April 13 THE EURO'S BIGGEST CHALLENGE: THE PIGS
When the EURO made its highly anticipated debut in 1999, Milton Freidman decided the crash the party. The Nobel-Prize-Winning Economist boldly predicted the new currency's demise. He proclaimed that: "The Euro will not survive Europe's first economic crisis." He noted that a floating currency exchange responds to a specific nation's slump with lower exchange rates. With the Euro in effect, this no longer exists. When one nation fails, everyone fails.
Eleven years later, Mr. Freidman's quote was put to the test. After months of teetering on the edge, debt-ridden Greece could be ignored no longer. As an EU member Greece must keep her deficit to 3% of GDP. So when it got to 12%, the other nations had to step in. Athens needed $75 billion in bonds alone to stay afloat. The EURO-ZONE had Brussels abuzz with conferences, meetings and press conferences. Finally they came to a decision: Germany must bail Greece out.
With the deepest pockets in Europe, Chancellor Angela Merkel agreed and the Euro was saved. However, back in Germany, Merkel's approval ratings slipped to an all-time low. She was abruptly reminded that polls showed (back in the 1990's) that the German PEOPLE were clearly not in favor of scapping their precious Mark. German POLITICIANS ignored this and went ahead with the Euro. To someone in Berlin, the fact that hard-earned German money is going to lazy Greek state employees is simply intolerable.
While the Euro has survived this crisis, pundits are still not convinced it can survive the next one. Other EURO-ZONE nations are also teetering on the brink of economic meltdown. They have been grouped together: Portugal, Italy, Spain, Greece. They are known by their acronym: THE PIGS. They're lazy, smelly and wallow in the mud. They will destroy the EURO.
And while Northern Europe berates the South, they do have to realize one major problem with THE PIGS is their own doing. A good portion of the economies of these four Mediterranean nations are tourism-based. When economic recessions occur, people stop taking expensive vacations. So if the Germans really want to save their OWN economy, they better start buying pricey package deals to Ibiza and Santorini! How about THAT for an economic solution, Mr. Friedman?
Count me among the pundits that doesn't think the Euro is safe yet; it has dodged a bullet but the shooting isn't quite over. As you noted, there are four members of the PIGS and another could face the same run on its debt that Greece just did. If Angela and the Christian Democrats are kicked out of power in the May elections, there may not be the political will in Europe to prop up another failed state.
ReplyDeleteHowever, working in the Euro's favor is the improving economy and markets and that might help shore up the other PIGS. Only time will tell...
Here is what should really scare you: the US isn't in much better fiscal shape than Greece with structural deficits as far as the eye can see, now compounded with a giant new entitlement with health care. For fifty years we have been digging a fiscal whole in the US and no politician seems to have the will to even point out that we have a big problem - we just keep digging.
Great post, Duner!
Update: Greek debt dropped to junk status. Global markets fall. Portuguese debt downgraded. Looks like we are in for a bit more excitement before things settle out...
ReplyDelete"They're lazy, smelly and wallow in the mud." Well, if that's how you feel about the Portuguese, I will make sure to get your mudpit ready for your next visit. - Aunt Sara
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