EU: Austerity Measures and the Accompanying Troubles

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A spokesman for Hungarian Prime Minister Viktor Orban said June 4 that Hungary’s economy is in a “very grave situation” due to the previous government’s manipulation of economic figures. The announcement is bound to unnerve markets and Hungary’s EU partners, as this same dynamic gave rise to Greece’s sovereign debt crisis. An unnamed Hungarian government official said the country’s deficit in 2010 could be 7-7.5 percent of gross domestic product (GDP) — double the 2010 target of 3.8 percent. While deeply troubling, this jump in deficit figures does not come close to the Greek revelation in late 2009 that its budget deficit was more than 12 percent of GDP rather than the projected 5.1 percent.

Nonetheless, the announcement highlights two current concerns in the European Union. The first is that the eurozone debt crisis is not strictly limited to the eurozone, and given Europe’s lingering banking sector issues and generally lower growth outlook, these problems could well spread to Central and Eastern Europe, the areas that created the greatest economic concern for Europe in late 2008 and early 2009. The second concern is that in addition to austerity measures announced in the Club Med countries (Greece, Portugal, Spain and Italy), other European states — particularly in Central and Eastern Europe — will have to enact deep budget cuts to get their economies back on sustainable paths. Because they are outside the eurozone, these Central and Eastern European countries theoretically could use currency manipulation to increase competitiveness and solve some budget problems, but since most of their loans are in euros, such a move would appreciate their debts.

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The Hungarian government announced June 4 that it will put together an austerity package within 72 hours (by June 7) to tackle its increased budget deficit. This makes Hungary one of several countries undergoing austerity measures to rebalance their economies. The most draconian austerity measures are being implemented in Greece, with its fellow Club Med members and Ireland following closely. For the Club Med countries, the measures are intended to reassure the markets that they can rein in their deficit problems before the situation gets out of hand. Rumors in Europe are already circulating that the Portuguese government might try to use the 750 billion euro ($900 billion) eurozone financial aid fund because its debt financing costs are rising. While EU heavyweights Germany, France and the United Kingdom also recently announced further plans to rein in their deficits under the EU-mandated threshold of 3 percent of GDP, those measures are practically a formality compared to the spending cuts and tax hikes being implemented in the eurozone’s peripheral countries.

An obvious consequence of the announcements of austerity measures is that labor union activity has already picked up and is set to increase in the summer. Aside from the political pressures that strikes will induce, the austerity measures are going to put a number of governments on uneasy footing as opposition to the spending cuts coalesces. This is in part why Paris and Berlin had to enact some deficit cuts of their own — even if not nearly as severe — so that Athens, Rome, Madrid and Lisbon are not attacked for cutting budgets while the EU heavyweights get a “free pass.”

The upcoming summer in the EU will therefore be a volatile one politically and will put the Club Med governments on edge. The minority Socialist government in Portugal, Spanish Prime Minister Jose Luis Rodriguez Zapatero and the Greek government are particularly threatened, as they are all undertaking draconian deficit cuts. Any sign of political instability could return the continent to a state of economic panic.

Upcoming Major Strikes in Europe

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