Translated material
Europe was screwed over
Weak spot in Europe. The economic inequality of the eurozone countries can bring the least developed members of the eurozone to the brink of bankruptcy. Observers united them in a group pejoratively named PIIGS - Portugal, Italy, Ireland, Greece, Spain. The main problems of the newly-minted "pigs" are large debts, distrust of creditors, budget deficits
Investors doubt Distrust on the part of investors deprived Greece of the opportunity to issue 10-year bonds - there is practically no demand for them. In January, the Greek Ministry of Finance managed to sell only short bonds - for 3 and 6 months. Shortly thereafter, prominent financier George Soros and other economists began to promote the idea of pan-European bonds. Naturally, Italian Finance Minister Giulio Tremonti happily picked up the idea. The risks have grown, and investors who are no longer ready to lend to troubled countries individually will willingly buy papers for which the entire eurozone will be jointly and severally liable. The proposal, however, was rejected by the European Commission, fearing that the governments of the countries will relieve themselves of any responsibility for their budgetary and debt policies. Each of the 16 eurozone countries should be responsible for its own budget and its financing, stresses the President of the European Central Bank (ECB), Jean-Claude Trichet.
In a similar, but somewhat milder situation, other countries from the “pigs” group. Italy needs to attract €377 billion this year, about 23% of GDP. In years past, it needed more to service its debt, but now capital markets are extremely weak. The yield on Greek long-term government bonds rose to 5.7% (in Germany - 3%), which further inflates the budget deficit. The premium required by investors for the purchase of government debt in Ireland, Italy and Spain has also risen sharply. At the same time, the level of public debt in relation to GDP in these countries is not prohibitive. In contrast to the deficit, which in all countries of the group, by European standards, is quite large (see graphs), while in Ireland it generally goes off scale beyond all conceivable norms.
It will be much more difficult than for large economies to cope with the banking crisis for the countries of the PIIGS group. So, according to the calculations of the ex-Chief Economist of the IMF Simon Johnson, the assets of the three largest Irish banks exceed the country's GDP by 2.5 times, three Portuguese - 1.5 times, two Italian - 2.2 times, and Spanish - twice. The risk of default by Greece in the next 5 years is estimated at more than 10%.
We are too different… Eurozone membership itself is starting to make it difficult for the PIIGS countries to cope with their problems. First, the ECB is much less active than the US Federal Reserve in providing liquidity to banks. Secondly, interest rates are higher in Europe - again because of the ECB's conservative policy, primarily aimed at curbing inflation, notes Nobel laureate in economics Paul Krugman. Thirdly, as members of the eurozone, PIIGS countries cannot devalue their currencies and thereby make it easier for companies to compete with imports, attract investors with cheap assets, and reduce the cost of servicing domestic debt. Too rigid policy of the ECB only exacerbates the crisis in PIIGS, says Johnson.
On the contrary, during the years of prosperity, membership in the eurozone brought considerable dividends to the PIIGS countries: it became easier and cheaper to attract investments. The situation in these countries has also been improved by a restrained budget policy (in the pre-crisis years, the deficit could not exceed 3% of GDP, and this year in the euro area, according to the forecast of the European Commission, it will be 4%).
Now, however, European rigidity in limiting the budget deficit turns out to be untimely for PIIGS. Thus, Spain will have to stay within 4% of GDP, while the recession in this country may be one of the strongest in Europe. Analyst Lorenzo Bernaldo de Quiros of Freemarket International Consulting expects the country's GDP to fall by 3% in 2009 and the unemployment rate to soar to 19%. In 2008 alone, about a million Spaniards lost their jobs. In addition, Spain's housing market has been severely overheated, and private sector debt has doubled over the past 10 years, to 120% of GDP. It is hard to adapt to budgetary constraints and Ireland, where GDP at the end of 2008 fell at a rate of 7.5%. The Irish Treasury expects tax revenues to fall by 20% this year.
We'll have to help So far, of course, only marginal economists dream of leaving the eurozone in the PIIGS countries. Now a return to national currencies and their devaluation would only make debt repayment even more expensive, hit trade and banks, Bloomberg quotes Aurelio Macciario, chief eurozone economist at UniCredit Group. Any country that finds it difficult to finance its debt while in the euro area will find life outside the zone even more difficult: the cost of raising funds will skyrocket, writes the Economist.
There is another important problem: in all PIIGS countries, the level of social solidarity is lower than, say, in Germany or France. Thus, Greek anarchist students in recent months have been trying to change both the government and parliament. The demonstrators set fire to cars, attacked the offices of officials and police stations. There is no confidence in the government: several ministers resigned over winter due to corruption scandals.
A mechanism to help PIIGS countries while they remain in the euro area has not yet been developed: neither the IMF nor the EU are eager to guarantee their debts or spend funds intended for Eastern Europe or the world's poorest countries to support PIIGS. But soon, apparently, they will have to help - otherwise problems on the periphery of Europe will call into question the integrity of the eurozone. The problem is that the economic and financial integration of the countries of the Old World has moved much further than the political one, notes Krugman. Because of this, there is no common government in the EU that could take responsibility for anti-crisis policy, and the steps taken by individual countries are fragmented and do not solve all problems.
1 Public debt in general for 16 eurozone countries is 69% of GDP.