A causal loop analysis of the austerity policy adopted to address the Euro crisis - effects and side effects

Abstract

International audienceThe Euro crisis, consisting of the European banking crisis and the European sovereign debt crisis, has raised a huge amount of uncertainty in the Euro zone and has beset the entire world economic system. To address this concern, the austerity policy, emphasising on a surge in individual and corporate taxations and a decline in government spending, has been adopted by the highly leveraged countries in the Euro zone. This paper aims at analysing the dynamics of the austerity policy and demonstrating its effects and side effects on the EU economy by employing the causal loop diagrams to model parameters involved in it. We conclude that this policy has triggered three economic side effects of rising unemployment rate, economic recession and eroded capital of the EU banks as well as some political side effects, leading to the emergence of the debtor's dilemma and the political crisis in the Euro zone

An analysis of the social distancing effects on global economy and international finance using causal loop diagrams

“…And the reinforcing loop of R5 goes on and shapes the debt shock to the government. The nature of R5 is similar to the structure of the European sovereign debt crisis which is investigated by some researchers such as Moradi and Paulet [39] and the economic response of advanced economies is very much alike: quantitative easing at a large scale.…”

Determinants of the Capital Structure of European Firms: The Moderating Role of Efsf/Esm Financial Assistance Programs

“…Previous researches have also faced this conflicting result and two explanations have been provided. Either the firms' profitability was so high that the full exploitation of debt-and non-debt tax shields was justified or, due to high tax rates, the firms had found new ways to decrease their tax burden (Moradi & Paulet, 2019;Moradi & Paulet, 2015). Given that during an EFSF/ESM program, a firm's profitability was not expected to be significantly high, it was safe enough to suppose that the firm increased its depreciations and amortization, as a means of reacting to the increase in taxes.…”

Proactive Management of Regulatory Policy Ripple Effects via a Computational Hierarchical Change Management Structure

“…Several research studies have presented evidence of using causal loops as an analysis tool for banking issues, crises or complexities around the world (Coglianese 2012;Morecroft 2015;Richardson 1986;Rosenberg et al 2014). The recent study by Moradi and Paulet (2014) sought to provide analysis of the austerity policy as well as a demonstration of its impact and side effects on the economy of the European Union (EU) through the application of causal loop diagrams to the policy framework parameters. Moradi and Paulet (2014) have employed causal loop diagrams (CLDs) to capture the mechanisms of the European banking crisis as well as the European sovereign debt crisis.…”

“…The recent study by Moradi and Paulet (2014) sought to provide analysis of the austerity policy as well as a demonstration of its impact and side effects on the economy of the European Union (EU) through the application of causal loop diagrams to the policy framework parameters. Moradi and Paulet (2014) have employed causal loop diagrams (CLDs) to capture the mechanisms of the European banking crisis as well as the European sovereign debt crisis. These attempts have aimed at providing an understanding of the banking system that is dynamically complex.…”

“…In their findings, they noted that CLDs have attempted to predict the issues of differences arising between the European banking crisis and the overall banking crisis. Regarding the side effects of the policy, Moradi and Paulet (2014) pointed out two categories of economic consequences: where CLDs are useful in modeling of the causal structure of the real system. One is an increase in the unemployment rate, a slump in the economy and a decline of asset values; the other is the ongoing political issues.…”