are fed up with cuts but it's important to remember how we got to the point where "austerity" became a buzzword for European finance ministers.

Euro zone members Greece, Portugal, Ireland, Spain and Cyprus all experienced sovereign debt crises to varying degrees and for various reasons from onwards. These ranged from the popping of property bubbles Ireland and Spain, for example to the major failing of sectors like tourism and shipping that had been affected by the global financial crisis, as well as the general mismanagement of government budgets and the accrual of large amounts of debt, like we saw in Greece. Controversially nicknamed the "PIGS" meaning Portugal, Ireland, Greece and Spain, the acronym omitting Cyprus and sometimes including Italy , bailed-out nations were given financial lifelines by the International Monetary Fund, the European Central Bank and the European Commission, a trio of lenders that became known as the "troika.

While the causes of their financial misfortunes might have differed, the bailout nations shared in common the lenders' insistence that they adhere to strict fiscal austerity measures in return for financial aid. The main aim of this was to get countries to reduce budget deficits, debt piles and, essentially, the danger they posed to the euro zone's financial stability. It wasn't just bailed-out nations that were press-ganged into implementing cost-cutting measures.

The austerity drive spread throughout Europe to countries that were experiencing recessions after the financial crisis and the U. Soon enough, austerity measures were de rigueur in Europe.

Of course, with the public largely bearing the brunt of austerity measures, it's not surprising that cost-cutting policies were not welcomed. Anti-austerity protests were common across Europe and there was often violence between protesters and the police.

Anti-austerity parties and politicians were popular remember then-French President Francois Hollande's pledge to introduce a 75 percent tax on incomes over 1 million euros? Although Greece's left-wing party Syriza promised, and held, a referendum in which a majority of the public voted against accepting another bailout, anti-austerity ideologies were quickly faced with brutal realities.