Non-technical summary of ESM Working Paper 67: The distributional implications of the euro area crisis: Evidence from macroeconomic adjustment in Greece and Portugal

The paper explores distributional effects of economic crises and the resulting economic adjustments on household income. It uses the euro area (EA) sovereign debt crisis as a case study to analyse changes in the income distribution during the periods of economic adjustment triggered by economic crises. It draws lessons from the experiences of both Greece and Portugal. 

Detailed data from the European Union Statistics on Income and Living Conditions (EU-SILC), help us look beyond conventional aggregate inequality measures. The fine-grained microdata allow us to examine how different income sources for various social groups evolved during the crisis. Thanks to this high-quality dataset, we can differentiate between groups based on age, gender, education, and income level. With multiple empirical methods, we examine the distributional impact of the crisis and the economic adjustments and provide a nuanced understanding of these effects. 

The paper also investigates the roles of social spending and redistribution. In both Portugal and Greece, we document a temporary decline in disposable household income due to the crisis and the adjustment programs. The observed decline is larger in magnitude in Greece than in Portugal. After an initial drop in the early adjustment period, income gaps compared to similar countries stabilise. This points to distinctive trajectories in the early adjustment period and in subsequent years. Notably, the gap starts to diminish in 2016 in Greece and in 2015 in Portugal, indicating a gradual convergence and a potential shift in income dynamics in later stages of the crisis.

Our analysis confirms that different income groups depend on different income types and that such variation results in different vulnerabilities in times of crisis. For the most vulnerable groups, our analysis documents the crucial role played by pensions and transfer systems during the economic adjustments in the Eurozone crisis. It points to the need to put in place effective and sustainable safety nets in stable times, as ad hoc tweaks during economic crises can negatively impact the well-being of the lowest income groups. We also confirm that targeted reforms can alleviate pressures on the poor.