Almost a decade on from the sovereign debt crisis, we explore whether the euro zone's peripheral economies have materially improved or old vulnerabilities will again become apparent as growth slows.
The sovereign debt crisis that began in Greece in late 2009 and spread swiftly to other peripheral euro zone economies tested the region's policymakers to its limits. But bailouts for Greece, Ireland, Portugal, Spain and Cyprus, combined with a ‘whatever it takes' promise by the European Central Bank (ECB), restored calm.
Progress since then across peripheral economies, unkindly labelled the PIIGS (Portugal, Ireland, Italy, Greece and Spain), has been uneven. Although GDP per capita is now higher in Portugal, Ireland and Spain, it remains well below pre-crisis levels in Italy and Greece; where the jobless rate also remains much higher, as well as in Spain.
"The PIIGS label is misleading," explains Stewart Robertson, senior UK and European economist at Aviva Investors. "While all peripheral countries were impacted by the sovereign debt crisis, the structure of their economies, policy responses to the crisis and their recoveries from it have varied significantly."
But with growth in the euro zone beginning to slow down, the question remains: are peripheral economies better equipped to survive another crisis or have the ECB's extraordinary support measures masked fundamental weaknesses?
Ireland has enjoyed the strongest recovery among the peripheral economies, with robust growth leading to a rapid reduction in unemployment and improvement in public and private balance sheets.1 &2
"Ireland took comprehensive and early steps to get its economy back on track and restore its competitiveness, including reform of its banking sector," says Robertson. "Keeping an open policy to trade and foreign investment, a key factor behind its rise in the 1990s and 2000s, has been central to its recovery."
Spain has also posted decent growth, reflecting "relatively light-handed fiscal adjustment, the effects of thorough reforms to the labour market and financial sector in 2012-13, and very favourable cyclical factors", according to Peter Ceretti and Alfonso Velasco, analysts at the Economist Intelligence Unit (EIU).
However, unemployment remains a serious problem, especially among the young, and the share of temporary contracts and involuntary part-time employment remain some of the highest in the EU. Additionally, public debt has declined only marginally from its peak in 2014.3
Economic conditions have improved in Portugal, which has recorded one of the fastest declines in unemployment among OECD countries over the past five years.4 The economy has also rebalanced to become more export-oriented, moving the external current account from a chronic deficit of around ten per cent of GDP to a balanced position, according to the IMF which also praised Portugal's "impressive progress" in cutting its fiscal deficit. 5 However, the poverty rate of the working age population remains elevated.
Progress has been less evident in Italy and Greece, which are the only European Union (EU) countries where output has failed to recover to pre-crisis levels.6
Italian GDP per capita is lower, adjusted for inflation, than in 2000, and the economy slipped back into recession for the third time in ten years in the second half of 2018. The government says the contraction will continue this year, which will aggravate its financial problems. Italy has the highest level of government debt in the EU at more than €2.3 trillion.7
In contrast to the other PIIGS economies, Italy did not require a bailout a decade ago, but - with the exception of Greece - its problems have proven to be deeper rooted and more difficult to recover from.
"Until the recent agreement on its budget with the European Commission, Italy's public finances were at risk of heading down an explosive and hugely unsustainable path," says Robertson. "But there are still weaknesses in the Italian financial sector, and political tensions could flare up again. It is not out of the woods yet."
Meanwhile, the Greek economy could take another decade to return to pre-crisis levels, according to government forecasts.8 General government debt is officially projected to reach €335 billion by the end of the year, around 185 per cent of GDP, according to EIU estimates. It is also almost entirely owed to official creditors (the EU and the IMF), so another debt writedown, as happened in 2012, is unlikely, says Agathe Demarais, principal economist at the EIU.
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