Austerity Measures in the Current European Debt Crisis
What drives governments to choose these unpopular policies?

Graduate School of Public Policy (MPP/IP), The University of Tokyo
Marc Blanco Reniu

Submission Date: July 10th, 2012

1. Introduction
Austerity Measures in Europe
This paper tries to analyze what has driven several European countries of the so-called“periphery” to carry out very unpopular austerity measures that has proven to hurt thepoliticians in charge in following elections. In this sense, this paper does not try to
determine whether fiscal consolidation is effective to solve the current European debt crisis.
Besides, due to the extremely complicated nature of this crisis, this paper will not try todescribe what are the causes and possible solutions to it either.
Currently there is an intense international debate on which solution suits best the recent
European debt crisis that has affected so many countries of the Euro-zone. Actually thedebate is whether austerity measures or fiscal consolidation (tax hikes and spending cuts)
are better than expansionary measures to promote growth (such as Central Banks lending tobanks, the purchase of bonds and stocks and throwing money into the market among
others).
Despite all the controversy and popular opposition, the reality is that many European
countries are following austerity measures during the debt crisis, so in relation to this topic,
this paper tries to describe what is behind the decision taken by these democraticallyelected governments to carry out fiscal consolidation this way.
Apart from the most typical measures of fiscal consolidation, which consist on raisingtaxes and cutting public spending, other proposals have been suggested to solve the crisis,such as for example the creation of a European Financial Stability Facility or EFSF, a

Franco-German Pact on Fiscal Stability that was designed by former president Sarkozy and
Merkel, etc.
In order to analyze the reasons that lead governments to choose austerity measures, it isimportant to first understand, at least in part, the causes of the debt crisis. In this sense,
there are both economic and political causes.
As for economic reasons, according to a publication of the European Commission, thecurrent European debt crisis can be considered at least in part as a result of transferring
liabilities linked to the financial crisis “from private –banking- sector to the public sector”[BARRIOS et al., p. 4]1. In another publication by The Economist2 the following statement
can be found: “virtue in the core was dependent on vice in the periphery” [The Economist
2011, p.6]. What it explains is basically that the periphery could enjoy booms fuelled bydebt, while the core could still grow through exports, despite a weak domestic demand. So
for example, while Germany had a current-account surplus of almost 7% of GDP, somecountries in the periphery had current-account deficits larger than 10% of GDP (figures in2008). Another economic cause of the crisis is the fact that although periphery countries
have lost competitiveness in a way wages has grown faster than productivity, thesecountries cannot depreciate their currency against their trading partners. Currency
devaluation would lead to an improved balance of trade, growth in GDP and growth in tax
revenues. However, due to monetary policy inflexibility, indebted countries cannot print

	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
1

	
  BARRIOS,	
  et	
  al.	  (2010).	
  European	
  Commission.	
  Directorate-­‐General	
  for	
  Economic	
  and	
  Financial	
  Affairs,	
  "EU	
  fiscal	  consolidation	
  after	  the	
  financial	
  crisis.	
  Lessons	
  from	  past	  experiences",	
  European	
  Union	  (Brussels:	
  July).	
  2

	
  The	
  Economist,	  (2011).	
  “State	
  of	
  the	
  Union:	
  Can	  the	
  euro	  zone	  survive	
  its	
  debt	  crisis?”,	
  Economist	  Intelligence	
  Unit	  (London:	
  March).	
  money to pay creditors and ease their risk of default, as it is also explained by The
Economist.
As for political causes of the European debt crisis, one of the most remarkable ones isthe financial markets’ lack of confidence towards the indebted European economies.
Another one can be the role of Rating Agencies as a huge influence in the previously
mentioned lack of confidence. Finally, a third reason can be the disagreements between
European leaders that defend their interests on how to solve the crisis. This third reason canlead to the lack of confidence by the markets as well.

Research methodology
The methodology used for this paper has been secondary research, so a large number ofnewspaper articles on the debt crisis, the bailing out of the banking sector, politicalsituation in Germany and Spain and effects of fiscal consolidation published in Germany,
Spain, the UK or the U.S. have been used for this purpose.
This paper has also used working papers on fiscal consolidation and its effects by IMF,
the European Commission and Central Banks, in order to explain why there is such arejection by the general public of austerity measures.

2. Argument
Literature Review
There are a large number of working papers and other kinds of literature on fiscal
consolidations, studies that analyze whether these policies are beneficial in the short,medium and long-term, etc. As it was already mentioned in the introduction, although thispaper does not try to find any answer to the question of fiscal consolidation as a good or
bad measure during a debt crisis, it is important to review the literature on this topic, inorder to be able to understand the reasons why the population rejects these austerity
measures.
After reviewing some literature on austerity measures, it can be said that the basic
definition of austerity measures, which are common in all papers, is that they are a
combination of tax hikes and spending cuts. On the other hand, the term “austerity
measures” can also be referred to as “fiscal consolidation”. So in this paper both terms will
be used alternatively, as the reader could already notice during the introductory part.
A working paper by the IMF3 published in 2010 mentions that currently there is thehighest average budget deficit of advanced economies in 50 years, so in 2007 it represented
only 1%, while in 2009 it rose to 9% and in 2010 reached 100% [IMF 2010, p.93].
In this IMF paper on the macroeconomic effects of fiscal consolidation, the basic
research questions were on which would be the short-term effects of fiscal retrenchment on
economic activity, the role of monetary policy, composition of the package (taxes against
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
3

	
  IMF,	
  (2010).	
  “Will	  It	
  Hurt?	
  Macroeconomic	
  Effects	
  of	
  Fiscal	
  Consolidation,”	
  World	
  Economic	
  Outlook	
  (Washington:	
  October).	
  spending), the perceived risk of sovereign default and simultaneity of deficit cuts, etc.
Other research questions in this working paper were the influence of interest rates and thelong-term effects of austerity measures to the economy [IMF 2010, p.93].
One of the findings in the IMF paper were the “contractionary effect on output” (iffiscal consolidation with a value of 1% of GDP takes place, then GDP decreases 0.5% andunemployment rises 0.3% in a period of two years [IMF 2010, p.94].
Other findings are that the reduction of interest rates supports output, so “in case of nearzero levels, fiscal consolidation is more costly”, [IMF 2010, p. 94] the positive effect onexports of a decline of the value of currency in a country, the fact that “spending cuts haveless contractionary effects than tax-based adjustments” and “monetary stimulus is weakfollowing indirect hikes such as VAT” [IMF 2010, p. 95].
Finally, two other major findings by this IMF paper were that there is less contractionin the case of sovereign default crisis countries, and that there are positive long-term effects(that meaning less debt, more private investment and lower interest rates).
In another working paper by Barrios et al.4 at the European Commission on the lessons
learnt from fiscal consolidation being carried out after past financial crisis, the mainquestions are when is the appropriate timing for fiscal consolidation in relation to theeconomic recovery, the role played by the current financial crisis, the macroeconomic
adjustment mechanisms (especially the exchange rate) and what are the similarities

	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
4

	
  BARRIOS,	
  et	
  al.	  (2010).	
  European	
  Commission.	
  Directorate-­‐General	
  for	
  Economic	
  and	
  Financial	
  Affairs,	
  "EU	
  fiscal	  consolidation	
  after	  the	
  financial	
  crisis.	
  Lessons	
  from	  past	  experiences",	
  European	
  Union	  (Brussels:	
  July).	
  between the current debt crisis and other debt increase episodes in the past, as well as trying
to find the definition of a successful fiscal consolidation.
This paper describes the current economic context in Europe as a period in whichgovernment debt ratios are rapidly growing, as a result of the financial crisis, increasing
government deficits, low economic growth and support to the financial sector [BARRIOS
et al. 2011, p.3].
Among the most relevant findings in this paper, it can be found that “restoring thefinancial sector is a precondition for achieving successful fiscal consolidation”, while in theaftermath of a crisis, it is less successful (gradual fiscal consolation against “cold shower”)[BARRIOS et al. 2011, p. 29].
Then, high debt levels have an incidence on the success of fiscal consolidation, while
the influence of exchange rate depreciation or devaluation is inconclusive due to thenumerous exceptions reviewed in this European Commission paper.
After reviewing these two first papers on economic features of the current crisis and thefiscal consolidation, a more social approach to austerity measures effect is a paper on the
distributional effects of fiscal consolidation by Callan et al.5, at the Institute for Social andEconomic Research. This research compares the distributional effects of austerity measures
introduced in 6 EU countries (Estonia, Ireland, Spain, Portugal, UK and Greece) after the
2007-08 financial crisis. Then, the main research question is the impact on income poverty
and inequality.
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
5

	
  CALLAN,	
  et	
  al.	  (2011).	
  Institute	
  for	  Social	
  and	
  Economic	
  Research,	
  "The	  distributional	
  effects	
  of	
  austerity	
  measures:	
  a	
  comparison	
  of	
  six	  EU	
  countries,"	
  University	
  of	
  Essex	
  (Colchester:	
  December).	
  The findings show that “how the cost of the crisis is distributed has implications for theprospects for macroeconomic recovery, financial stability, as well as the politicalacceptability of pathways in this direction” [CALLAN, p. 16]. Then, “high income
households contribute a larger proportion to public pay cuts” (except in the case of Portugal
and Estonia), “VAT increases change the shape of the burden”, “measures fall less heavily
on older people” [CALLAN, p. 17] (except in Greece), “the risk of poverty increases
especially in Ireland and Portugal” [CALLAN, p. 18], and “changes to benefits andpensions hit those on low income the hardest” [CALLAN, p. 26].
After some of the key points on this topic has been described through the review ofthese three working papers (by the IMF, Barrios et al., and Callan et al.), it is easier tounderstand that there is still room for debate on whether austerity measures are good or badin the current situation for Spain, so the public opinion totally rejects them.

Dependent variable
The dependent variable is this paper is the fact that, although fiscal consolidation is
unpopular and vastly opposed by the public, governments affected by the debt crisis in
Europe still choose to take austerity measures. Of course, this is very risky for thegovernments themselves, because it can affect negatively in the next elections.

Independent variable
The independent variables the paper takes into account in order to explain thedependent variable are the IMF and central banks’ recommendations, the pressure to
periphery governments (in this case Spain) by some political leaders from core Euro-zone
states like Germany, the differences between right and left wing political parties and theirposition towards fiscal consolidations and whether this is a factor that affects the decision
to undertake fiscal consolidation, the views of rating agencies, and finally the public
opinion in both not debt countries (Germany) and indebted countries (Spain) to see how
differ to one another and whether this explains the dependent variable subject to analyze inthis paper.

Controlled variable
The variables that are going to be controlled in this paper are basically monetaryinflexibility in the Euro-zone, and other economic factors such as GDP levels in both
Germany and Spain, etc. Besides, in the comparison between both countries, this paper will
not include the case of Greece (involved in the crisis by mismanagement of public finances),since it is far different from the crisis in Spain, which was motivated by the banking sector
and the housing bubble burst.

Hypothesis
In order to understand what makes governments such as the current one in Spain choose
unpopular fiscal consolidation against the public opinion, it is important to think about it in
an international and political context.
The hypothesis in this paper is that two different levels of Europe (core and periphery)
which are represented by the examples of Germany and Spain, has made some countries
with better economic conditions after the global financial crisis (Germany) impose too
tough austerity measures that are mainly suffered by the periphery (Spain). In this sense,
stronger countries can decide on policies of weaker countries.
However, since every hypothesis needs a counter-hypothesis, it is also interesting to see
to what extent Spain has to accept imposed austerity measures without much resistance, orwhether if there is any alternative for Spain to negotiate any kind of conditionality. At thesame time, it is important to see to what extent Germany can concede to the Spanish
demands. Since the role of Spain can oppose and actually balance decision-making between
both countries, a further analysis on what way Spain can do that is also required in thispaper.

Main political reasons on why choosing austerity measures
This paper is only focusing on the political causes or reasons why the Spanish
government is carrying out austerity measures, so a comparison between the situation inGermany and Spain is relevant in order to successfully develop the hypothesis of this paper.

The basic political reasons that will be analyzed in this report are the following: 1)
politics in both core (Germany) and periphery (Spain) economies before and during thecrisis, taking into account whether their leaders are from right or left wing political parties,
2) pressure to the Spanish government from core political leaders, 3) the role of Rating
Agencies as a huge influence in the lack of markets’ confidence, and 4) what are the major
Central Banks and IMF saying about it.

Politics in Germany and Spain before the crisis
If we look at the politics in Germany and Spain before the crisis, the most remarkabledifference is that while in Germany the ruling party was a right wing party, in the case of
Spain it was a left wing party. In thelatestGermanfederalelectioninNovember 2009, the coalition between
the CDU (Christlich Demokratische
Union

Deutschlands,

Democratic

Union),or

Christian

the

CSU

(Christlick-Soziale Union in Bayern, or
Christian Social Union) and the FDP(Freie Demokratische Partei, or Free
Democratic Party) won the election andformed a center-right government withAngela Merkel as the Chancellor.

Note: Parliamentary districts results in the German Federal Elections (2009)

Although at that time the coalition between CDU and CSU had the lowest share ofvotes in 60 years, their main political rival, the SDP (Sozialdemokratische Partei
Deutschlands or Social Democratic Party) had its worst result in history. So these results
can be understood as even though the center-right coalition had lost votes in this election,
the fall of votes of the center-left SDP was even more significant.
The case of Spain is very different. The center-left wing PSOE (Partido Socialista
Obrero Español, or Spanish Socialist Workers’ Party) won the general elections in 2008
again, and almost achieved an overall majority of seats in the Congress, against theconservative PP (Partido Popular,orPopularParty).

José

Luís

Zapatero was reelected as PM.
Theseresultsreflecthowthemajority of the Spanish populationpreferred at that time liberal, leftwing

policies

ratherthanconservative, center-wing policies.

Note: Spanish General Election results (2008).

Politics in Germany and Spain during the crisis
Since both democratic elections results were known before the debt crisis in Europe
became such a problem, it is easy to see what the trends in both countries were without
taking into account the effects of the crisis. However, after the Spanish housing bubble

burst effect and the start of the debt crisis, the government led by Zapatero began carrying
out unsuccessful expansionary measures to improve worsening jobless rates (such as Plan
E). This Plan E consisted on the government putting money to promote the construction ofparks, roads, etc. However, this had the negative effect of even increasing more the fiscal
deficit.
The next general elections
took place in 2011. At this time,the image of the ruling party had
worsened to such an extent PP
vastly won in these elections. The
new PM Mariano Rajoy promised
during the election campaign not
to increase any tax, a promise that
could not be kept at all after theNote: Spanish General Election results (2011).

decision to carry out the so much unpopular austerity measures.
However, it is also important to take into account the fact that even when the PSOE wasin power, the government increased the VAT tax from 16% to 18% (that is an austerity
measure), while spending cuts were also taking place. That means that although the new
ruling center-right party has taken a lot more austerity measures, that does not mean acenter-left wing party such as the PSOE did not start fiscal consolidation.
As a conclusion to this data, it seems more or less obvious that although right wingparties feel more comfortable with austerity measures, liberal parties are also obliged totake them to some extent. Even if we see the case in Germany, where recent Länder orRegional Elections are showing how the opposition party SDP is winning against the CDU,
the SDP leaders do not disagree with Merkel’s vision of the necessity to stop fiscal deficitof the periphery countries in the Euro-zone as an ultimate solution for this crisis6. That is,both right and left parties in Germany agree on imposing austerity measures to Spain. So,left and right wing government are not a major, key reason on whether austerity measurestake place or not.	
  Pressure to Spain from core countries’ political leaders
During the recent debt crisis in Europe, it has become more obvious that foreign
policies play a really big role in the negotiations between countries in the Euro-zone area.
Furthermore, through these negotiations it is also easy to see which country leaders seem to
be more powerful.
Since this paper tries to compare the cases between Germany and Spain, it is importantto analyze the relations between the current Chancellor in Germany (Merkel) and the PM in
Spain (Rajoy).
Both political leaders have supported each other during electoral campaigns in theircountries, basically because both leaders are from conservative, center-right wing politicalparties that in many cases share the same values. In this sense, when Zapatero was still in
power and was hugely criticized by the markets and international leaders for not doing
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
6

	
  GÓMEZ,	
  J.	
  Economía	
  “El	  SPD	
  alemán	  y	
  Los	  Verdes	  se	
  suman	
  a	
  Merkel	
  en	
  el	
  rechazo	
  a	
  los	
  eurobonos”	
  (Germany’s	
  SPD	
  and	  the	  Green	  Party	  support	
  Merkel’s	
  rejection	
  to	
  the	
  eurobonds),	
  El	
  País	  (May	  24th,	  2012).	
  enough to stop the fiscal deficit, Rajoy (still in the opposition at that time) and Merkel
seemed to share the same opinion on what was necessary for Spain to recover from thecrisis.
So when Rajoy gained power in Spain, it was not unexpected that Rajoy would try tofirmly follow the strict measures recommended by Germany, first of all as a gesture ofbeing a reliable partner in Europe, but also because Rajoy also had a similar opinion onwhat was good for Spain. The issue began when the harsh measures imposed to the Spanish
population were not enough to recover confidence in the markets. While Rajoy tried tonegotiate less hard austerity measures with Germany, Merkel avoided any kind ofconcession, undermining the popularity Rajoy had during the first weeks after being electedin the Spanish general elections.
Even some newspapers in Spain such as El País did not hesitate to state that in the lossof power of the PSOE and now the increasing loss of power of the PP, who were to blame
were not the Spanish political leaders themselves but the international context and theforeign pressure represented by the markets but also by some foreign leaders.
In this regard, there is a feeling in Spain that the policies and economic measures thatare now taking place in Spain are not chosen or proposed by Madrid or even by Brussels,
but by Berlin. Of course, this is not the case only in Spain, but what seems clear is that fearof instability in the southern part of Europe is moving deposits and investment to the coreeconomies such as Germany. Then, this is undermining years of efforts in Europe toachieve a credible union between countries.

Core economies see the periphery as lazy economies that have been enjoying bubbles
and have been living above their possibilities7, while in the periphery economies the imageof core Europe has also worsened and it is starting to be depicted as a kind of despotic
north8.
The Franco-German Pact between Sarkozy and Merkel encouraging all debt Euro-zone
countries to take fiscal consolidation is of course another way of pressure to the Spanish
government to follow these rules proposed by their neighbor states’ leaders.
Besides, although this is not a direct foreign pressure from a core economy, obviously
seeing the example of Greece is not helping the Spaniards to stop feeling unrested. Of
course the nature of the crisis in Greece is completely different from the nature of the crisisin Spain. However, the consequences of too harsh program on austerity measures in the
Greek economy seem to be a reflection of what can actually happen to Spain in the near
future if more expansionary measures are not carried out. Then, this is also a kind ofpressure (at least a psychological pressure) to the government in Spain.

The role of Rating Agencies
There are many newspaper articles recently that try to find out how important is the roleof credit agencies to motivate governments to choose austerity measures. If we look at towhat extent downgrading by credit rating agencies has affected economies hurt by the debt
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
7

	
  GÓMEZ,	
  J.	
  Economía	
  “Angela	
  Merkel	
  advierte	
  que	
  nadie	
  viva	  por	
  encima	
  de	
  sus	  posibilidades”	
  (Angela	  Merkel	
  warns	
  anybody	  cannot	  live	  above	
  their	
  possibilities),	
  El	
  País	  (June	  15th,	  2012).	
  8

	
  MENÉNDEZ	  DEL	
  VALLE,	
  E.	
  Opinión	
  “La	  incontenible	
  ambición	
  de	
  Alemania”	
  (Germany’s	
  uncontrollable	  ambition),	
  El	
  País	  (May	  8th,	
  2012).	
  crisis (in this case the Spanish economy), we see that when Standard & Poor, Moody’s orFitch among other have lowered rating of sovereign debt, that has been after these rating
agencies have considered that fiscal consolidation in Spain were not enough to deal withhigh debt levels.
Of course, this fact has made the ECB and many politicians in Spain such as the former
PM Zapatero directly criticize these credit rating agencies9. Since this debt crisis is in part
because of a lack of confidence by the markets to the Spanish economy, being downgradedby these rating agencies and being told by them austerity measures are not enough yet candefinitely influence policy decision-making by the government to carry out even tougher
measures so the markets can eventually rest.
It is a fact that the European leaders but also the European Central Bank are calling toinvestors to rely more on the moves and efforts in Europe (who seem to be not fully
understood) and not to rely too much on ratings decided by the previously mentioned credit
rating agencies.
That is why a lot of the criticism towards the current crisis management by theEuropean leaders focuses on the fact that these leaders seem to make their decisions
according to the rating agencies and the market as whole, rather than assisting the citizen
who actually chose them to be in power of their nations.

What are the Central Banks and the IMF saying?
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
9

	
  WERDIGIER,	
  J.	
  Global	
  Business,	
  “European	
  Central	  Bankers	
  Criticize	
  Role	  of	
  Rating	
  Agencies”,	
  The	  New	
  York	  Times	
  (January	
  12th,	  2012).	
  In order to understand the whole context in which the Spanish government decided totake unpopular fiscal consolidation, it is important to bear in mind what are the Central
Banks and the IMF saying about it.
In this sense, we see some working papers that do not necessarily share the official
thinking of Central Banks, but are written by members of the Central Bank that defend
fiscal consolidation as a way to solve the debt crisis at least in the long-term, as it can beread in Almeida’s work by the Bank of Portugal.
On the other hand, it is remarkable that the opinion of the European Central Bank (theone that could have the most decisive role if it decided to carry out economic expansionary
measures such as throwing money to the markets or lending to the CBs of the Euro-zone
countries in need), is that although austerity measures and other structural changes in thebanking sector, etc. in countries such as Spain or Italy are unavoidable in the current
situation, a pact of growth is also necessary in Europe. Related to this recommendation by
the ECB it is important to remember that the current president of France (Hollande) is
actually proposing less austerity and more growth to solve the crisis. Hollande’s idea seems
to be rejected by not only Germany but also other leaders such as the case in Finland, whofear that sharing debt with the periphery will end up hurting their local economies as well.
The case of the IMF is also remarkable, since although the IMF considers that it isimportant to reach fiscal stability again, cutting government spending too fast will hurt
income and make long-term unemployment worse.

Basic argument

Within the Euro-zone there are core economies and periphery economies. At the sametime, we have countries with more power to decide and control rules than other. This is thecase of Germany, which seems to be more powerful than Spain in decision-making within
Europe. The basic difference between these two countries is that nowadays Spain isseverely struggling with a debt crisis, a bubble burst, a banking sector, lack of confidenceby the markets in the solvency of the economy and a huge problem with the jobless rate.
However, the case of Germany is almost the opposite than Spain, and far better
economically after this crisis.
In order to get out of the crisis, there is increasingly a call for expansionary measures.
But in countries like Germany who are not suffering the fiscal deficits of the southern area,
expansionary measures means spending more on the failures of their neighbors. In thissense, while the Spaniards demand more help from Europe, Germany demands Spain aguarantee that things will get done in a better way from now on. That means drasticallycutting the fiscal deficit. The way suggested by Germany to do so is with fiscal
consolidation. It is not difficult to understand why Germany tries to impose these measures
to Spain. Since the debt is in Spain, further spending through the taxes paid by the German
citizens to the bail out of the Spanish banking sector, etc. would definitely be extremely
unpopular and very costly for the German government.
Then, Spain has little room to negotiate but accept carrying out austerity measures thatwill worsen the situation of the government and the leaders in power at the moment. So in
the question on why the Spanish government chooses fiscal consolidation, it is obvious that
the Spanish government cannot really avoid them due to the very nature of the crisis. Thisdebt crisis is not something that can be solved only on a local level. It is also a lack ofconfidence from foreign investors, etc. In this sense, what is believed or thought outside
Spain counts a lot. Then, Spain cannot ignore suggestions and proposals from other foreign
leaders and organizations such as IMF.
Credit rating agencies do not help to improve this situation, but instead pressure evenmore the Spanish government to go further with the austerity measures. However, despite
having all this in mind, the Spanish politicians cannot forget they have been actuallyelected democratically by citizen that watch what their government is doing. That meansthat if the government chooses to carry out unpopular austerity measures, there is a risk thatat one level the population may end up rejecting them through popular unrest, riots andother episodes that could be seen in the Greek crisis.
In the press the following sentence “Spain is too big to fail” is usually used. That is the
Spanish economy is too big within the Euro-zone so leaving the Euro as its currency would
have terrible consequences for the rest of the Euro-zone countries. It will probably cause
contagion to other countries (especially Italy but also maybe France) and perhaps it would
mean the end of the common currency10.
Although this is not a very likely scenario (Greece seemed more likely to leave the Eurobut their citizen finally elected a government in favor of keeping the Euro but changing theconditionality terms established after their bail out), obviously Spain can certainly use it asa negotiation weapon with Germany. That means that in the event of Germany insisting on
further austerity measures in Spain, the Spanish government can actually try to renegotiate
or get concessions by the German government by arguing that the popular unrest caused by
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
10

	
  WARNER,	
  M.B.	
  (2012).	
  The	  World	
  from	  Berlin,	
  “Europe	
  Could	
  Economize	
  Istelf	
  to	
  Death”,	
  Spiegel	  Online	
  International	
  (Berlin:	
  April).	
  the fiscal consolidation may developed into a rejection of the Euro, something that
Germany clearly wants to avoid.
Then, the new political context in the neighboring France, where the left-wing party
headed by Hollande won the latest elections can also help Spain find an ally or partner in
the negotiations about the future banking bail out, etc. between Euro-zone countries.

Conclusion
Although this paper does not try to explain if fiscal consolidation is more positive or
negative to the economies hit by the European debt crisis, it has analyzed the literature on
the topic, in order to understand why these measures are so unpopular not only among the
public but also about a large number of economists.
Then, it has analyzed some of the consequences of fiscal consolidation in the short-term
for the economies that decide to carry them out. Finally, the paper tries to compare thecases of Spain (as a periphery economy) and Germany (as a core economy) in order to see
what motivates the German government to propose austerity measures, and what motivates
the Spanish government to apply this fiscal consolidation during a period of crisis.
To do this, the political context of both countries has been analyzed to see if theorientation of the political parties in power is relevant in the decision of carrying out fiscal
consolidation. However, it is proved that both right and left-wing political parties takeausterity measures or propose them to third countries. At the same time, left-wing parties

seem to be more hesitant to these measures and usually prefer expansionary measures, suchas the case of Hollande in France.
Finally, although the role of credit rating agencies, CBs and the IMF are very importantand can be behind the motivation of the taking austerity measures, these do not seem to be
crucial. But an unbalance of power within the European Union members seems to be thekey. In this sense, Berlin is stronger than Madrid in decision-making through Brussels. Of
course, this is not 100% true though, since Madrid can still negotiate through the help ofstrategic allies such as France or Italy, in order to get concession by Germany. At the sametime, Spain can also use the example of Greece as something that has to be avoided fromhappening in Spain as well. That means can always argue that too harsh austerity imposed
to its citizens can make Spain eventually choose to leave the Euro.

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