For those with long memories, you might recall that last May marked not only the anniversary of the infamous “Flash Crash” but also when the European debt crisis first made major headlines, causing a worldwide financial scare. Money quickly shifted to safer investments like treasury bills and precious metals, and the Euro took a significant dip compared to the dollar. The term “PIIGS”—referring to Portugal, Ireland, Italy, Greece, and Spain—became a staple in our financial vocabulary.
Initially, the Euro had climbed to around $1.60 but fell sharply during the recession. It managed a comeback, reaching $1.51, but tumbled again to a four-year low of $1.18 when the extent of the debt issues was fully realized in May. What started with Greece quickly spread to the other PIIGS countries, stoking fears and financial instability.
A year later, despite bailouts and promises of austerity measures, the fundamental problems persist. It’s more than a currency battle between the Euro and the Dollar; it’s about whether Western economies can spur enough growth to increase tax revenues and manage huge national debts and deficits.
As this currency saga unfolds, the real fight is over debt. Market confidence hinges on seeing real progress in managing and reducing debt levels. Recent warnings from Standard and Poor’s about potentially downgrading the U.S. debt rating if fiscal issues aren’t addressed have only added to the urgency.
In Europe, officials like Carlo Cottarelli from the IMF suggest that the situation is improving, but skepticism remains. Bailout efforts in Greece and Ireland have been orderly, but Portugal is now facing its own challenges with social unrest and reluctance on austerity measures. Spain is also struggling, particularly with a real estate crisis that mirrors the U.S. situation.
The ongoing crisis highlights a fundamental flaw in the Euro system: while the EU adopted a single currency, individual member states retained control over their economic policies, leading to imbalances and deficits. The PIIGS countries are mostly importers, relying on the larger economies like Germany, the Netherlands, and France, which are strong exporters that bolster the Euro. However, the distribution of credit ratings didn’t reflect the economic disparities among member states, leading to excessive borrowing now coming due.
As of the past few months, the Euro has strengthened to $1.42, suggesting Europe is recovering somewhat, though the U.S. remains stuck in a legislative stalemate. Both regions need growth, but with manufacturing increasingly moving to Asia, the outlook is complicated.
