The important issue, which should be determined first, is the meaning of the government budget and its role in real GDP equilibrium. A position of government budget is the difference between the spending of the government and the government tax revenue. Obviously, in case the spending of the government exceeds its revenues, the economy experiences deficit in budget. In contrast, in case the revenues exceed spending of the government, the economy experiences surplus of the budget. As well as Greece faces the budget deficit, austerity measures mean the attempts to eliminate it. Reducing the budget deficit can be achieved via elimination of the government spending and taxes increase. Precisely these measures are aimed at strengthening the country’s economy, confidence, and fiscal position in the long-run.
Austerity measures have their negative outcomes, which means that overcoming deficit in budget may become self-defeating for the countries like Greece. Greece’s national debt had grown in 2009 and the country’s real GDP was extremely low. Tight fiscal policy leads to fall in real GDP in Greece, debt increase, and rise of the GDP ratios. Other impacts of austerity in Greece include lower demand, the lack of economic growth, high competitiveness in business sector, and social inequality. Tight fiscal policy does not influence Greek society equality, since the least protected social layers appear to be the biggest losers in budget improvements policy. Austerity influenced the unemployed crucially, as their number increased from 9.8% in October 2009 to 12.6% in September 2010 and 13.5% in October 2010. Importantly, while Greece got the status of a developed country in 2001, it became the first country in the world that lost this status in 2013.
According to the austerity, Greek government ran a broad privatization program, which led to global bonds issuing twice in 2009. However, due to such a policy, Greek economy occurred on the brink of default in spring 2010. The Euro currency had fallen off to the annual minimum at that time. Austerity measures, which implied spending reduction, freezing the wages, raising the retirement age, and tax increases, led to mass strikes, protests, and riots. Another side of social impact, which austerity had in Greece, is annunciation of a tax amnesty and running the corruption reduction among the public officials.
Austerity measures did not result in improvement in the government’s budget position, since they caused social dissatisfaction, inequality, and instability. The Greek government reduced numerous social programs and increased the taxes at the same time. These measures made people struggle for their rights and wages’ increasing. Excessively tight fiscal policy leads to the growth of anti-governmental moods and strikes, which make the real GDP and national economy fall down. The policy of austerity measures is ineffective to overcome the national crisis and budget deficit, since it causes constant deflationary spiral in the country’s economic system. A deflationary spiral is a self-sustaining process, which implies the fall of the economy causes deflation that leads to further economic decline and larger deflation as a result. Spiral mechanism is realized via the relationship between economy and prices. Due to the prices fall, economic agents can reduce the amount of investments to place their funds in a more profitable way after several years’ pass. Such a policy leads to a further drop in demand that stimulates a further drop in commodity prices and general decrease of production.
In conclusion, it becomes apparent that austerity measures, implemented in Greece, are contradictory. The main reason of their contradictory essence is that tight fiscal policy led to a significant reduction in the Greek real GDP, that is why, the banks reduced lending. Lending reduce caused a reduction in the money supply in the country. The national economy occurred in deflationary spiral and lost its status of a developing country.