After Us, the Deluge: Europe Ten Years After the Crisis

by Matthew Edwards

3 September 2019

This article originally appeared on 29 May 2019 on the Austrian Economics Center Blog.

The last ten years have been difficult ones for many, to put it mildly: the near collapse of the international financial system, bailouts of banks, sovereign debt crises, massive unemployment, with subsequent headlines of government spending austerity in many countries. There have been countless initiatives to improve competitiveness, dozens of announcements of spending cuts or targeted investment, and billions spent on this or that programme.

But behind these headlines, and against the background of the sovereign debt crises, unemployment and supposed austerity, what has the impact of all these actually been for European Union countries? This article presents a series of metrics from the OECD and Eurostat – looking at government revenue and spending, government debt, international competitiveness and employment rates – to illustrate where there have been some changes and where, despite many heated headlines, there has actually been very little.

Government Revenue and Spending

Comparing general government expenditure and revenue presents a mixed picture. Of the 28 EU countries, government expenditure (measured as a percentage of GDP) increased in 13 and dropped in 15, albeit that these were very marginal increases/reductions in five countries. In terms of revenue collected (i.e. taxes, duties etc.), this increased in 21 countries and reduced in seven. Within these figures there are obviously some outliers – Ireland, for example, had extremely high expenditure in 2008 (not least due to bank bailouts), accounting for the very large subsequent reduction.

Going further, the general government expenditure and revenue figures show that:

• expenditure and revenue collected both dropped in six countries (bottom left quadrant of the figure: Bulgaria, Ireland, Hungary, Lithuania, Romania and Sweden)
• expenditure rose and revenue collected dropped in one country (top left quadrant: Denmark)
• expenditure fell and revenue collected rose in nine countries (bottom right quadrant: Austria, Estonia, Greece, Malta, the Netherlands, Poland, Portugal, Slovenia, the UK)
• expenditure and revenue collected both rose in 12 countries (top right quadrant: Belgium, Croatia, Cyprus, Czech Republic, Finland, France, Germany, Italy, Lithuania, Latvia, Slovakia, Spain).

Despite all the headlines of austerity, government expenditure has continued to rise in almost half of the EU: in only 12 of the 28 EU countries has it dropped by more than 1% of GDP. Perhaps less surprisingly, the amount of revenue taken by governments has increased in three-quarters of the EU. Some of this has clearly been necessary to reduce fiscal deficits, but it is notable that the state has continued to expand, not least in France, Italy and Belgium.

Two interesting areas of expenditure (albeit not necessarily directly related) are research and development (R&D) and pensions: the first as such expenditure is needed if countries are to be competitive and increase productivity in the long term; the second as with demographic change, pensions are likely to consume an increasing part of government expenditure. R&D expenditure (whether by business or government) can fluctuate considerably; pension expenditure is determined by legislation and is (generally) more predictable.

Between 2008 and 2016, the last year for which both sets of figures are available, there is (unsurprising) no real linkage between the changes R&D and pensions expenditure, measured as a percentage of GDP. There does not appear to be any geographical pattern or EU accession date grouping in the rates of increase or decrease. What is interesting is that despite the various crises from 2008 onwards, R&D expenditure – which covers the business enterprise, government, higher education, and private non-profit sectors – has increased in nearly two-thirds of EU countries.

The percentage change is one aspect: the overall rate of expenditure is another.  Here there do seem to be some discernible groupings:

• the first grouping of lower levels of both pension and R&D expenditure comprise mainly eastern European and Baltic countries;
• the second grouping of higher levels of pension expenditure but still comparatively low levels of R&D expenditure comprises of Greece, Italy, Portugal and Spain;
• while the group grouping, of moderate to higher pension expenditure combined with higher R&D expenditure consists of mainly western European and Nordic countries.

Government Debt

Perhaps the most notable item about the levels of general government gross debt over the last ten years in that it has increased in almost all EU countries. In only four EU countries – Germany, Hungary, Malta, and the Netherlands – has government debt decreased.

The challenges in reducing GDP-relative levels of debt, let alone absolute debt, are shown in this figure. The impact of a decade of fairly anaemic economic growth in a number of countries and the long shadow of the Global Financial Crisis and the Eurozone debt crisis are clear. Behind this looms the other spectre that has started to come increasingly into play: demographic aging and the increasing demands this is placing on countries’ fiscal space.

International Competitiveness

Barely a day goes by without a reminder of the highly competitive international economic environment. Governmental and EU-level measures and initiatives to improve economic competitiveness have been plentiful. Yet often the importance is not just absolute competitiveness, it is relative competitiveness compared to other parts of the world, not least Asia. So what have been the results of the last ten years?

Based on the World Bank’s Doing Business rankings, of the 26 EU countries for whom figures are available, relative competitiveness has increased in exactly half. Given the challenges in improving performance from a high base level, it is unsurprising that there have been some slight comparative reductions or at best only marginal improvements in some countries – such as Denmark, the UK and Sweden.

The major improvements in relative competitiveness are clearly seen in Poland, Croatia, Greece, the Czech Republic and Slovenia – albeit that all of these started in 2008 from positions low down the ‘Ease of Doing Business’ ranking. But the considerable improvement is clearly seen.

On the less positive side is those countries with middling positions that have barely moved or decreased slightly – such as Austria, France, Italy and Romania – and those countries that have seen substantial decreases in relative competitiveness – Belgium, Luxembourg, Ireland, the Netherlands, Bulgaria, Slovakia and Hungary.

Linked to international competitiveness is the tax burden for firms. Figures from the OECD show how the tax on corporate profits (defined as taxes levied on the net profits (gross income minus allowable tax reliefs) of enterprises, also covers taxes levied on the capital gains of enterprises, at all government levels) has changed. While not covering all EU countries (Bulgaria, Croatia, Cyprus, Greece, Malta and Romania are absent), it provides another take on how countries’ positions have changed.

Employment Rates

Unemployment rates often garner the headlines; they certainly have done so in the last ten years. Yet, reversing the examination and looking at employment rates shows a different picture within most of the EU.

In all but four countries, the employment rates for the population between the ages of 20-64 have increased. Three of the four countries where the rate has dropped – Cyprus, Spain and Greece – were some of the most heavily impacted during the Eurozone debt crisis, while the fourth – Denmark – despite the decrease, is still the country with the seventh highest employment rate in the EU in 2018. It should be noted though that 2018 saw growth in employment rates in every single EU country; had comparator figures for 2017 been used, decreases in the employment rate (as compared to 2008) would have also be seen in Croatia, Finland, Ireland, Italy and Latvia, as well as the four countries previously mentioned.

The bottom line, though, is that even at a cursory level, it is fair to say that for much of the EU, it has taken almost 10 years for employment to recover from the start of the crises in 2008.

Interestingly, an examination of tax wedge data from the OECD – from 2008 to 2017, covering 22 EU countries (excluding Bulgaria, Croatia, Cyprus, Greece, Malta and Romania) – provides only a limited correlation to employment growth. The OECD defines the tax wedge as the ratio between the amount of taxes paid by an average single worker (a single person at 100% of average earnings) without children and the corresponding total labour cost for the employer. The average tax wedge measures the extent to which tax on labour income discourages employment and is measured in percentage of labour cost.

For the period of 2008 to 2017, the average tax wedge for the 22 EU countries covered declined by 0.26% corresponding to an average increase in employment of 1.26% over the same period for the same countries. However, for individual countries there are some interesting examples thrown up. In Denmark, for example, the tax wedge decreased by 2.62% but the employment rate had dropped by 2.8% (2008-2017), though this had moderated to a 1.5% reduction in employment, according to Eurostat 2018 figures. In the UK, the tax wedge decreased by 1.87% (2008-17) with employment rates increasing by 3% (2017) and 3.5% (2018); in Sweden, which had a very similar tax wedge decrease of 1.89%, the corresponding increases were 1.4% and 2.2% respectively.

Thoughts

Questions can be asked as to how much the last ten years represent a ‘lost decade’, similar to that in Japan in the 1990s – clearly some countries are still far from fully recovered, with all the accompanying human tragedies and social costs. This is just a snapshot of various statistics that look at different aspects of EU countries performance compared to 2008 and clearly a straight-line transition from the earlier to the later set of figures is not what happened.

But these snapshots presented do provide some interesting points and demonstrate the long-lasting effects of the financial and debt crises post-2008. Employment rates have only (just about) recovered some ten years later. There have been some significant improvements in international competitiveness by individual European nations, offset by some others where competitiveness has dropped markedly.

Yet for all the newspaper headlines and political froth and protests about austerity in many countries, overall the state has continued to expand: spending is higher, revenue collection is higher, and government debt is higher in the majority of EU countries, indeed at considerably elevated levels in some. This prompts one further question: what happens the next time there is a major recession or financial crisis?