How the PIIGS have gone to the pigs

The Euro came into existence on 1 January 1999. Before that, the PIIGS – Portugal, Italy, Ireland, Portugal and Spain, had their own currencies. These countries were, in the past, the weaker of the European economies. They had higher inflation and interest rates. They regularly devalued their currencies to maintain competitive.

Under the Euro, interest rate was standardized across the EU. This presented the PIIGS a sudden lowering of the cost of borrowing. The effect was a domestic consumption boom and a real estate bubble. This caused the costs to go up, especially labour. The problem was exacerbated by the immobility of the labour forces in the EU. The end result was a lowering of competitiveness. Unlike before, they are unable to devalue their currencies to regain competitiveness now.

Like the business sector, the easy credit induced the governments to borrowed more money to develop the countries. This caused a ballooning of their debts. An increase in government revenue due to the consumption boom gave the governments more confidence to embark on the lavish spending.

When the EU raised rates to fight inflation, the real estate bubble burst and the tax revenue collapsed. This resulted in them finding difficulty to service their huge debts.

The only way forward for the PIIGS is to lower wages and endure years of deflation and high unemployment. They have to go on a real austerity drive.