Modern Economy, 2011, 2, 498-513
doi:10.4236/me.2011.24055 Published Online September 2011 (http://www.SciRP.org/journal/me)
The Effects of European Austerity Programmes on Social
Security Systems
Arne Heise, Hanna Lierse
University of Hamburg, Hamburg, German
Received March 14, 2011; revised May 5, 2011; accepted May 18, 2011
Abstract
The recent financial and economic crisis is intensifying the pressure for budget consolidation,increasing the
likelihood of cuts in social services throughout Europe. One government after another is bringing forward a
budget consolidation programme. Cuts are envisaged above all in social services and so the question arises of
what effects this will have on welfare states in EU member countries and on Social Europe in general. In this
study cuts in social systems are analysed and compared, both planned and already undertaken. Regardless of
the different magnitudes of the austerity efforts and the policy fields concerned there can be no doubt that all
austerity programmes are regressive in nature and that the option of raising incomes is being exercised far
less frequently than spending cuts and this applies especially in the social realm.
Keywords: European Integration, Social Policy, Budget Consolidation
1. Introduction
It is an open secret that the welfare state has become a
basket case and must therefore be reformed or at least
reconstructed and modernised. Globalisation and Euro-
pean integration, demographic change and individualisa-
tion processes in society have, slowly but surely, eroded
the welfare state foundations of EU member states. If the
renovation work does not start soon, according to the
conventional wisdom, the welfare state will collapse un-
der the weight of its costs and the burden of redistribu-
tion. What has been the mainstream perspective on social
policy in economics as well as in politics over the past
two decades, may become another TINA (there is no
alternative) imperative in the aftermath of the recent
world financial crisis and the ensuing ‘absurd austerity
policies’ [1] almost everywhere in Europe.
Before we turn to the development trends of European
welfare states the European Social Model in particular
under conditions of the general need for consolidation in
the face of soaring public debt due to the recent global
financial crisis in six European countries (part 2), first a
few taxonomical remarks (part 1) will be made. After a
comparison of the austerity programmes (part 3) a short
conclusion (part 4) tries to take up the lines of discussion
addressed in the first part.
1.1. A Taxonomy
In general usage, but also in the social science literature,
the terms social state (Sozialstaat) and welfare state
(Wohlfahrtsstaat) are virtually synonymous. By contrast,
we shall use the term welfare state only when state in-
tervention involves, not just social adjustment or social
protection but broader social and economic policy
change to increase societal welfare. Social policy in the
strict sense is to be reserved for protection against the
five basic life risks old age, illness, unemployment, ac-
cident and poverty and social state refers to this core.
Welfare state policy, by contrast, requires, besides the
instruments of social policy in the strict sense, collec-
tively determined and democratically legitimised objec-
tives (for example, the degree of redistribution, possible
limits to be imposed on the market or a willingness to
pursue decommodification) and a broad-based embed-
ding of social policy, ranging from macroeconomic con-
trol through family policy to education policy as the ba-
sis of participation and inclusion which is not exclusively
market-oriented.
Within the framework of this distinction we shall be
concerned here only with the social state in the EU and
the European Social Model will refer precisely to that not
the welfare state in the broader sense. This is owing, on

A. HEISE ET AL.499
the one hand, to a necessary limitation of the object of
investigation, while at the same time reflecting the
abovementioned change of perspective with regard to the
allocation of social policy tasks after the end of the
Keynesian welfare state. Three objective processes
 globalisation/European integration
 individualisation
 population ageing
have led, against the background of the neoliberalism
which has dominated for the past three decades, to social
policy being understood almost exclusively in supply-
side terms as a distortion of allocation due to adverse
incentives. In this view, the collective redistributive con-
tent of social policy justifiable in demand-side terms
needed to be scaled back in favour of greater individual
equivalence and, where possible, provided privately so
that both in supply-side terms and as regards competi-
tiveness the greatest possible efficiency and financial
sustainability (economisation) would be ensured.
It will also be demonstrated by means of the distinc-
tion between welfare state and social state that the out-
come of the social policy modernisation efforts will not
be the end of the social state, but does involve a clear-cut
change in its substantive arrangements, the balance be-
tween collective and individual contributions, funding
and also benefit eligibility and legitimacy. In this sense
the former contrast between Europe, with its developed
welfare states, and the USA, with its limited social state,
is brought out more clearly. And if one takes the devel-
opment outlined above into account, it is obvious why [2]
no longer recognises any systematic difference between
Europe and the USA which would justify a special em-
phasis on a European Social Model.
1.2. Different Models of the Social State in the
EU
European social states have not only developed fairly
disparately in historical terms, but they also correspond
to the variety of European economic models [3]. This
relates to the extent of the provision of social security,
the level of decommodification, the manner of funding,
the structural allocation of social security needs in terms
of the various exigencies and their institutionalisation.
According to the well-known categorisation by [4] we
can therefore distinguish between at least three types of
social state in the EU:
1) the social democratic or Scandinavian type
2) the social conservative or continental type
3) the liberal or Anglo-Saxon type
With eastern enlargement this variety is likely to have
increased [5]: for the time being, therefore, one cannot
talk of one or the European Social Model. To be sure, the
abovementioned transformation and modernisation pro-
cess of the various social states in the EU may converge
into a common model; on the other hand, the European
Social Model can also serve as an ideal model for a
(new?) mode of integration capable of distinguishing
itself more clearly again from the US model.
1.3. Related Work: European Integration as
Engine of Convergence?
The literature on the future development of the social
state in the EU is voluminous and inconclusive [6-8].
Although the abovementioned objective factors and, in
particular, the requirements of European integration af-
fect all member states, national adaptation paths can vary
considerably: on the one hand, one may agree with [9]
who, against the background of neoliberal ideologising
and the EU integration architecture, take the view that
only the liberal model is capable of surviving and, there-
fore, predict a corresponding convergence; on the other
hand, however, one might share [3] assessment that not
only is the social state model shaped by the underlying
economic model, but also the relevant modernisation and
adaptation paths are fitted to the economic model and,
consequently, divergences will remain and, at best, over
the long term various hybrid models will emerge. To
some extent between these positions lies [5] and [10]
who claims to recognise a convergence towards a hybrid
model in the system of competitive market states which
is the result of the EU’s neoliberal architecture (see also
[11]) which takes account of the fact that social systems
have become significant factors in competitiveness, in
particular in the single currency area (that is, EMU).
Within the framework of the method of open coordina-
tion the soft form of governance which characterises EU
social policy forms of recommodification, privatisation
and cuts in social security may be discerned practically
everywhere.
There is no room here to go into detail concerning the
individual structural features of the putative convergence
process. Ultimately, however, economisation is tied up
with a scaling back of the level of social security with a
view to reducing alleged problems of allocation and
competitiveness. If one looks at the relative social spend-
ing of various countries representing different models
(Figure 1), however, a general downward spiral of levels
of social security is not apparent.1
Some member states, regardless of their social security
model (France as an example of the continental model,
Denmark as an example of the Scandinavian model and
1Certainly, it should not be overlooked that a constant rate of social
spending does not necessarily mean a constant level of social security
if the number of benefit recipients increases due to population ageing,
risin
g
p
overt
y
or unem
p
lo
y
ment.

A. HEISE ET AL. 500
Figure 1. Social Spending as a Percentage of GDP (1980-2005). Source: OECD, Country statistical profiles 2009.
Poland as representative of the CEE countries), even
register increasing social spending rates and only in a
few countries for example, Ireland as representative of
the liberal model, Slovakia as representative of the CEE
states and Sweden as representative of the Scandinavian
model is there a falling trend with regard to social
spending rates, and in all cases in terms of a more up-
to-date time horizon stagnation can be discerned rather
than a clear (downward) trend.
If, therefore, convergence towards a generalisable
European Social Model is to be linked to serious endan-
germent of social achievements in the EU other evidence
has to be produced. In Figures 2(a) and 2(b), therefore,
not only the development of social spending rates is
taken into account but also the state of development of
the national economy (GDP per capita). Social security,
after all, is a public good demand for which on the part
of consumers (citizens) increases with rising incomes
(positive income elasticity).
It would be evidence of dumping not only if social
benefit rates are falling in absolute terms but also if these
rates do not correspond to economic development, as
long as a positive correlation can be determined between
the two. Figures 2(a) and 2(b) identify this correlation at
various time points: with regard to 1980 and 1990 we
can talk of a high and even increasing correlation coeffi-
cient (R-square), regardless of variations in terms of so-
cial state models. The level of the rate of social spending
is explained, on this basis, by the state of economic de-
velopment (57 per cent and 71 per cent, respectively):
the increase in the correlation coefficient can be under-
stood primarily as a result of the fact that Greece imple-
mented an above-average increase in social spending
after EU accession and sought to adapt to Europe’s (ma-
terial) development path. The picture changes, however,
when we look at 2000 and 2005: now the close correla-
tion is largely dissolved only around 16 - 17 per cent of
social spending can be explained on the basis of the state
of development of member states’ economies. Responsi-
ble for this is at least relative dumping in countries of the
liberal (Ireland) and CEE (Slovakia) type which did not
develop their social states in accordance with their grow-
ing economies, but countries of the continental type (the
Netherlands), too, contributed by scaling back their so-
cial states to making social policy in the EU increas-
ingly a location and competitiveness factor.
1.4. The European Social Model under Pressure
The developments in social states depend on a variety of
real political power constellations; they do not depend on
economic-functional or ideological considerations alone.
Despite numerous objective and subjective negative fac-
tors the European modernisation process is not simply a
matter of a race to the bottom with regard to social stan-
dards. On the other hand, the data suggest that the mate-
rial development path discernible in the 1980s and 1990s
is being abandoned or at least will no longer shape the
frame of reference. The bigger the objective negative
factors and the change of perspective with regard to the
welfare state in the direction of economisation the sooner
a corresponding development is to be expected. To that
extent it is important whether the European Social Model
in particular after the sobering experiences of European
political actors with the at least sceptical, if not hostile
attitude of EU citizens, which also manifested itself in
the failed attempt to obtain agreement on a European
Constitution is developed as a positive vision of a social

A. HEISE ET AL. 501
y=2,5486x‐ 2,8022
R²=0,5667
0
5
10
15
20
25
30
0246810
Soci al expenditureas%ofGDP
GDPpercapitainppp
12
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R²=0,7155
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10
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0510 15 20 25
Socialexpendituresas%inGDP
GDPper capitainppp
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IRL
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(a)
y=0,2581x+16,296
R²=0,1731
0
5
10
15
20
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0510 15 20 25 30 35
Social e xpe ndi tureas%ofGDP
GDPpercapitainppp
IRL
NL
SLO

A. HEISE ET AL. 502
y=0,2405x+16,558
R²=0,157
0
5
10
15
20
25
30
35
0510 15 20 25 30 35 40 45
So ci alexpenditureas %ofGDP
GDPpe r capitainppp
IRL
N
SL
NL
(b)
Figure 2. (a): Correlation between Social Spending and Per Capita Income (1980 and 1990); (b): Correlation between Social
Spending and Per Capita Income (2000 and 2005). Note: The following countries were selected: Germany, France, Netherlands,
Denmark, Italy, Greece, Spain, Belgium, Sweden, Austria, Ireland, Slovakia, Czech Republic, Poland. Source: OECD, Country
statistical profiles 2009.
or welfare state which differs from the US model.
The strategy of former Commission President Jacques
Delors consisted precisely of this attempt to reduce the
social deficit [12] by paying closer attention to the social
component. Delors is associated not only with further
economic integration within the framework of the single
market and monetary union, but also with the shaping of
the European Social Model. Delors was convinced that
market creating integration measures alone would not be
sufficient to overcome the Euro-scepticism of the 1980s
(Eurosclerosis); in particular, the increasing incongru-
ence of the reach of the market and market regulation
threatened to put national social standards under pressure
revealing the limits of semi-sovereign nation states [13].
For the socialist Delors, therefore, economic and social
integration still presupposed one another and his vision
of the European Social Model may still be regarded as a
serious attempt to defend Europe’s welfare state tradi-
tions and to understand it as a source of legitimation for
European integration. Later European Commissions,
therefore, must be regarded as important motors of the
change of perspective (see, for example, [14-15]). In this
way those forces in the European Commission have won
through in the struggle over European integration [16]
which in the Delors Commission were still kept in check
by the white paper Growth, Competitiveness and Em-
ployment [17], sometimes described as neo-Keynesian
[18]. This occurred, astonishingly, at a time when a
window of opportunity was opened up by the coming to
power in many and indeed the most important EU mem-
ber states of Social Democratic governments for estab-
lishing or restoring a genuinely Euro-Keynesian deve-
lopment path. The major discord which arose in the
German SPD during the first Schröder government with
Oskar Lafontaine’s resignation from all Party and gov-
ernment posts and the ultimate victory of left-wing sup-
ply side politician [19] exemplifies the uncertainty about
the future economic and social policy course of Euro-
pean social democracy (see [14]) and explains why this
window of opportunity soon closed again. It also ex-
plains why the European Commission found it easy to
assert its ideas on the social investment state and the
human capital-oriented and incentive-compatible notion
of employability in place of the quantitative (level of)
employment as the connotative basis of the European
Social Model, as well as the employment policy incor-
porated in the Amsterdam Treaty as further source of
legitimation. For [15] the Commission has taken advan-
tage of ideas which the general public view positively
such as the European Social Model and employment
policy to enhance the legitimacy and acceptance princi-
pally of economic integration, hiding and reinterpreting
the economisation of the social behind the apparently
familiar.
Whether the recent world financial crisis will lead
once again to the kind of violent social conflicts through
which emancipatory forces will set the agenda and the
currently dominant projects will be rejected [20] remains
to be seen. Besides the temporary loss of legitimacy of
orthodox neoliberal economic and financial ideas at the
ideological level [21], at the level of political practice the
global financial crisis has, for the time being, imposed an

A. HEISE ET AL.503
enormous strain on public-sector budgets.
Almost in parallel in 2009 the whole of Europe en-
tered a deep depression of a magnitude and extent not
seen since the world economic crisis at the beginning of
the 1930s. Different from the 1930s, however, has been
the level-headed reaction of governments and the posi-
tive effects of social security: by means of discretionary
economic stimulus packages, far-reaching financial mar-
ket stabilisation programmes and socially responsive
automatic stabilisers, further destabilisation of the real
economy and the complete collapse of the international
financial markets have been prevented although with
significant consequences for state budgets. Structural
new borrowing everywhere has exceeded the level of the
balanced budget foreseen by the Stability and Growth
Pact and the automatic stabilisers are everywhere adding
several percentage points to this. Germany, although af-
fected slightly more than average by the financial crisis,
is experiencing only mild upheavals. This shows the two
faces of Germany’s strong export orientation: the major
economic downturn has been countered less by discre-
tionary measures [22] than by trust in the competitive-
ness of the German economy in the surprisingly strong
upswing of, in particular, some emerging countries in
2010. Other countries especially Greece, Spain and the
UK have relied more on their own economic stabilisation
measures or need more financial resources to stabilise
the banks.
Everywhere, public debt is rising sharply, thereby can-
celling out a decade of albeit modest consolidation. This
demonstrates the level of consolidation needed if the
debt limit of 60 per cent of GDP laid down in the Stabil-
ity and Growth Pact is to be maintained as the measure
of sustainable finance policy: only the new accession
states, which started out from very low levels of debt in
the wake of their social and economic transformations,
will manage to keep below the threshold in 2010. But
even on the basis of this fact it cannot be called into
question that the structural deficits in relation to eco-
nomic growth must be cut considerably if a permanent
increase in public debt is to be prevented. The perenni-
ally sensitive issue for finance policy is whether this is to
be achieved through tax rises or tax cuts, or through cuts
or increases in (social) consumption or investment. The
conventional view that cuts in (in particular social) con-
sumption are to be preferred to tax increases is contro-
versial, to say the least [23].
2. The Empirical Study
Having concerned ourselves in the previous section with
a theoretical reflection on the classification and deve-
lopment of social security systems in European countries,
in this section we shall take a detailed look at the effects
and changes which accompanied the recent economic
crisis.
In 2009, the member states commenced a fiscal policy
exit strategy in order to reduce the public borrowing
which had increased enormously since the outbreak of
the economic crisis. This exit strategy is supposed to
continue beyond the scaling back of economic stimulus
packages and to be supported by means of further sav-
ings and structural reforms. While the European Com-
mission suggests that consolidation measures be imple-
mented at the latest in 2011 most states adopted far-
reaching cuts and reforms in 2010 and some began the
consolidation process as early as 2009.
While no EU member state has been spared the need
to take consolidation measures, the extent and nature of
the measures involved and their effects on social security
systems have not yet been examined systematically and
comparatively. The analysis which follows constitutes a
contribution to that and an attempt to discover whether
and how member states’ social security systems have
been affected by the cuts and the structural reforms. We
shall also evaluate whether the crisis has functioned as a
motor of social policy convergence among the member
states. Building on the previous theoretical discussion of
the development of social security systems in Europe we
shall assume that there are both similarities between
countries and types of system and specifically national,
path-dependent developments with regard to social secu-
rity systems. In particular, it is assumed that the crisis
has triggered further convergence towards a social in-
vestment system which is largely undoing the decom-
modification of social policy.
In what follows we shall examine in some detail the
consolidation programmes of six European countries
from 2008 to the end of 2010 as published by their re-
spective governments and their effects on social security
systems. By the choice of countries we attempted to re-
flect the plurality of types of social state in Europe in
order to render the results as general as possible: While
Germany represents the continental type, the UK repre-
sents the liberal model, Greece and Spain the Southern
European type, Romania the Central and East European
type and Iceland can be assigned, in the broadest sense,
to the social democratic model.
2.1. Germany
With its Financial Plan up to 2014 and the Federal
Budget 2011 the Merkel government laid down the basic
pillars of German consolidation policy: by 2014, 80 bil-
lion euros are to be saved, representing an annual 0.8 per
cent of GDP. In this way by 2013 the deficit limit of the

A. HEISE ET AL. 504
Stability and Growth Pact is to be maintained and by
2016 the structural deficit is to be brought down to 0.35
per cent of GDP, as prescribed by the new debt regula-
tion in the Constitution. The focus of the German auste-
rity package is spending, the idea being to make a start
where savings and higher revenues are possible without
endangering the growth potential of the economy and the
social balance [24]. Nevertheless, the German govern-
ment also plans substantial cuts in the social budget,
making up more than 30 per cent of the whole consolida-
tion programme. This is because sustainable budgetary
restructuring can succeed only if this sector also makes a
targeted and fair contribution [24].
The conservative-liberal government plans, besides
cuts in parental benefits for recipients of so-called un-
employment benefit II (which consists of the former
unemployment benefit and transfers from the social wel-
fare system), to transform statutory benefits into discre-
tionary benefits and to abolish subsidies for heating and
the state pension contribution for this group. At present,
persons receiving unemployment benefit II for a year
receive an additional pension entitlement of 2.2 euros a
month. Since this sum is insufficient to obtain an ade-
quate pension, according to the government, the coalition
is now abolishing it completely. Besides these measures,
which affect the most needy, the government plans cuts
in parental benefits and structural changes in health care
policy. Even in the latter two areas, in which it would be
possible to incorporate an element of progressive redis-
tribution, the government’s consolidation policy is af-
fecting those on the lowest incomes.
Unlike in most European countries the government in
Germany does not adjust old age pensions. However, in
previous years the pension level fell due to a number of
reforms and the role of private and company pensions
increased [25]. Furthermore, the consolidation measures
also concerned the health care system [26]: besides drug
companies, doctors and hospitals, in particular those with
statutory health insurance have to bear the cost of rising
health care spending. Under the health care reform of
2011 health insurance companies can levy an additional
contribution from members with the professed aim of
promoting transparency and competition [27]. However,
the contribution is not income-related and can be re-
garded as an increase in the flat-rate premium. Given the
regressive effects of flat-rate premiums low incomes are
comparatively harder hit despite the solidarity sur-
charge [28]. The reform also abolishes parity of contri-
butions between employers and employees, hitherto a
basic principle of German health insurance.
The German government’s budget consolidation pro-
gramme and the social state reforms are relatively low in
terms of GDP in comparison to those of other European
countries (see also Table 1). This is certainly because of
Germany’s favourable current economic and thus also
budgetary development. Despite the relatively low level
of restructuring the reforms are clearly directed towards
social policy: the measures have affected the neediest in
society—safeguarding or reinforcing social benefits for
the unemployed and low earners does not come into it.
On the contrary, all additional emoluments have been cut
in order to boost incentives to get a job and personal re-
sponsibility, according to the government. The basic idea
of social balance, as advanced by the conservative-liberal
coalition, can thus be understood not in terms of social
inclusion and ensuring incomes, but rather as a turning
away from high social benefits and towards indi- vidual
responsibility and private provision.
2.2. Spain
With the budget plan for 2010 the Spanish consolidation
process commenced with the aim of reducing the deficit
to three per cent of GDP by 2013 [29]. However, on top
of this package the government ratcheted up its economy
drive in the course of the year: besides the austerity plan
(2011 - 2013) and the Action Plan (2010) considerable
spending cuts were earmarked for the public sector, and
the government passed laws on structural reform in the
pension system and the labour market, as well as addi-
tional economies totalling 15 billion euros [30]. These
extensive reforms are supposed to tighten the Spanish
budget while boosting economic growth and ensuring
basic social care. The Spanish strategy is thus concen-
trating on a mixture of spending cuts and revenue in-
creases ([29], see also Table 1).
With its first consolidation wave, the 2010 budget plan,
the government decided to reduce the deficit by 2.1 per
cent of GDP, whereby no significant cuts in social ser-
vices were envisaged. The government increased VAT,
tax on interest and some consumption taxes. In addition,
incentives were laid down to stabilise jobs, within the
framework of which corporate tax was to be reduced
from 25 per cent to 20 per cent for SMEs which maintain
or increase their employment rate. On the spending side,
the government planned a public sector pay and pension
freeze. Substantial reforms and cuts in the Spanish social
state were not foreseen. However, the social democratic
government implemented additional austerity measures
which envisage cuts in the pension system and other ar-
eas of social policy.
Within the framework of the Strategy for a sustain-
able economy and budget position the Spanish govern-
ment implemented a number of structural reforms in re-
lation to pension and labour market policy [29]. The lat-
ter is supposed to introduce more flexibility into wage

A. HEISE ET AL. 505
negotiations and employment protection, but at the same-
time to reinforce the employment rights of those on tem-
porary contracts [31]. The aim is to stabilise the em-
ployment situation in Spain, where the main problem is
the large proportion of temporary and provisional jobs,
accounting for around 30 per cent of all employment
contracts, well over the European average of 14 per cent
[32]. The lack of employment policy stabilisers un-
doubtedly also explains the sharp increase in the unem-
ployment rate since the beginning of the economic crisis.
The belief that more flexibilisation will contribute to
stabilisation may be explained historically: since the end
of Francoism neoliberal approaches have had consider-
able weight in Spain [33].
The Toledo Pact of 2010, which envisages extensive
pension reform and is supposed to achieve cuts to the
value of four per cent of GDP by 2030 [34], is also part
of the strategy for a sustainable economy and budget
position. Pension reform includes measures in accor-
dance with the OECD trend [35]: a uniform pension sys-
tem has been established, individual equivalence has
been reinforced, the retirement age has been raised and
the minimum contribution period has been increased
from 15 to 25 years. Furthermore, part-time work for
those approaching retirement has been temporarily abo-
lished and the 2011 pension increase suspended, al-
though the social security pension is exempt from the
latter two measures [30]. The aim of the reforms is to
create incentives for regular and longer payment of pen-
sion insurance contributions. However, in particular the
strengthening of individual equivalence, which is sup-
posed to connect pension levels more closely to contri-
butions, leads to pension redistribution: those with low
incomes and erratic employment will increasingly re-
ceive lower benefits than those with stable and high in-
comes. In Spain, where the unemployment rate is cur-
rently 20 per cent and the number of temporary contracts
is high, this reform can be expected to exacerbate income
inequality in old age.
The government also plans to abolish the so-called
baby cheque and to reduce costs in the health care sector.
The baby cheque was introduced by the social de- moc-
ratic government in 2007 and entitles parents to a one-off
payment of at least 2,500 euros on the birth of a child.
From 2011 this non-income related support will be abol-
ished. Health care reforms are aimed at reducing costs:
the state system entitles every citizen to free health care.
However, expenditure on drugs is high in Spain and in-
frastructure is poor and out-of-date [36]. The current
reforms are aimed in particular at lowering drug costs:
savings of 1.5 billion euros a year are to be achieved by
reducing the price of generic medicines and introducing
price caps. Although the social democratic government is
not levying copayments, the state health care system will
cover only drug costs which are in line with the new
price regulations.
The social policy cuts implemented by the Spanish
government within the framework of budget consolida-
tion are relatively moderate (see also Table 1) since no
specific cuts in basic provisions for social insurance re-
cipients are envisaged. However, the reforms must be re-
garded as predominantly liberal and regressive because the
Table 1. Synopsis* of National Austerity Programmes.
Austerity programme Germany Estonia Greece UK Romania Iceland
% of GDP 3.3*** 8.5** 10.5** 7.2** 13.9* 12***
% of GDP per year 0.8 2 - 3 3 1.8 - 2 7 2.4
Billions, national currency 80€
2010 - 14
85€
2010 - 13
24 €
2010 - 13
No data
2010 - 12/13
74.6 Lei
2009 - 10
179 ISK
2009 - 13
1. Revenue increases 33 41.2** 42.9 31 15 36
- Corporate taxes
- Income taxes
7.52
/
–1.6
/
8.5
/
–8.5
–11.563
/
/
1.4
32.3
- VAT / 11.4 23.4 44.9 104 4.6
2. Spending cuts 52 58.8 57.1 69 85 64
- Social security5 34 5.4 No data 21.9 No data 15.6
Sources: * Authors’ own calculations, based on various IMF and EU sources, as well as national budget plans. ** EU Public Finances 2010, p. 66. *** Ger-
many: Package for the Future 2010 (Zukunftspaket); UK: Budget Plan 2010; Iceland: Financial Plan 2009 - 13.
2Even though no increase in corporate tax was introduced, the German government plans to introduce a transaction tax with projected revenues o
f
around six billion euros, corresponding to around 7.5 per cent of the austerity package.
3In Britain the personal income tax allowance was increased by £1,000 per annum, which is regressive, not progressive in effect.
4Estimates for Romania are particularly difficult because of the lack of public data and the multitude of revisions, since initial consolidation effects
were not achieved. However, Romania decided, alongside an increase in VAT from 19 per cent to 24 per cent, only on an extension of personal in-
come tax and consumption taxes to medical products. The former will, according to the finance minister, amount to around 3.5–4 billion lei, corre-
sponding to around 0.65 per cent of GDP. Total consolidation measures for 2010 amount to 6.5 per cent of GDP, so that 90 per cent of the Romanian
p
ackage consists of cuts and only 10 per cent can be attributed to additional revenues. European Commission estimates confirm this finding [49].
5Without long-term structural reforms in the health care sector and pension system.

A. HEISE ET AL. 506
abolition of the baby cheque has hit low income families
hardest. Pension reform, too, adversely affects in par-
ticular those with unstable and irregular work records.
Taking into consideration the high unemployment and
the instability on the Spanish labour market pension re-
form will result in significantly lower earnings for many
people. In addition, the Zapatero government is not plan-
ning redistributive compensation by taxing higher in-
comes or property, so that budget consolidation will
predominantly affect families and future pensioners on
low and irregular incomes. In order to be able to contex-
tualise the reforms within the framework of the overall
development of social policy in Spain, in what follows
the basic features of the Spanish social state will be ex-
amined in more detail.
2.3. Greece
The social democratic government is banking on tough
austerity measures which will not leave the Greek social
security system unscathed. The 2010 Stability Program-
me was aimed at reducing the budget deficit within the
year by between four and 8.7 per cent [37]. When shortly
afterwards at the beginning of 2010 the danger of state
bankruptcy reared its head and Greece signed an interna-
tional rescue package (see above) the Papandreou gov-
ernment passed additional austerity measures in the
amount of two per cent of GDP or 4.8 billion euros [38].
The government’s consolidation strategy is comprehen-
sive and includes both tax increases and social security
cuts (see also Table 1). Although the latter are not the
focus of the consolidation measures essential areas such
as pension provisions, labour market policy and health
care have been substantially affected.
Extensive pension reforms were presented to parlia-
ment because thus ran the argument only in this way
would Greece be able to make its public finances sus-
tainable. The costs of pension provisions have risen in
recent years from 4.5 per cent of GDP in 2005 to 6.6 per
cent of GDP in 2009. According to various prognoses
unless the pension system is restructured spending will
even exceed 24 per cent of GDP by 2060 [37]. Spending
is significantly above the average for European member
states which could point to preferential treatment for
pension recipients with regard to social spending. How-
ever, the non-contribution related social pension, with a
basic monthly benefit of 228 euros (2006), is very low
and the system is strongly segmented, with major differ-
ences between benefit levels, retirement ages and the
contribution system. Since the mid-1990s pension reform
has been high on the reform agenda, but until the out-
break of the crisis there was little to show for it.
In July 2010 Parliament assented to this extensive
pension reform, which is designed to save three billion
euros by 2012. A series of measures are supposed to help
to rationalise pension spending and, at the same time, to
provide employment incentives by boosting individual
contribution equivalence. For example, the retirement
age for women and men has been raised to 65 years of
age, pension amounts have been adapted to GDP fluctua-
tions, early retirement incentives have been abolished,
the payment period for the minimum pension has been
lengthened and the contribution assessment base has
been increased, so that it no longer relates solely to the
final years’ income. Privileges for particular groups have
been abolished and the number of pension funds has
been reduced. In addition, a wage freeze has been im-
posed for 2010-2012, holiday bonuses have been reduced
and those receiving pensions of over 1,400 euros a
month will in future pay extra income tax of up to 10 per
cent. The pension reforms are generally in line with
those of other OECD states, putting more emphasis on
individual contribution equivalence, the living income
principle and raising the retirement age [35]. From these
reforms it may be expected that state pension benefits
will in future be lower and distributed much more un-
equally, although the 10 per cent tax on higher pensions
will compensate this effect to some extent.
The Greek health care system has also been hit by the
austerity measures. A reduction in state funded drugs and
the introduction of price and cost caps for hospitals are
intended to save at least 300 million euros. In contrast to
pensions, however, even before the crisis public spend-
ing on health care was below that of other EU member
states [37]. In addition, the state system introduced in
1983, which is supposed to provide universal access and
coverage with regard to health services, early on exhi-
bited serious inefficiencies, funding deficits, corruption
and discrimination [39]. To what extent the planned re-
forms will rectify these problems remains unclear.
In response to public budgetary difficulties the Greek
government reformed the pension and health care sys-
tems and stepped up its existing activating labour market
policy. The pension and health care reforms are designed
to boost the incentives with regard to normal employ-
ment. Both the pension reform, which has reinforced
individual contribution equivalence, and the employment
policy orientation more strongly emphasise incentives,
with not much of a role for redistribution and income
stabilisation. However, the social democratic government
shied away from explicit cuts in social benefits and im-
posed extra taxes on higher pensions, as well as one-off
payments on high profit rates and expensive real estate.
The social policy reforms fit in the paradigm of the so-
cial investment welfare state, which focuses less on re-
distribution and income guarantees and more on incen-

A. HEISE ET AL.507
tives towards labour market participation. However, the
Greek austerity programme and social policy cuts which
have affected unemployment benefit recipients and low
earners appear to be relatively moderate (see also Section
3, Table 1).
2.4. Iceland
In July 2009 the Left-Green government presented its
budget consolidation package, which amounts to 179
billion krona or 12 per cent of GDP, covering a period of
five years. This represents a significant moderation of the
programme of the preceding conservative government,
which planned cuts amounting to 16 per cent of GDP
[40]. In the period 2009 - 2013, 35 billion krona (around
1.17 billion euros) are to be saved annually, or 2.4 per
cent of GDP. The measures are all-embracing and in-
clude both spending cuts and tax increases, aimed at
achieving a positive primary balance in 2011 and posi-
tive net lending/borrowing in 2013 [41]. Although the
government takes the view that, given the continuing
recession, tax increases would do less damage to econo-
mic growth, spending cuts account for the largest share
of the consolidation package, at 64 percent [40].
On the revenue side, the Icelandic government has
adopted extensive reforms. In July 2009, it increased so-
cial insurance contributions from 5.34 per cent to seven
percent, raised VAT by half a percentage point, in-
creased a number of consumption taxes and the capital
levy on yields of over 250,000 krona from 10 per cent to
15 per cent, and introduced a temporary supplementary
tax on monthly incomes above 700,000 krona (around
4,600 euros) [42]. An increase in corporation tax is also
planned, which at present stands at only 18 per cent.
These tax policy measures are progressive since the go-
vernment, besides tax rises across the board, is making
those on higher incomes pay more.
On the expenditure side, too, the Left-Green govern-
ment has tried to avoid imposing a disproportionate bur-
den and cuts in living standards on those on low incomes.
Despite this approach, however, Iceland has not been
spared social cuts: particularly hard hit have been old age
and invalidity pensions, as well as health insurance and
child benefit. Cuts in these areas are intended to reduce
spending by around 10 billion krona before the end of
2010, although minimum payments are not affected but
rather those benefitting from universal benefits despite
higher incomes.
The current policy approach, which leaves low in-
comes untouched, represents a move away from previous
social policy reforms in Iceland. In the 1990s, Iceland
increased the proportion of individual user funding of
public services, as well as the link between individual
benefit payments and benefits. In the pension system,
besides the state and company pensions, an additional
private provision was introduced and tied to tax policy
incentives. The basic pension, which originally was in-
dependent of earnings, was adapted to individual pay-
ments. The current pension reform partly severs the link
between contributions and claims. Earnings in addition
to the basic state pension have been cut: in future, earn-
ings from employment and other pension funds that are
above 10,000 krona will be credited against the basic
pension. As income increases, therefore, benefits will be
cut back and from an income of four million krona a year
completely abolished. The Icelandic measures thereby
represent a deviation from the OECD trend, which em-
phasises the correlation between individual contributions
and claims.
The consolidation package also affects the national
health care system which, as in most Nordic states, is
largely organised by the state. Health care costs in Ice-
land are traditionally significantly higher than the EU
average, because the system is extensive. However, since
the 1990s there has been a move away from universal
and free services in this area. Access to free health care
has been restricted, fees introduced for all services and
co-payments for drugs increased [43]. The current health
care reforms are in line with these developments: co-
payments for medicines have been raised in order to
boost demand for generic drugs, with a view to reducing
costs by 10 per cent. Much like in the pension system,
basic care is maintained by means of free generic drugs.
However, this development could also lead to social di-
vision in the sense that only a few will be able to afford
some special drugs.
Besides pensions and health care costs child benefits
and parental benefits have also been affected by the aus-
terity measures. While child benefit is at present paid to
families with children below six years of age regardless
of income, from now on benefits will be at least partly
income-related, with the aim of saving one billion krona.
In addition, the government is cutting parental benefit
which has an income replacement rate of 80 per cent and
at present may amount to a maximum 400,000 krona a
month. Within the framework of the austerity package
the highest payment is being reduced to 350,000 krona a
month, so that in particular higher and medium incomes
are affected by this measure. Parents who earn less than
437,500 krona (around 2,900 euros) will continue to re-
ceive 80 per cent of their income. The government esti-
mates that this measure will save 70 million krona and
adversely affect 15 per cent of parents (30 per cent of
men and 10 per cent of women). Much the same as with
regard to pensions and health care these reforms repre-
sent a move away from universal provisions and put the
emphasis on means-tested payments.

A. HEISE ET AL. 508
The austerity package of Iceland’s Left-Green coali-
tion is predominantly progressive and aimed at prevent-
ing growing income inequality. The government has re-
duced benefits primarily for those on higher incomes,
while low earners remain untouched. Benefits are there-
fore reduced as income increases and pensions have been
completely abolished for those with incomes above four
million krona a year [41]. This means that, although
there has been a move away from non-income related
benefits, minimum benefits and the living standards of
those on low incomes are ensured.
2.5. Romania
The Romanian government started to implement its strict
austerity plan in 2009. The budget envisaged an increase
in social contributions of 3.3 per cent, as well as cuts in
public sector wages and jobs. On the approval of the in-
ternational loan in May 2009 Romania adopted the first
consolidation programme. Since one year later it was
evident that, despite the reforms, the agreed deficit target
would not be reached the government passed another
austerity package. This provides for deep cuts in the
Romanian welfare state, with sweeping cuts of 15 per
cent in all social transfers and of 25 per cent in public
sector wages in order to bring about a structurally ba-
lanced budget by 2014.
The government’s approach is based mainly on cuts;
with an increase in tax revenues not envisaged for the
time being (see also Table 1). In order to reach its
budget policy targets the Romanian government planned,
in the first rounds of cuts, the introduction of a law on
standard pensions, as well as a uniform payment sys- tem.
While the latter relies on the standardisation and effi-
ciency of public sector pay, the former concerns com-
prehensive pension reform. Pension reform is to be im-
plemented in 2011 and is intended to reduce the budget
deficit by up to four per cent over the long term [44].
Pension reform encompasses a number of measures
aimed at reducing costs over the long term. To this end
the retirement age is being raised to 65 and standardised
for men and women; the minimum contribution period is
being increased; and the assessment base is being ex-
tended among others to freelancers and the public sector.
In addition, pensions are being tied to inflation, which
over the long term will yield considerable savings be-
cause adjustment will increasingly be oriented towards
consumer prices and less to increases in income. In fu-
ture, pension levels will be calculated also on the basis of
total contributions and no longer on earnings in the final
years of insurance. These measures are supposed to es-
tablish an incentive to remain in employment longer and
more constantly. However, they will also lead to lower
pensions, especially for those with irregular contribution
records. Besides re-orientating the state pension system
the Romanian government is set on bringing the private
pension system to the fore. Since 2007, people have in-
creasingly been turning to private and capital funded
provisions.
On 6 May 2010 Finance Minister Basescu announced
the consolidation measures, justifying them by saying
that the payment of the next IMF loan depended on them.
While it is true that the IMF demanded further budgetary
consolidation to the value of 2.3 per cent of GDP in 2010
there were no specific guidelines concerning the shape
restructuring was supposed to take. Within the frame-
work of the second austerity package, however, drastic
cuts in the social budget and in the public sector are to
the fore. The government resolved on wage cuts of 25
per cent in the public sector and cuts in all social trans-
fers of 15 per cent. While sweeping reductions in pen-
sions were halted by the Constitutional Court, the other
areas, such as unemployment benefits and parental bene-
fits, are affected by these deep cuts. However, the mea-
sures do not include minimum payments and thus do not
protect those most in need.
While the Romanian consolidation strategy is based on
massive economies virtually no tax increases are planned.
Although the government raised VAT from 19 per cent
to 24 per cent in July 2010 it was an emergency measure
after the planned pension cuts of 15 per cent had been
declared unconstitutional. Apart from that no additional
taxes are being levied and the government does not en-
visage redistribution by means of property and inheri-
tance taxes or the taxation of gains from foreign ex-
change and speculation. The government’s strict auste-
rity plan thus affects, besides the public sector, in par-
ticular pensioners, families and social benefit recipients.
However, there is no differentiation between income
groups; the across-the-board cuts will leave those on low
incomes comparatively worse off.
The Romanian government’s reforms represent a re-
gressive policy approach in which high and stable in-
comes are spared. While the consolidation package af-
fects all benefit recipients high-income and wealthy
strata are exempted from collective responsibility for
correcting the budget deficit. Naturally, they are affected
by the VAT increase, but apart from that they do not
really have to share the costs of the government’s mea-
sures. Socially vulnerable groups therefore not just rela-
tively but also nominally have to bear more of the burden
of budget restructuring. The Romanian government’s
austerity plan can therefore be considered a renunciation
by the state of redistributive and social policy goals.
2.6. United Kingdom
The guiding principles of the Conservative-Liberal coali-

A. HEISE ET AL.509
tion’s austerity programme are personal responsibility
and freedom. The five-year plan is aimed at eliminating
the structural deficit by 2014 - 2015 and reducing net
bor- rowing from 11.4 per cent to 1.1 per cent in the fis-
cal year 2015 - 2016. Besides introducing a banking tax
and raising VAT and capital taxation, the government
plans to reduce the debt primarily through cuts: by 2015,
77 per cent of the consolidation programme is to be achi-
eved through spending cuts [45]. The budgets of almost
every ministry are being cut, half a million public sector
jobs are being eliminated, British people will have to
work longer and social spending, as well as welfare fraud
and misuse are to be reduced.
The aim of the British welfare reforms is to heighten
the responsibility of the individual and to reinforce the
incentives to take up regular employment (subject to
social insurance contributions, known as national in-
surance) by way of sanctions and benefit reductions, so
that work always pays [46]. The government measures
are comprehensive and affect pensioners, single parents,
welfare benefit recipients and families. A switch from
the retail price index to the consumer price index is to be
introduced for the calculation of all benefits. The extent
to which benefit recipients will lose out as a result of this
switch is disputed. Some studies show, however, that it
corresponds to a reduction in benefits and will provide
the state with savings of around 5.8 billion pounds in
2014 - 2015 [47].
Besides the reorientation of pension indexation the
Conservative-Liberal coalition decided to raise the re-
tirement age again and to eliminate tax relief on pensions
over 130,000 pounds a year. While the limitation of tax
relief affects only higher pensions the change in indexa-
tion, which could be accompanied by a lowering of pen-
sions in general, affects in particular the recipients of
state pensions. A characteristic feature of the British
pension system is the importance of private and company
pensions, since the flat-rate state pension is not enough
to cover basic needs [48]. Pensioners who have no other
income are therefore dependent on other benefits. How-
ever, within the framework of the consolidation strategy
complementary benefits, such as housing benefit and
child benefit, are being cut.
Housing benefit, which currently stands at 50 per cent
of the rent, is being reduced by the coalition to 30 per
cent. That means that recipients of this benefit can only
choose the cheapest housing in their area. In addition, a
general maximum payment is being introduced inde-
pendent of local rents, with a view to saving 4.2 billion
pounds over the next five years. The government also
plans to restructure child benefit, linking benefits more
closely to need. While child benefit, which is not in-
come-related, is being cut, the government is boosting
child credits, which are means-tested. This means that
over the next few years increases in child benefit will be
postponed and abolished for families on higher incomes
from 2013. This is in line with the key values of the
British welfare state, which traditionally emphasises
benefits for the poorest and for children. In addition, sin-
gle parents with children over five years of age can no
longer obtain income support but in future will have to
register as unemployed: this measure is intended to in-
crease employment incentives for this group.
Besides the tax increases and welfare reforms the
British government also plans to raise the personal tax
allowance for all by 1,000 pounds. While the cuts affect
benefit recipients most of all, those on higher incomes
benefit most from this measure. The Institute for Finan-
cial Studies [47] therefore describes the British austerity
programme as regressive, the biggest losers from the
Conservative-Liberal reforms being benefit recipients. In
contrast, those without children and on higher incomes
are the biggest winners since they are not affected by the
reforms and benefit from the raising of the tax allowance.
Although the austerity package is certainly comprehen-
sive and means severe cuts for some groups the reforms
do not represent a complete reorientation of the British
welfare system, but in many respects rather the consoli-
dation of the existing model.
3. A Comparison of the Austerity
Programmes
Table 1 summarises the findings of country studies and
presents the sums involved in the various consolidation
programmes in relation to GDP and in billions of the
national currency. While Romania adopted a package
worth almost 14 per cent of GDP, the German austerity
programme amounts to a mere 3.3 per cent of GDP. In
order to develop a solid basis for inter-state comparison
it makes sense to compare the various austerity plans in
relation to annual GDP. Romania with an annual con-
solidation effect of seven per cent of GDP is at the top,
followed by Greece with five per cent. In contrast, the
package of the German conservative-liberal coalition, at
0.8 per cent, lies at the bottom end, and the Spanish and
Icelandic programmes are also relatively low. The mag-
nitudes of the consolidation programmes therefore vary
considerably.
The differences can be traced back to, among things,
the various effects of the crisis in European countries.
While Germany’s economic situation and the national
debt appear to be recovering swiftly, other countries –
such as Romania and Greece have taken up international
loans linked to strict budget plans and extensive struc-
tural reforms. In these states in particular the austerity

A. HEISE ET AL. 510
programmes are very harsh. However, there are also dif-
ferences: Iceland also stood on the brink of state bank-
ruptcy when the nationalisation of the three largest banks
greatly exceeded the national finances. Although the
Icelandic government applied for billions in international
loans annual consolidation is quite low, at 2.4 per cent.
The approach of Prime Minister Sigurðardóttir’s gov-
ernment which envisages cuts worth 12 per cent of GDP
is a long-term one, over a five year period, and thus low
expressed as an annual average.
Table 1 presents, besides the size of the consolidation
package, the relationship between revenue increases and
spending cuts as a percentage of the respective austerity
package. According to our calculations all states focus
predominantly on cuts in spending rather than on in-
creasing or introducing taxes or social contributions.
This can be explained by the fact that the economic lit-
erature shows that consolidation is more effective and
more sustained by means of spending cuts than consoli-
dation through tax increases, as highlighted by the Euro-
pean Commission [49]. However, given the extent of
government debts one-sided consolidation is consi- dered
insufficient.
Although all states are relying largely on cuts consid-
erable differences with regard to consolidation appro-
aches can be observed. While almost half the Greek aus-
terity programme is being achieved through tax revenues
their proportion in the Romanian package is only one-
sixth. These differences can be traced back, on the one
hand, to variations in national circumstances and so to
the existing scope for cuts and tax increases. On the other
hand, there are also governments that subscribe to dif-
ferent values and have different national traditions,
which certainly favour different consolidation appro-
aches.
The crisis and the dire state of the public finances have
served in all countries both to trigger and to justify cuts
in the welfare state. In Germany, for example, about one-
third of all consolidation measures involve social secu-
rity reforms, while in Britain they make up one-fifth. In
Spain, in contrast, the cuts represent only around five per
cent and in Iceland about 15 per cent. In other words,
while some countries have focused on welfare cuts, in
others they have been far less significant. In addition,
findings show that an automatic uncoordinated European
convergence is improbable: even countries such as Brit-
ain and Romania plan further reductions although social
spending as a proportion of GDP is already below the
EU average (see Section 1). The data show, therefore,
that also in future there is no question of an automatic
adjustment to a social security standard, but rather that
European coordination is necessary.
Not only the proportion of welfare cuts but also the
ways in which they are made differ considerably. In ge-
neral, either the pension or the health care system is af-
fected in all countries, in many cases both. In these areas
certain tendencies can be observed: in pensions, besides
increases in the retirement age, calculation bases are be-
ing extended and individual contribution equivalence is
being strengthened. While most governments plan struc-
tural reforms in pension schemes Romania originally
decided to implement across-the-board cuts of 15 per
cent and 10 per cent, respectively. Since these were
struck down by the Constitutional Court similar effects
are to be achieved by structural reforms. It is all the more
astonishing that the Icelandic government passed a pen-
sion reform which bucks this trend. Pensions in Iceland
are to be cut back with increasing incomes and individual
equivalence reduced.
Besides health care systems other social spending has
been affected in all countries. In health care, cuts have
been made through price and cost caps, increasing resort
to generic drugs, less inpatient treatment and individual
co-payments. While the scope of these measures differs
by country a move away from state benefits and towards
individual co-payments and risk provision can be ob-
served. Besides cuts in health care, benefits and services
in other areas of social security have been scaled back. In
Romania all benefits have been cut by 15 per cent; in
Germany parental benefits for social security recipients
have been abolished; in Britain housing benefit has been
cut; in Spain baby cheques have been abolished.
While most countries are making savings at the ex-
pense of those on low incomes, only a few governments
are pursuing a strategy which also involves higher ear-
ners in debt consolidation. For example, Britain and
Germany are making cuts which affect the neediest and
social benefit recipients with the aim of reducing the
wage gap and boosting employment incentives. This
represents a regressive policy, with in effect redistri-
bution from low to high earners. However, also those
programmes which plan mainly across-the-board welfare
cuts such as those of Spain and Romania can be catego-
rised as regressive. In contrast, Iceland has passed wel-
fare cuts which predominantly affect middle and higher
incomes. In addition, only a few countries such as Ice-
land and Greece plan to involve higher earners through
taxation of property or wealth or through taxes on pro-
fitable companies. Although some other countries, such
as Britain, have introduced a banking levy they have at
the same time reduced corporate taxes, thereby diluting
the redistributive component.
Basically, the international economic crisis and the re-
sulting public debt situation have served in all six coun-
tries as both trigger and justification of social spending
cuts. Although their consolidation strategies share a

A. HEISE ET AL.511
number of similarities there are also considerable diffe-
rences: on the one hand, there appear to be few countries
whose approach includes a redistributive component and
thus represents a progressive approach; on the other hand,
most consolidation programmes – such as those of Brit-
ain and Germany are in effect targeting those on lower
incomes.
4. Conclusions
Europe said goodbye long ago to defining social policy
within the framework of a particular concept of society.
Welfare states have given way to historically differing
European social models in which social policy must fol-
low economic and fiscal priorities. This implies both a
declining solidarity component in social security and a
financial commitment which declines for every succes-
sive benefit claim in pursuit of alleged incentive and al-
location effects. This general assessment applies not only
to the developed EU states of “Old Europe”, but also to
the convergence candidates in the south and east of the
EU, which have deserted the former development path
with its higher correlation between economic develop-
ment and social provisions.
The hope that the world financial crisis, with its social
upheavals, could lead to a rethink and that the hotly con-
tested—European Social Model could serve as the basis
for an alternative approach to European integration
seems vain, given the budgetary situations in almost
every EU country. Almost everywhere, even in the wake
of the global financial crisis, the orthodox truths of fi-
nance policy balanced budget within the framework of
the Stability and Growth Pact still apply or are formu-
lated even more starkly. The belief that budget consoli-
dation is more likely to succeed on the basis of spending
cuts than revenue increases also seems unshakable6.
In all the cases investigated – perhaps with the excep-
tion of Iceland regressive spending cuts predominate,
regardless of the composition of the government. Reve-
nue increases by means of progressive tax rate rises at
best play a subordinate role: occasionally, regressive
VAT increases are partly offset by corporate tax in-
creases, thereby heightening the regression. Even coun-
tries such as Ireland, which have to apply to the Euro-
pean aid programme, appear to have been able to avoid
having to raise their competition-distorting low corporate
taxes.
Since almost everywhere in the EU regressive auster-
ity measures of unprecedented magnitude have been im-
plemented the consolidation effects are at the very least
unclear: the still dominant fiscal orthodoxy is built on the
notion of the crowding in of private investment as gov-
ernment spending falls. Then the growth path can remain
intact or even with corresponding expectation effects in-
crease and consolidation succeed alongside a trimmed
social state [51]. The alternative (Keynesian) view regards
as naïve the hope of a compensating private crowding in
the event of falling consumer spending power and fears
negative effects with regard to growth which depending
on the magnitude of the multiplier and accelerator effects
will at the very least hinder consolidation, if not make it
impossible [51]. The more widespread the cuts the less
hope there is that deficient domestic demand can be com-
pensated by external (export) demand. There is therefore
a great deal of evidence of a stagnant growth scenario in
the EU in which consolidation efforts will have little
success and thus the pressure towards regressive mea-
sures will even increase [1].
Considering, finally, that the EU and the European
Monetary Union are characterised by increasing regional
imbalances which cannot be sustained over the long term
(see, for example, [52]) the danger cannot be ignored that
the pessimistic convergence prognosis will become real-
ity: if regulation at EU level does not prevent it cuts in
social services as both a consolidation and a competi-
tiveness strategy could become dominant. Given the di-
verse social models in the EU member states a harmoni-
sation of social policy as a counter-strategy is not only
somewhat unconvincing but also impractical. A concept
which maintained national autonomy over social policy,
while preventing both absolute and relative forms of
dumping, however, could be accepted: this is the so-
called corridor model (see [10 and 53]). On this basis the
connection between economic development and social
security (see Figure 2(a)) which prevailed in the 1990s
could be institutionally safeguarded by requiring each
member state to guarantee a social spending rate in ac-
cordance with its state of development within a defined
corridor. Economic advancement of the kind achieved by,
for example, Ireland would be linked to a corresponding
expansion of the welfare state the priorities would re-
main a national matter, but relative dumping would be
halted. And absolute dumping in crisis periods would be
prevented unless the Community, on the basis of shared
responsibility, redefined the corridor.
6Which is peculiar as empirical evidence produced by a recent study o
f
the IMF clearly shows no clear correlation between the type of con-
solidation and the success of large fiscal adjustments: large fiscal ad-
j
ustments can be almost entirely based on income increasing measures
as in Greece between 1995 and 2001 or can be based almost entirely on
expenditure reductions as in Belgium between 1998 and 2009. Or they
can be based on a mixture of revenue increase and expenditure cuts as
in Ireland (1989 – 2001), Sweden (1987 – 1994) or Denmark (1986
–
1991); [50].
After the billions spent on rescue packages for banks
and whole countries such a European Social Model could
be considered a necessary social shield which would
restrict national autonomy no more than the single cur-
rency and the European Stability and Growth Pact have

A. HEISE ET AL. 512
long done. The social protests all over Europe serve as a
reminder that an EU without social foundations could, in
the long term, be built on sand.
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