The austerity implemented in the eurozone since the GFC has been particularly controversial. Many eurozone countries had escalating public debt in the aftermath of the crisis, often accompanied by rising unemployment and severe falls in GDP. The Greek recession in particular was arguably the worst recession experienced by an advanced economy since the Second World War.

In much of this book so far, the focus has been on the UK when discussing austerity. A crucial difference between the UK and eurozone countries is that the UK has its own currency and hence can conduct an independent monetary policy. Austerity in such a non-eurozone country may work, at least in part, through influencing the exchange rate and interest rates. However, in the eurozone, with its common currency, these mechanisms were not available to the countries concerned. (A common currency means that interest rates on bonds with the same maturity and default risks must be the same throughout the common currency area provided there is no chance of any country exiting the currency area.)

A qualification does need to be made to the above statement: austerity in some eurozone countries may affect interest rates on sovereign debt which include a default premium, by affecting the perceived probability of a country defaulting on its debt, so this may be one way in which austerity may work for such a country. (Of course, such austerity may not be successful. Critics of austerity might argue that austerity may increase the probability of a country defaulting, in which case this might be a mechanism whereby austerity makes things even worse.)

In the rest of this chapter, we will discuss the experience of a number of eurozone countries. Our intention will not be so much to present a narrative of what happened – there are plenty of such accounts available already – but to try to make sense of what happened to the eurozone countries in the light of the theories outlined in this book.

Greece was the country worst affected by the eurozone crisis. In 2001, Greece was allowed to join the eurozone in spite of it being fairly clear that it did not satisfy the Maastricht deficit/debt requirements for membership. These stipulated a public sector deficit of no more than 3 per cent of GDP and a ratio of public debt to GDP of under 60 per cent.