PIIGS and the EU Dilemma: Analyzing the Underpinnings of Europe’s Financial Disarray

Why has Europe struggled recently? 2008’s financial crisis was not kind to the continent, and the European Union (EU) was subsequently saddled with the precarious welfares of a series of failing countries. Imposing a widely-used currency system has proved to be a mistake, as citizens of more prosperous EU countries have found themselves bailing out multiple foreign governments for the past 7 years. That oh-so-brave ideology of European unity championed by foreign Socialists might have worked in a purely non-fiscal environment, but tying a large and closely-linked noose around a diverse group of countries spells imminent doom: if one nation goes to the gallows, so do the others.

Five countries in particular — Portugal, Italy, Ireland, Greece and Spain — were especially hard-hit by the Recession, and have been the EU’s burdens to bear since then. These countries, known snidely as PIIGS, have varied stories but all point to the futility of large-scale international economic marriages, and should serve as warnings for similar future ideologies.

Portugal:

The first of the five countries in crisis owes its present situation to an age-old practice: corruption. Joining the European Union in 1986 as a reasonably early member and becoming one of the first countries to adopt the Euro in 1999, Portugal entered the 21st century as a modest European power, with an S&P rating of “A+” for financial stability. Portuguese education was rated better than American education and continues to rival the United States in literacy and graduation rates. Even life expectancy in Portugal, at an average of 81 for both sexes, outpaced (and outpaces) the average American life expectancy of 75. But, like the United States and like the other countries on this list, Portugal’s financial strategies provided a period of short-lived success at the price of a mortal pitfall.

When the Great Recession hit, the practices of two main banks in Portugal, Banco Português de Negócios (BPN) and Banco Privado Português (BPP, came to light. A 2008 investigation unearthed that the banks, particularly BPN had been recording losses for years and requesting funding and bailouts to cover bad financing. Additionally, the banks were engaging in rampant embezzlement and fraud in desperate attempts to continue operating.

Economically, there are a few courses of action that Portuguese government officials could have pursued — notably allowing the banks to receive the penalties they had brought upon themselves. But, since many high-ranking government officials — including the Portuguese Prime Minister — had ties to the banks in question, it was decided that taxpayers would be responsible for paying off all the losses that had been accumulated by the illegitimate bank operations.

This announcement spelled immediate doom for the country. Simply put, Portugal did not have enough money to bail out the banks. Yet, the European Union lent a hand and floated 80 billion Euros towards the grateful country in 2010. Since then Portugal has been working to repay the loan, and stabilized its banking system in 2014 — though not before experiencing a drop in GDP and a jump in unemployment to 15%. A noble cause has become a burden for the rest of the world and launched Portugal into hard times.

Italy:

One of the biggest and wealthiest countries of the PIIGS group, Italy has been gravely wounded by the Great Recession. With currently the 4th largest national economy in Europe and the 8th largest national economy in the world, Italy is watched by the international community with bated breath. If the peninsular nation goes down, so does the E.U.

Italy is a proud member of the G7 group of industrialized nations and has a major (60%) trade stake with the rest of the EU. Typical national GDP is raked in through the gold and business-economy industries, with substantial contributions from the agriculture, clothing and automobile industries.

After WWII had wreaked devastation upon Italy, the country’s economy took a hit, but GDP growth was solidly recorded from 1945–1990. Yet 1990 was to be the last recorded year of the Italian prosperity, as it has stagnated or shrunk consistently since then. As one might guess, with a lame-duck economy for almost two decades, Italy was devastated by the Great Recession: its economy shrunk 7% in just one year.

The country’s rapid degradation engendered a cry for help, a cry which the brotherly EU was ready to step in and calm, to the tune of hundreds of billions of Euros. Current Italian debt to GDP ratios are estimated to be around 130%, but a more serious issue lurks in the economic sector. Unlike any of the other PIIGS countries, Italy has been unable to take even baby steps in tempering its very own economic tsunami. Italian earnings and economy have been shrinking since the Recession with no end in sight. Lavish government programs both for national spending and public service/pension security have taken their toll on the struggling country, and austerity measures have been unsuccessfully imposed.

The EU is watching carefully as Italy wheezes along, and an ambitious goal of lowering the public debt to 2.8% of public budget deficit within 2016 has been laid out by creditors. However, economists and armchair philosophers alike have condemned this goal as being too unrealistic.

One plus that Italy does have is that most of its whopping 2.2 trillion Euro debt is owed domestically, though that hardly eases the pain considering the fact that no debt seems to currently be in the process of being bought out by the Italian government. It’s been a slippery slope for Italy; default is entirely possible but holds terrifying possibilities.

Ireland:

Ireland’s thriving banking industry turned out to be a burden rather than a boon. In 1995, the country entered a booming era, largely due to aggressive financial tactics. The rest of the world, noticeably intrigued, dubbed the northern island country the “Celtic Tiger” on account of its ferocious growth, similar to that of many rapidly industrializing countries in Asia. Ireland was on top of the world at the turn of the 21st century, with an unemployment rate of 4% and attractively low corporate taxes; it was becoming something of a Silicon Valley across the Atlantic, and acquired a reputation for housing high-tech companies. A 2005 study by the Economist rated the quality of living in the country as the highest in the world.

From 1995–2007, the country experienced the highest rate of economic growth in all of Europe. Facilitating such enormous expansion is impossible without sustainable capital, and Irish banks were not fully equipped to handle so much activity. As an early member of the European Union (joining in 1973) with a few years Euro use (the Irish Pound was replaced by the Euro in 2002), and an impressive projected growth level, Ireland seemed like an appealing place for foreign investors to flood with cash. The 12 year sweetspot that ended at the start of the Great Recession saw Ireland build an enormous system of banking, largely underwritten by foreign investment.

When the Great Recession hit and stock began to drop, a property bubble coupled with a drying up of international lending effectively destroyed the Irish economy. To combat hundreds of billions of Euros in debt, the Irish elected a centrist liberal Labour government, which instituted government bailout to banks, which proved to be insufficient. In 2010, the rest of the European Union gifted a 70 billion Euro “bailout”, essentially relieving Ireland of paying that debt. While the world reeled from the shock of the fallen economy, the Celtic Tiger batted a limp paw, making no austerity or economic reforms to pay back debt. Such a strategy ensured a glacial recovery, which can be seen in the world today.

While Irish banks have been “stabilized” as of 2011 (according to the government), the country is still saddled with some 225 billion Euros in debt to the European Union. GDP has begun growing at about 4% annually and international behemoths like Google have taken up residency in Ireland, though the country is far from being out of the woods.

Greece:

The country that founded democracy now finds itself in the midst of its worst economic crisis ever. A relatively early member of the unofficial European Union, Greece joined the continental coalition in 1981, while its currency was still the volatile Drachma. In 2001, the country prudently switched over to the Euro, catalyzing a short but illegitimate period of prosperity.

With a new, stable currency, government officials realized that they had the resources to easily appease the public, and began pushing for hearty salaries and unrealistic retirement ages. The average Greek bus driver could work minimal hours and cruise into retirement at the ripe old age of 55, while other members of the Western world worked longer days for many more years.

Indeed, it was an exciting half-decade for Greece; the country hosted the 2004 Olympics and revamped its buildings, transportation and infrastructure in doing so. Unemployment rates were steadily dropping, at 8% in 2004 and 5% just two years later. To top it all off, a 2004 investigation by the European Union revealed that Greece had a deficit below 3%, a healthy statistic by any metric.

Everything was looking good until the Great Recession took the world by storm in 2008, forcing Greece to borrow more money from the EU than it had previously. The EU, however, was being bled dry by the economic crisis, and had nothing else to give.

Suddenly, things fell apart. Deeper financial investigations unearthed that Greece had been lying (blatantly) about its earnings, and actually had a 15% deficit as of 2010. This quick turn for the worse threw the country into an abyss, driving unemployment rates up to 25% and lowering the average GDP by as much as 30%. One day in 2015, the Greeks woke up to find themselves in a downward spiral with an unpayable 350 Billion Euro IOU to international creditors. Germany, to whom Greece was the most in debt, passed an ultimatum down the Peloponnesus: pay up or leave the Eurozone.

Desperate times begat desperate measures. An ultra left wing government under the Syriza party took power, and prime minister Alexis Tsipras danced an impetuous waltz around irate EU diplomats. Greece had to implement austerity measures, such as raising the retirement age and cutting government spending, or face the prospect of going back to the unstylish Drachma. Despite loud Greek opposition to austerity, the government realized that it didn’t have much else of a choice. In the fall of 2015, austerity measures were put in place, sending Greece on a long road (without a foreseeable end) to paying back its debt.

Spain:

The mighty modern empire that once made the world hold its breath is now sucking every gulp of oxygen it can to stay afloat. Spain’s story is different but more unfortunate than that of Greece. In the 1980s, Spain was not doing quite as well as many of its fellow European countries, but with hard work and crafty diplomacy, the country managed to become a continental power. Fiscal conservative and former prime minister José María Aznar guided his nation into the Euro in 1999, and the early 2000s treated Spain quite well. Unemployment bottomed out at a modest 8% and the GDP almost tripled by 2007. Interest rates were at historically low levels, which caused a massive real estate boom; whereas Greece had no major economy outside tourism, Spain had an actively industrial income source.

But 2008 was especially difficult. With a major global financial crisis, people instantly became uninterested in purchasing property, and real estate profits (and consequently construction company profits) decreased. This bursting of the real estate bubble, coupled with the fact that Spain did not play host to many large foreign companies, struck a crippling blow.

In an instant, Spain had the wind knocked out of it and had to suffer an economic beatdown before it could right internal affairs again. In the year after 2008, nearly 1.2 million Spanish jobs evaporated, and the overall GDP dropped 7%. The situation grew increasingly more grim as Spain sought EU funds in the midst of an economy contracting at -4% annually and a ballooning 18% unemployment rate.

Despite amassing a 1 trillion Euro debt, the country has persevered admirably, turning to mass agriculture for additional funds and becoming the world’s largest producer of olive oil in 2012. While the Greeks have floundered and languished, the Spanish have taken action and even expanded into new horizons, such as the previously untouched automobile business. Austerity measures, implemented in 2010, have also helped pave the way for a beginning to recovery, though Spaniards still have a heavy bill to foot. While the country still has a ways to go before it can equal its erstwhile influence, a conservative government and a focus on the future should help ease the sting of past misfortunes.

The Future:

There is no question that the sticky situation in which the EU finds itself will take a long, long time to be resolved. While Spain and Portugal are on the upswing, Ireland is moving forward slowly and Italy and Greece threaten to singlehandedly destroy all progress of the other PIIGS countries. This article did not even begin to cover the other, more visible social issues the EU contends with: the influx of hundreds of thousands of immigrants, the Brexit, and the rise of extremism, among other factors. But, the fundamental financial mess that underlies the system is beyond frightening.On the scale of historical foreign policy, the EU should henceforth be remembered as a progressive overextension gone wrong.