by Philip Bagus
Thought this was good for anyone who wasn't sure what all this PIIGS talk has been about.
Europe is in turmoil once again. The sovereign-debt crisis threatens to spread from Ireland to Portugal and Spain. It all began with the financial crisis. Before the financial crisis, several governments of the eurozone, most notably those of Portugal, Italy, Ireland, Greece, and Spain (PIIGS), had been able to finance their deficits at artificially low interest rates. Some had accumulated unsustainable levels of public debts.
Such reckless fiscal behavior was only possible because markets assumed that if the national situations got worse, these governments would be bailed out by other countries of the eurozone in order to forestall a breakup of the euro. In other words, the euro came with an implicit bailout guarantee permitting governments to overindulge in debt. The implicit guarantee was and still is grounded in political interests. A failure of the euro would be interpreted as a failure of the idea of European centralization — i.e., of the European Union. This failure is regarded as something politically inconceivable.
Equipped with this implicit guarantee, many governments did not address structural problems such as uncompetitive labor markets or unsustainable welfare systems. They papered over these problems with government deficits. As the financial crisis hit, government deficits increased sharply due to increasing public spending and falling revenues. Deficits soared, not only in the PIIGS countries (the bailout candidates), but also in the countries that were supposed to pay the costs of bailing out the PIIGS governments (most prominently Germany).
It was at this point that market participants wanted to see something more than implicit promises. They started to doubt that Germany and others would be capable of bailing out the PIIGS governments, or willing to do so. Interest rates for bonds of PIIGS governments soared. Finally, in May 2010, eurozone governments had to make the implicit bailout guarantee into an explicit one. They installed a €750 billion rescue fund. (Continued. . .)