PIGS will fly

Obviously, at the beginning of this weblog it is a temptation to be provocative and dramatic, elements one would typically avoid in a PESTLE. But, in a search for readers, one looks for headlines, I suppose.

The European Union will face considerable stresses over the next 5 years. While I don't forecast the break-up of the EU or abandonment of the Euro, it is not unimaginable that one or more countries will drop the currency. The obvious candidates would be the PIGS--Portugal, Italy, Greece and Spain, which used to be referred to by the more dignified sobriquet of the Olive Belt. These countries have weaker economies, difficult political situations internally--almost to the point of paralysis in some cases--and fairly high levels of corruption and organised crime, in some cases.

What they also have is very high levels of public sector debt heading into a deep recession--not a good position to be in. This table from an article titled "Do BRICS (and Germans) Eat Pigs?" perhaps makes the point better:

Table 2: Actual Debt & Age Related Contingent Liabilities

Source: Goldman Sachs, European Weekly, 22/01/2009

The stronger and more open economies of the EU need (and have the political clout to insure) very different economic policy than one which would meet the urgent needs of the PIGS. The EU is growing in different directions, with new members Albania, Romania and Bulgaria aligning their (mis) governance and economies with the PIGS, while the more robust countries of Scandinavia, France and Germany move in another direction. Something will eventually have to give.

If the PIGS unite with the new members, they may be able to push policy in their favor. In which case, the policy surprise to watch for (not that I predict it, but I would not be surprised to see it) is a move by Germany to return to the Deutschmark, something that would be quite popular with large segments of the German population.

An article by Ian Bremmer in Foreign Policy disagrees, and makes the obvious point that weaker countries enjoy eurozone protection in many ways, and predicts that other weaker European economies may actually join the Euro. That may well happen. But it doesn't exclude the possibility that a Eurozone full of weak economies will certainly not suit Germany, and may not suit other countries as well. Germans feel strongly that they are bearing more of the burden for the EU than other countries. By many measures, they are correct.

5 year prediction: Something of an existential crisis, caused by economic turmoil, with members of the EU having serious discussions about their continued membership.

Comments

[Mark Wadsworth]

"PIIGS" actually, "Portugal, Ireland, Italy, Greece and Spain"