Is the eurozone periphery heading off the rails again?

Remember the PIIGS? It’s nearly 10 years since a debt crisis erupted in Greece and spread swiftly across the peripheral eurozone countries, unkindly labelled the PIIGS (Portugal, Ireland, Italy, Greece and Spain). That crisis prompted many forecasts of the eurozone’s demise and threatened to plunge the global economy, already reeling from the global financial crisis of 2008 into depression.

Why did and do these economies matter so much? Well, peripheral may be an accurate geographic description but economically it is a misnomer. The aggregate GDP of these eurozone economies amounts to around US$4 trillion, equivalent to the fourth largest economy in the world and bigger than Germany.

Fortunately, a series of bailout packages combined with a ‘whatever it takes’ approach by the European Central Bank (ECB), which created huge amounts of money to buy the debt of the stricken economies, helped avert the crisis.

But what happens when the global economy slows down again or worse still goes into recession? Are the peripheral economies such as Portugal better equipped to survive another crisis? In other words, have the governments of these economies used the time bought by the ECB’s extraordinary measures wisely or wasted it?

Certainly, progress across these economies has been uneven. Ireland has enjoyed the strongest recovery, while Spain has also recorded relatively robust growth in recent years compared to other eurozone economies. Economic conditions have also improved markedly in Portugal, which has recorded one of the fastest declines in unemployment among advanced economies over the past five years. Progress has been less evident in Italy and Greece.

Italian living standards are still lower than they were, adjusted for inflation, in 2000 while the Greek economy could take another decade to return to pre-crisis levels, according to government forecasts. The jobless rate also remains much higher in Italy, Greece and Spain, and public debt is higher in every economy than it was prior to 2007.

Missed opportunity?
The World Economic Forum’s Global Competitiveness rankings, which assess the microeconomic and macroeconomic foundations of national competitiveness, reveal that all of the PIIGS have moved upwards in the rankings, some sharply, since the crisis broke.

Yet Ireland is still the only one of the PIIGS ahead of Malaysia, while Greece languishes behind countries such as the Philippines, Indonesia and Russia.
Moreover, progress on reforms has stalled since the ECB embarked on its measures to save the eurozone.

Italy, for example, has wasted much of the breathing room the ECB bought for the country, and very little has been done in terms of structural reforms since 2015, according to Peter Ceretti and Agnese Ortolani, analysts at the Economist Intelligence Unit (EIU).

The same is true in Spain since 2015. This is largely the result of political obstacles, according to Ceretti and Alfonso Velasco, another analyst at the EIU. The country experienced two inconclusive general elections in 2015-16, and much of the policy-making capacity of the minority Rajoy government was absorbed in managing the Catalan crisis of 2017, rather than implementing pro-growth reforms.

Meanwhile, Agathe Demarais, principal economist at the EIU, argues that “measures like privatisation, which could help lower Portugal’s high public debt, as well as further labour-market reforms and other reforms to product markets that could potentially be painful, have not been enacted since the ECB’s quantitative easing purchases began”.

Rise of the populists
A broken trust between part of the electorate and the political elites explains why progress on reform has slowed. Despite the years of slog, unemployment remains very high in countries such as Spain, Italy and Greece. Long-suffering populations certainly appear far less willing to accept further punishing reforms than in the immediate aftermath of the crisis.

Consequently, many of the governments that passed the early reforms have been ejected from office and replaced by populist parties or coalitions that feature such parties. Italy is an obvious example.

Catalyst for change
The European elections in May could result in increased support for populist parties. However, as long as more conventional and pro-European parties form a majority in parliament, the rise of the populists could spur further reforms to drive European integration forwards and increase the competitive power of the eurozone within the global economy.

Steen Jakobsen, Chief Investment Officer at Danske Bank, argues that after the elections, populists “may make up 25% of European commissioners, the executers of power in Europe”. Jakobsen believes that such an outcome could prove positive in terms of stimulating the debate about where Europe should be headed.
“At a time when Europe is under attack, those who really believe in Europe will stand up and try to create an idea of not more Europe but a better Europe,” argues Jakobsen.

Taking cover
But any reforms, if they go ahead, will take time to implement and to take effect, and it is clear that, despite having made some progress since the debt crisis, all of the peripheral economies remain fragile. They may be able to weather a short and shallow downturn. However, a prolonged recession could prove devastating both economically and politically, given that debt levels are much higher than they were before the global financial crisis and there are doubts as to whether there is enough ammunition left in the ECB’s armoury to fight off another crisis.

Lack of ambition?
Ultimately, a lack of political leadership and ambition is holding back the peripheral economies and the wider eurozone argues Jakobsen. Portugal, for example, should be one of the three or four richest countries in the world, he argues, given its advantages, including a hard-working labour force with a high proportion of English speakers.

But he adds that “politicians in Portugal and other eurozone countries don’t ask where their country is going to be in 10 years’ time but focus solely on surviving day by day”.

By contrast, Beijing has its “Made in China 2025” plan to transform China from a low-end manufacturer to a high-end producer of goods, while the US has its “America First” programme.

“You may not agree with these ambitions but at least they show politicians in those countries are thinking about the future,” concludes Jakobsen.

By Anthony Beachey
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Anthony Beachey is a former BBC World Service journalist now working on a freelance basis in Portugal, where he specialises in economics and finance.