The distributional implications of the euro area crisis : evidence from macroeconomic adjustment in Greece and Portugal

We study the social and distributional implications of the euro area (EA) sovereign debt crisis in countries that received external financial assistance for macroeconomic adjustments. Combining granular data from about one million survey interviews with households across euro area states carried out between 2004 and 2019, we show how disposable income and its components evolved across different social groups before, during and after the EA crisis and the associated adjustment programmes. Using difference-in-difference and triple-difference methods, we compare distributional outcomes in countries with large financial assistance programmes (Greece and Portugal) to euro area countries with similar pre-crisis trajectories and macroeconomic fundamentals. The results show that incomes for most social groups in these countries declined during the crisis, but income losses were not uniform and differed across groups in terms of gender, age, and income level. Overall, public transfers mitigated increases in inequality of market incomes, yet both the timing and the magnitude of changes in market income and public transfers varied across income groups. While reforms of public transfer policies in the early macroeconomic adjustment period placed a greater burden on poorer income groups than on richer ones, reforms in later stages reduced inequality by supporting poorer households, especially in the case of Greece.