The PIIGS of the European Union are broke. Today’s clever acronym for the EU nations of Portugal, Italy, Ireland, Greece and Spain—PIIGS—is quite apt. They have been living high on the hog for years, propping up socialist programs with borrowed money. Now their debts are mountainous, their economies are slowing, and their lenders are leery. Moreover, if we examine the European crisis carefully, we find it has already arrived in America.
The first of the PIIGS to go under was Greece. It is now official. Greek Prime Minister George Papandreou announced his government could no longer pay bloated payrolls, pension plans, or even the interest due on outstanding debt. The total debt of Greece is over $400 billion, 125 percent of GDP—everything produced in a year—and the government cannot rein in the labor unions. This is not lost on lenders who are skeptical Greece can resolve its problems, so they demanded a level of interest that Greece could not hope to pay.
So last week Papandreou made a statement from the remote Aegean island of Kastelorizo, no doubt to avoid union mobs that have rocked Athens. He said Greece was “a sinking ship” and demanded loans from his EU partners of $40 billion and an additional $13.4 billion from the International Monetary Fund. Of course, such piddling sums from the EU and IMF will only tide Greece over the immediate crisis, mainly a debt repayment due May 19. More is sure to be needed.
Germany, the most conservative fiscal manager in the EU, has a robust economy, but it has deficit problems too. (Washington should note Germany intends to deal with the deficit by lowering taxes.) When the current crisis was unmasked, German taxpayers made it clear they did not want their money spent on rescuing Greek socialists. They have no love for the Euro these days and wish they still had their old rock-solid German Marks. But if Germany did not join a bailout, the EU could fracture. The Euro might disappear and take the painfully crafted European Union with it. German Chancellor Angela Merkel walks a tightrope between German politics and EU dissolution, but she plays along for the moment, demanding others must also contribute, including the IMF.
What the rest of the PIIGS see in their future is the example of Ireland, and they do not like that prospect at all. In desperate straits a year ago, the Irish shrunk their government 8 percent, slashed benefits and cut government employee salaries by 14 percent. Things are austere in Ireland now, and go-go growth has slowed dramatically into a mini-recession. But Ireland is on track to bring its economy into balance. That contrasts with a Greek populace that refuses to countenance the idea that their gravy train has run out of fuel.
Portugal is likely to fail next. About the time that Greece uses up the EU and IMF loans, the Portuguese will be knocking on the door. But the biggest threat to the American economy is from one of the biggest of the PIIGS, Spain.
With an economy four times the size of Greece, Spain is almost 10 percent of the entire Eurozone, and stopgap measures that plug holes in Greece’s sinking boat will not work on the Iberian Peninsula. The Spanish economy is a malfunctioning structure built decades ago, made worse by the bombs of Islamic terrorists that gave the 2004 election to a surprised socialist, Jose Luis Rodriguez Zapatero. He quickly allowed the government to grow faster than the economy, and inflation pushed the price of clothes and fruit to three times that of the rest of Europe. Unemployment has doubled in the last 18 months to 19 percent, and political meddling in the banking sector has resulted in a million empty houses and airports that no one uses. Just consolidating the caja system of banks will cost $120 billion, and many will go bankrupt anyway. One of these “savings and loans” banks in Rioja is underwater to the tune of $13,000 for every man, woman and child in the city.
Then there are Spanish labor laws. Zapatero, a socialist who said the idea a united country named Spain is “a concept that is open for discussion,” is not interested in labor reform. Today, Spanish workers get unemployment benefits for two years that start at 70 percent of last paycheck. Permanent workers cannot be fired without substantial payments. And the unions called nationwide strikes in 1988, 1992, 1994, and 2004 when modest reform was proposed to these laws, promising to create anarchy if the proposals were not dropped. Even when raising retirement age from 65 to 67 was suggested, the unions went into the streets. As a result, no company wants permanent workers. The housing bubble, labor laws, welfare rights, and lack of political will have brought Spain to the brink of bankruptcy.
The economy of Italy, the other PIIGS member, is so opaque it is hard to know the exact situation, but it is not good. And the rot certainly extends to non-PIIGS like France, and especially to Britain.
Unfortunate, you say, and too bad for Europe. Though it might mean a cheap vacation in the Eurozone, you still hope they solve their problems. Anyway, President Obama and congress told us we are out of our crisis, so why does the European mess matter? Well, keep three things in mind as you try to make sense of scant information in mainstream media:
- Good news: Serious investors are moving from European markets to the safe haven of U.S. Treasury bonds. That helps finance our debt and raises the value of the dollar. The value of a Euro will drop significantly, and may equal a dollar very soon. Visit Greece.
- Bad news: Serious investors are losing faith in European and U.S. stock markets as Europe’s debt crisis grows. They know the U.S. budget deficit will be $1 trillion for years, and as the Obama administration continues to spend and borrow, the U.S. national debt will reach the unimaginable sum of $20 trillion in 2020. They also know we can print dollars, and they suspect the politicians now in Washington will print lots and lot of dollars. Buy gold.
- Worse news: We pay a quarter of IMF loans! Although the U.S. is supposed to contribute 17.7 percent of ‘quota subscriptions,’ the IMF insures we contribute 26 percent of all IMF usable financial resources. That was the amount in October 1999, when congress discovered that IMF financial statements were not transparent, that the IMF bilked U.S. taxpayers of $2.7 billion of loan interest, and that proceeds of IMF sales of gold (much it from the U.S.) were not being properly shared, bilking the U.S. of additional billions. Nothing was done, of course. In the next weeks, a quarter out of every dollar Greece and the other PIIGS get from the IMF will come from the U.S. taxpayer’s pocket. Call your congressman and ask if understands IMF rules, what they cost us, and what he is doing about it. Good luck.
All the world knows the White House and congress are bankrupting us. Now here come the PIIGS.
Chet Nagle is the author of IRAN COVENANT.