Iceland’s Strategy of Redistribution

Stefán Ólafsson here explains the characteristics of the bubble economy in Iceland, the magnitude of the financial collapse of 2008, and its consequences. The crisis was dramatic and deep but bottomed out early (2010). Since then good growth has prevailed. The governments of the crisis period applied various policy reactions that worked quite well, and included both macroeconomic stimulus measures and social protective efforts. Ólafsson describes what he terms Iceland’s redistribution strategy, which aimed to protect the more vulnerable households. These included increased transfers aimed at the lower income groups, job creation, activation and rehabilitation, debt relief, and changed taxation policy. Altogether these efforts succeeded in softening the worst crisis consequences and contributed to an equalization of income distribution. Financial hardship topped in 2010 and has come down since then, gradually and persistently. By 2017 the highest employment and income levels of the pre-crisis years had been regained.

The Political Economy of Crisis Responses

Chapter 3, by Agnar Freyr Helgason, offers a review of political economy theories of crises responses. He starts by explaining the broad perspectives of the Keynesian and Austrian schools and then probes more deeply into recent work on government policy responses to economic crises, with a focus on the economic welfare of populations or households. The role of the welfare state and its importance during periods of crisis is considered, as well as the role of government policy more broadly, either that directed at the economy generally or at specific population groups. Key policy debates are covered, for example austerity versus stimulus, as well as mixed approaches.

Denmark

Jørgen Goul Andersen shows that Denmark entered the crisis with a strong economy, but also with a housing and credit bubble beginning to burst. This contributed to constraining private consumption for a long period. When the government switched in May 2010 to zero growth in public consumption and to significant cuts in social protection, this left exports as the only possible driver of growth. It took ten years for private consumption per capita to catch up with 2007 levels, while the number of public employees declined by 5 per cent from 2010 to 2016. Welfare and tax reforms since 2008 have contributed to an erosion of social citizenship, accompanied by strong rhetoric questioning the deservingness of people in a vulnerable position. Whereas the weakest groups are at risk of being excluded from social protection, the long-term decline in welfare services may ‘crowd in’ private welfare for the upper middle classes.

UK

This chapter shows how the UK tackled the crisis. The UK was affected early and implemented a post-crisis stimulus package quickly. But from 2010, with a new government, austerity was the watchword, with cuts in social security expenditures prioritized over tax increases. Spending on education and health was shielded, as were old-age pensioners’ benefits, but those of families with children were reduced. From 2015 a Conservative majority government continued on a similar path, though also implementing tax cuts and a higher minimum wage. Under the new Prime Minister, the aim of balancing the public finances was postponed. Initially the pain of the crisis was shared more broadly. But financial hardship increased after 2012, especially for lone parents and disabled people, and benefit cuts affected women in particular. Whilst employment has increased, recovery has been slow. It seems unlikely positive welfare state developments can be expected in the near future.

Ireland

Mary Daly examines the severe crisis in Ireland in this chapter. The crisis was preceded by an extended period of rapid economic growth, yet the national financial situation had been deteriorating prior to the recession. When it hit, a strong austerity approach was adopted, dictated principally by the terms of the financial bailout Ireland secured in 2010. In return for this funding, Ireland undertook a very detailed programme of reforms in which social policy and changed taxation were prioritized. These reforms featured large reductions in social expenditure and significant cuts to all benefits (except old-age pensions) and services, increasing poverty and hardship. Housing-related indebtedness increased quite widely as well. Reforms also institutionalized a much stronger activation approach. Apart from this, there was little or no major restructuring of the Irish welfare state, hence this proved quite resilient in a period that saw the overshadowing if not demise of social partnership.

Spain

Ana M. Guillén and Sergio González Begega address the crisis management strategies of Spain’s long-lasting recession and its associated protracted period of austerity. The Spanish economy enjoyed two decades of very intense expansion prior to the onset of the recession in 2008. That expansion was, nonetheless, unsustainable. Hence Spain went into a profound crisis with harsh social and employment consequences. Youth unemployment became excessive. The analysis of the overall policy responses to the recession and the reforms of the social protection system indicate a trajectory aimed unequivocally at regaining fiscal balance and appeasing the markets, while tending to growing social need remained a secondary objective. The outcome has been a substantive increase in financial hardship and socio-economic insecurity, borne principally by the lowest income quintile and by some active age population groups, such as single parents, immigrants, the unemployed, and, indirectly, children.

Norway

In this chapter, Jon Erik Dølvik and Johannes Oldervoll review how recurrent crises since the 1980s have taught Norwegian policymakers to stabilize a crisis-prone petroleum economy through comprehensive macroeconomic policy coordination. While regaining monetary policy autonomy and establishing fiscal policy rules that enable countercyclical use of petroleum revenues, Norway has drawn on reinvigorated wage coordination and welfare state expansion to cushion joblessness and financial hardship in turbulent times. This coordination from the top has been successful in tackling economic volatility but has failed to stem widening wage and wealth gaps during recent years’ affluence and rise in cross-border labour mobility and immigration. Although seemingly robust in the face of periodic shocks, and helping Norway to avert increased financial hardship during the Great Recession, the Norwegian policy regime appears to have lost some of its capacity to balance equity and efficiency.

Finland

Olli Kangas analyses crisis management strategies in two economic crises in Finland: the very deep crisis of the 1990s and the post-2008 recession. Since 2008, gross domestic product (GDP) growth has been weak, unemployment has increased, and domestic demand is being held back by low-income growth. Due to the EU embargo against Russia, Finnish exports to the East ceased, reinforcing the stagnation. For nine years, the national budget and those of municipalities have been running a deficit. A series of austerity packages have made the Finnish welfare state leaner and meaner. Surprisingly, despite cuts in welfare provisions and the high level of unemployment, poverty and inequality of disposable incomes have been declining during the 2010s, due to the protective capacity of the Finnish welfare state. Financial hardship has not increased. However, the prolonged recession may have some long-standing negative consequences that may only become visible in the coming decades.

Greece

Manos Matsaganis provides an account of the most severe crisis of the Great Recession: that of Greece. He explains the conditions at the start of the crisis and how the situation developed. Greece was the first Euro area member to request a bailout, which was granted in return for massive fiscal consolidation and structural reforms. Matsaganis explains the bailout programme and its conditions, progress, and consequences, particularly the adverse effects of the austerity measures on living standards and poverty. The Greek welfare state was weak before the crisis hit and lacked a minimum income protection scheme. Thus it was incapable of providing shelter against the massive crisis impact, as reflected in the very large increase of financial hardship from 2007 to 2014 in most socio-economic groups. Matsaganis lastly reflects on the politics of welfare and how the crisis has affected the Greek welfare state to date.

Conclusions

In the concluding chapter Stefán Ólafsson pulls the threads of this book together and discusses the lessons learned from the Great Recession along five dimensions: varieties of crisis experiences, how the burdens were shared, how the welfare state made a difference, how politics mattered, and lastly crises and the political economy of welfare futures. He summarizes the relationship between economic contraction, increased unemployment, and increased financial hardship in European countries, and he reviews how differing outcomes relate to welfare state structures, different policies, and other conditions. The chapter ends with a discussion of the future of welfare regimes in a globalized crisis-prone environment.