Many of the so called “PIGS” countries (Portugal, Italy, Greece & Spain) have been having a hard time with debt, unemployment and economic growth, especially since the European Sovereign Debt Crisis after the Great Recession. But Italian and Greek debt troubles have been drawing new concerns on the fate of the Euro.
While the Federal Reserve has been tightening monetary policy in the U.S., the European Central Bank (ECB), which is the central bank for the Eurozone, has kept its monetary policy very lax to bolster low inflation in the Eurozone.
As inflation and economic conditions become more favorable for most countries, the central bank is expected to taper quantitative easing (government bond purchases), effectively tightening monetary policy in the medium term.
However, because of this “tapering” investors are worried about high debt countries such as Italy and Greece. As a result, investors have been selling European government bonds as they see them as riskier, putting upward pressure on yields.
In fact, some Italian hedge funds have been making explicit bets that the price of Italian bonds will collapse, as the primary buyer of these bonds has been the ECB itself.
There has been a disconnect between the economies of southern and northern/central Europe for some time now. In 2015 the Greek and Italian economies barely grew, growing -0.2 percent and 0.7 percent respectively. While countries like Sweden, Poland and Slovakia did exceptionally well in Europe with gross domestic product (GDP) growths of about 4 percent in 2015.
There is also a discrepancy with debt.
In 2015 Greece and Italy had debt to GDP ratios of 177 percent and 132 percent respectively, compared to healthy ratios of 71 percent and 22 percent for Germany and Luxembourg. Perhaps unsurprisingly, unemployment also varies widely across the EU, very prominently between Germany with 4.6 percent and Greece with a dire 24.9 percent unemployment rate.
These discrepancies make it much more difficult to create policies that benefit all countries, what may be just enough here may be way too much there. So there is a concern a tighter ECB monetary policy that may be just right for countries like Germany and Slovakia could come at the expense of economically struggling ones like Greece and Italy.
With a tightening European monetary policy, anemic economic growth and government debts still alarmingly high, some consider the current situation unsustainable for high debt countries. Some economists have advocated debt relief/forgiveness, reform of the Eurozone, or most remarkably of all- leaving the Eurozone (and thus abandoning the common currency) all together.
Most prominently the International Monetary Fund has recommended that “European governments provide debt relief to Greece for the country’s economy to fully recover.”
None of these solutions are perfect, but if nothing substantial is done to alleviate the economic troubles of these countries, they will only continue to worsen.
With the complacency and incapability of the European Union is a European Sovereign Debt Crisis take two on the horizon?