The Role of the "PIIGS" in the European Sovereign Debt Crisis

Michael Teague  |

In American press-coverage of the ongoing European economic crisis, Greece is the most commonly cited example of a debt-ridden economy that is on its way to defaulting out of the E.U., while a combination of austerity measures, uncertainty, mass unemployment, and poverty push the country to ever-greater levels of unrest and socio-political polarization. But Europe’s sovereign debt crisis began in Ireland, and has manifested itself virulently in Spain, Portugal, and Italy as well as Greece. A quick run-through of how it happened in each of these troubled countries gives a decent synopsis of the rather complex layering of factors that have contributed to the ongoing scenario.

Before going through the list, however, it is helpful to recall that the formalization of the European Union and the establishment of a single currency (the Euro) began with the signing of the Maastricht Treaty in the Netherlands on the 10th of December, 1991. Among other things, this treaty stipulated four criteria for the economic status of member countries:

1. Member countries had to maintain inflation rates at a level no higher than 1.5 percentage points above the mean figure of the three member states with the lowest rates of inflation.

2. With very specific and temporary exceptions, the annual government deficit/GDP ratio could not exceed 3 percent at the end of the preceding fiscal year. Additionally, the gross government debt/GDP ratio could not exceed 60 percent at the end of the preceding fiscal year.

3. Applicants had to join the European Monetary System’s exchange-rate mechanism for two consecutive years without devaluing their currency during that time.

4. The long-term interest rate of an applicant could not be more than 2 percent higher than the mean of the three member states with the lowest inflation rates.

Even though the treaty has been amended several times since it was first ratified in 1991, it is an instructive point of departure/comparison. With the present-day reality of the eurozone economy having strayed so far into new frontiers of potential disaster, the above criteria seem like a quaint anachronism.

-Ireland was really the first E.U. country to buckle under the weight of its own economic boom that began in the 1990s and stretched into the early-mid 2000s. This is because the Irish “miracle” was fueled by unsustainable amounts of personal debt and overinflated housing prices. This became particularly consequential when the housing bubble burst in 2007, sending unemployment up by 10 percentage points by 2010 as the country’s budget surplus was eradicated and the deficit ballooned to 32 percent of GDP during the same period. The subsequent banking losses caused depositors and bond-holders to cash in en masse, necessitating loans from the EU and IMF, which could only be obtained if the country promised to get its finances under control, which of course necessitated austerity measures.

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-Greece, in the early 2000s, was one of Europe’s fastest-growing economies. This was made possible, in large part, because of the country’s structural deficit (in other words, deficit that exists even when the economy is operating at full potential). Structural deficit results from profligate government spending, which in turn necessitates the assumption of more and more debt. Greece, as the birthplace of Western civilization, has an economy that is particularly dependent on tourism, and as the global financial crisis unfolded the country was hit harder than most of its European colleagues. Bailouts from the so-called Troika (the European Commission, the European Central Bank, and the IMF), were contingent upon extremely harsh austerity measures, which had the effect of causing massive social unrest and polarizing the country’s political landscape, making it very difficult for any government to take decisive measures to handle the fallout. Such a level of austerity also has the consequence of prolonging recession, a dangerous situation with about half of the country’s youth currently unemployed.

-Portugal: The mismanagement of funds, the creation of unstable debt, and the irresponsible inflation of the public sector (namely through redundancy in public servants and inflated salaries of top bureaucrats) left Portugal extremely vulnerable to the ripple effects of the global financial crisis. Here again, efforts to reign in the state’s finances required measures that sent the economy into recession, with unemployment lunging up to 15 percent. In 2012, the country’s debt was estimated at 124 percent of GDP. The country has made significant progress in some areas, for example by regaining partial access to markets in October of last year; full access is a condition for the country to receive more aid from the European Central Bank. But the recession is expected to last through 2013 at least, with GDP growth in the negative by 3 percent in 2012.

-Spain is perhaps the European country where a housing bubble played the decisive role in the crisis.  Interestingly, prior to the bubble popping, the country had relatively little debt because its inflation was somewhat offset by the equally inflated tax rates by which it was accompanied. All the same, the banks had to be bailed out when the bubble burst, and along with the economic downturn, the country’s debts increased significantly, leading to a downgrade of its credit rating. The usual austerity measures have been required as a precondition for financial assistance from the European banking system. The resulting social unrest in the country has taken the form of massive, relatively peaceful popular protests in 2011 and 2012 (very similar to the “Occupy Wall St.” movement, and very much unlike Greece, where extreme right and left-wing groups have burned government buildings and battled with police). These were followed last year by unprecedented million-plus marches in favor of separatism for the country’s more economically productive Catalan region. This is all very significant as Spain is one of Europe’s largest economies, making any instability or shake-up of dire consequence for the existence of the European Union as a whole.

-Italy. As a result of the financial crisis, Italy’s public debt ballooned to 116 percent of GDP in 2010, the second largest ratio behind that of Greece. In all, the Italian economy shrank by nearly 7 percent between 2007 and 2011, a time during which it has known continuous recession and high levels of unemployment. Like Spain, the country is one of Europe’s largest economies, but the relatively successful measures implemented in order to lower the country’s public debts have not done anything for the country’s forecasted growth prospects. This has all taken place against the backdrop of the country’s famously unstable parliamentary system and extremely polarized political scene which, like Greece, makes it very difficult for politicians and government functionaries to take decisive measures to deal with the effects of the crisis. Unlike the other countries, however, Italy has relatively high levels of private savings and correspondingly low levels of private debt, which could mean a more stable, if more drawn-out, process of recovery.

These countries, often known by the acronym “PIIGS”, are not the only European countries to have experienced significant economic difficulties as a result of the global financial crisis. However, a complex network of interweaving factors has made them the hardest hit. These factors include very consequential historical and socio-political considerations that are beyond the scope of the present article (though no less important for that fact), but have as much if not more to do with the rise of global finance (and the lack of a corresponding regulatory structure with a global outlook), the willingness of banks to hide their losses and/or overstate their financial health, excessive and unaccountable government spending, large amounts of public debt, and housing bubbles, all against the backdrop of an intemperate rush to join the European Union at all costs.

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