PIGS AND THE EUROS

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Abstract

‘PIGS’ is an acronym for Portugal, Ireland, Greece and Spain, mostly used by economists to describe their weak economy and huge debts that have raised concern in Europe and the world at large. The situation has caused economic crisis in these countries and also caused problems for the euro. The single currency’s fall against the dollar saw the decrease in income for the big American companies exporting to Europe. The European union leaders should come together in order to find the root causes of the problems affecting their member states, as this will aid them in finding lasting solutions to the same and save the euro.

Introduction

Before the euro was introduced, Portugal, Italy, Greece and Spain were constantly facing economic crises which later came to disappear as a result of prospering economically in the subsequent years. This was brought about by the adoption of the euro which imposed monetary and economic moderation upon them. Nonetheless, these PIGS countries were unable to meet the economic as well as monetary requirements that were imposed on them by Maastricht. This led to intensification of economic hardship and the member states of Eurozone felt that they were no longer able to support their already weak economic and monetary stability which was even becoming harder to conceal. In point of fact, the PIGS countries were not only facing excessive debts and deficits but were also engulfed with economic imbalances like excessive and unmanageable deficits of their current account and as a result they begun to put the blame on the euro (Lorca-susino, 2011).

 

 

The root of the problem

The problems faced by these countries comes from the fact that monetary union boosts fiscal unbalances, since it is no longer an alternative to opt for devaluation of competitive currency and what remains a substitute is abuse of fiscal policy which thereupon affecting the differentials of the sovereign bond yield. In the year 2005, the yield differentials were almost zero betwixt German Bund and the yield of countries whose current account deficits were in excess. However, during the year ago, yield spreads became a disturbing reality, which in turn raised governments default risks, judged by sudden rise in demand for ‘credit default swaps’. Thus the economic distress occurring currently, has for a fact shown that, default risk is a substitute for currency risk in monetary union, since every member state sovereign debt is given under the authority of the respective finance ministries (Lorca-susino, 2011).

How to repair the problems

During the Euro zone’s government regime deep flaws were revealed by the crisis. After the financial market fiasco that mostly occurred in Western Europe and United States of America in the years 2007, 2008, 2009 and more especially from 2010, deep expressed concerns have highly affected the financial markets about some European nation’s states solvency. Fundamental questions should be addressed by European Union leaders on the principles of operation on which the euro is based upon. The European Union is face two main challenges; regulating the crisis while at the same time carrying out the adjustments of Eurozone and making government reforms to avoid crises in the future. The euro problem can be blamed on poor implementation of rules, therefore enforcing this rules might be part of the solution  (Lorca-susino, 2011).

Such changes may include;

Realistic policy framework reform

European Central Bank is currently assigned price Stability and stability and Growth Pack assigned budgetary discipline. The existing framework assumes explicitly that all threats on stability arise from budgetary indiscipline. Apart from price stability, Eurozone governance has three other economic objectives which include financial stability, avoidance of macroeconomic imbalances and budgetary discipline. Therefore, the new reformed policy framework should clearly define task allocation (Lorca-susino, 2011).

Encourage decentralization

The budgetary discipline of Eurozone was not a big success and this could succeed even more if the system was somehow decentralized. A system that puts together market forces and domestic institutional reforms to keep checking deficits and debts would emerge. Decentralization should therefore be encouraged by government through provision of umbrella framework for institutions and national rules. By ensuring that eurozone objectives are in consistence with government reform frameworks and rewarding countries with better institutions, the European Union should see its economy a yardstick ahead (Lorca-susino, 2011).

Defining complete policy regime

A full crisis resolution regime needs to be defined regarding the debt crises which may include the modalities and principles of assistance and debt restructuring. In that accord, Eurozone economic stability will be secured (Lorca-susino, 2011).

 

 

Conclusion

Enforcement might be part of the solution to the European Union’s problem, but their problem surely runs deeper than that. In that case their leaders should sit down and find a lasting solution to their crisis. Important questions about the operational principles in which the euro is based should be addressed. The Eurozone leaders should adapt to the changing situation and change with it as the future of the euro entirely depends on them.

WE ACCEPT