Global Economy World Economy
PIIGs and Greece
In 1997, business analysts created the acronym "PIGS" that refer to the economies of Portugal, Italy, Greece and Spain. In 2008, "PIGS" has been revived to "PIIGS" where Ireland has been the most recent addition. To Europe and to the Eurozone they are like never ending headache.
They are the troubled and heavily indebted countries of Europe, rather Eurozone and are seen as having high external debt, high government debt levels and a high current account deficit.
But recently Greece is in news because of its ballooning budget deficit. Countries everywhere already have high budget deficits, backed by the recession. Greece is exceptional only by degree. In 2009, its budget deficit was 13.6 percent of its gross domestic product (a measure of its economy); its debt, the accumulation of past deficits, was 115 percent of GDP. Its gross debt in 2010 is forecasted to be at 125% of GDP.
The entire financial market-the banks and investors that buy government bonds are reportedly worried. Aging populations make the situation even worse. In Greece, the 65-and-over population is projected to go from 18 percent of the total in 2005 to 25 percent in 2030.
Now let's roll back in 2000 to dig the root to the current problem. In June 2000, Greece was lucky enough to meet the criteria for admission to Europe's new currency union, eurozone and was admitted to the same on 1st January, 2001. Since then Greece started taking the benefits. In 1973, 100 Greek Drachmas was equivalent to $3.33. By May 2000, that was down to only 27¢. But with Greece's inclusion in the eurozone, the drachma's value was fixed to that of hard-money countries such as Germany and the Netherlands, and its long decline against the dollar slowed. Then in 2002, the drachma exited the currency stage, giving way to the euro.
Greece suddenly found itself with a solid, reliable currency. Its government and businesses could borrow at lower interest rates than before. The country boomed, with real GDP growth topping 3.8% for eight straight years where US and Germany were lacking behind compared to their growth rate. It seemed that Greece had started getting the taste of economic good times.
But the reality was far more complicated. First of all, Greece now had a solid currency no doubt; but it wasn't Greece's currency. Secondly, the Greek economy didn't have any value to those monetary wonks at the European Central Bank in Frankfurt who were at the work of managing the euro. Thirdly, some serious blunders were made by the Greek government themselves. They went on something of a spending spree and public spending (especially in the unproductive sectors like building houses in excess of demand etc.) soared. The country kept running big deficits even in the boom years.
Now, it became completely impossible for them to cope with its huge debt loads and to meet EU deficit rules because of its huge spending and widespread tax evasion. "Greece faces the risk of sinking under its debt," PM George Papandreou said.
A scan of the data reveals two other euro-zone countries with bloated debts (Italy and Belgium) and another two with Greek-style overreliance on foreign lending (Portugal and Spain). But as of now they are overshadowed by Athens.
Last fall, Greece's deficit was, at 12.7%, more than four times higher than European rules allow, as revealed by their new government. Along with this, was the blow from the Great Recession. The world's financial markets never ever had any faith on Greece and its economy. But in those days the problems of Greece were restricted only to its boundaries. Only this time, it isn't just Greece's problem.
Robert Samuelson looks at the Greek debt debacle and says the real problem is the welfare state: The central cause is not the euro, even if it has meant Greece can't depreciate its own currency to ease the economic pain. Budget deficits and debt are the real problems; and these stem from all the welfare benefits (unemployment insurance, old-age assistance, health insurance) provided by modern governments.
The welfare state's death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day-no one knows when-doubt governments' ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.
Macroeconomist Krugman's view is somehow opposite. To him it is a "I've painted myself in the corner" problem. The main culprit here is euro though he also keeps the same view as Samuelson that anything done in this moment by the Greek government will actually go against them. Greece is in the EU, adopted the euro (abandoning the drachma) and now cannot devalue its currency to boost its economy. It is stuck with the euro. It could withdraw from the euro zone, but that would cause a huge run against Greek bonds and stocks. Greece cannot raise interest rates, because those are now set by the ECB, the European Central Bank. Greece cannot 'inflate' to reduce the debt burden, as other nations have done in history, because, frankly, what Greece needs to do is deflate, lower its wages, prices and costs in order to become more competitive within Europe. But if it deflates, the debt burden becomes much more onerous, rather than less so.
Confession of the Greek Government
Sometimes back Greece was also found confessing that it has cheated the European Union budget deficit rules since 2000, leading to suggestions that it may not have been entitled to join the common currency after all. Under EU rules, members must keep budget deficits to 3% of gross domestic product. For 2001 and 2002, the actual deficits of Greece were 3.7%, more than twice the originally reported figure. The other years are also not exceptional.
These revelations have raised questions not only about whether skeptics were right, but also about the accuracy of EU statistics, which rely on data from the member states. Appearing before the European Parliament in Brussels, the European Central Bank president, Jean-Claude Trichet, described the situation as "a real enormous problem".
While Greece is not the only member state to have breached the budget cap, it is the first to admit to hiding the truth.
Now whatever the case may be, the current state is such that Greece has big debts relative to the size of its $357 billion economy (about 120% of GDP). It no longer has the option of eating into those debts by inflating its currency. In fact, it has no power to use monetary policy to ease its pain, as the Federal Reserve has been doing in a big way in the U.S. The only options for Greece are to 1) scrimp and save to convince creditors that it can keep paying them off, 2) convince its fellow euro-zone countries--or maybe the International Monetary Fund--to bail it out, 3) default on its debts or 4) pull out of the euro.
The first option is a sort of domestic political suicide, slashing government spending and raising taxes during a downturn could worsen that downturn. The second option sounds the best of the lot in the present context but has high international political hurdles to overcome. The third option would be a disaster for Greece and for the global financial system. As for the fourth option, given that there are no procedures for leaving the euro, it might risk unraveling the entire project. In the euro's prelaunch period, a few skeptics predicted that the mismatch between a single European currency and differing nation