Can Austerity Lead Off the Debt and Crisis? Did It Work in Baltic Countries?

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Can austerity lead an economy out of a debt crisis and recession? Was it successful in the Baltics?

“Austerity describes policies used by governments to reduce budget deficits during a period of adverse economic conditions.” These policies may include combination of spending cuts or/and tax increases, or a mixture of the two. But does applying austerity helps countries to grow out of debt? The thesis of this essay is that austerity cannot lead an economy out of a debt crisis and recession, due to its negative effect on economic growth, tax revenues (higher taxes - less revenues) and employment (increased unemployment). The failure of it in many countries (Europe, including “successful” model Latvia) proves its inability to work efficiently and help countries after recession. Firstly, applying austerity measures, the tendencies which occurred in all countries showed that austerity is not efficient and its effect in most cases turns out to worsen the situation in country. After financial crisis of 2008, in order to be able to reduce deficit (reduce the debt), some countries, especially in Europe, were forced to embark on austerity measures (e.g. Greece). The first tendency was that the rate of unemployment in all countries got bigger. Austerity states that “budget cuts can spur growth by giving businesses increased confidence”. The increase of unemployment rate because of austerity could be expected in short-term, but the real situation is different. Eurostat reported that unemployment in the 17 Euro area countries reached record levels in March 2013, at 12.1%, up from 11.0% in March 2012 and 10.3% in March 2011. Unemployment in countries has risen as high as never before. In Greece it was 27.2% in January, Spain - 26.7% and Portugal - 17.5%. 5 years after the crisis in this case is not a short-run, but a long-run. The second tendency is that by adapting…...

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