Economics, 3rd Edition

The Argument for Austerity 

Countries must take steps to get public finances under control. If attempts 

are made to increase borrowing to spend their way out of recession the effect will be increased inflation, 

higher borrowing costs across the whole of the EU and further uncertainty which threatens the whole of 

the euro area. There is also a moral dimension to the necessity for austerity – it is not fair to expect the 

SELF TEST 

Why might we wish to distinguish between government current expenditure and government 

investment expenditure and take account of the economic cycle when judging whether the government should 

balance its budget?

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CHAPTER 37  THE FINANCIAL CRISIS AND SOVEREIGN DEBT  801

taxpayers of countries which have maintained a sound fiscal stance and abided by the rules of the euro 

area to pay for the lax behaviour of governments in other countries.

In the short to medium term the effects of austerity are considerable but the long-term benefits of 

sounder finances, improved structural reforms and a stronger banking sector will mean that all countries in 

Europe will be more competitive and in a position to benefit from stronger and more sustained economic 

growth in the future.