The Euro’s PIG-Headed Masters
June 3rd, 2011
02:44 PM ET

The Euro’s PIG-Headed Masters

Editor's Note: Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University. He was formerly chief economist at the IMF. He will be on CNN GPS this Sunday at 10am ET/PT. For more from Yao Yang, visit Project Syndicate and check it out on Facebook and Twitter.

By Kenneth Rogoff

Europe is in constitutional crisis. No one seems to have the power to impose a sensible resolution of its peripheral countries’ debt crisis. Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions. Unfortunately, they are not just “kicking the can down the road,” but pushing a snowball down a mountain.

True, for the moment, the problem is still economically manageable. Eurozone growth is respectable, and the PIGs account for only 6% of the eurozone’s GDP. But by stubbornly arguing that that these countries are facing a liquidity crisis, rather than a solvency problem, euro officials are putting entire system at risk.

Major eurozone economies like Spain and Italy have huge debt problems of their own, especially given anemic growth and a manifest lack of competitiveness. The last thing they need is for people to be led to believe that an implicit transfer union is already in place, and that reform and economic restructuring can wait.

European Union officials argue that it would be catastrophic to restructure any member’s debts proactively. It is certainly the case that contagion will rage after any Greek restructuring. It will stop spreading only when Germany constructs a firm and credible firewall, presumably around Spanish and Italian central-government debt.

This is exactly the kind of hardheaded solution that one would see in a truly integrated currency area. So, why do Europe’s leaders find this intermediate solution so unimaginable?

Perhaps it is because they believe they do not have the governance mechanisms in place to make tough decisions, to pick winners and losers. The European Union’s weak, fractured institutions dispose of less than 2% of eurozone GDP in tax revenues.

Any kind of bold decision essentially requires unanimity. It is all for one and one for all, regardless of size, debt position, and accountability. There is no point is drawing up a Plan B if there is no authority or capacity to execute it.

Might Europe get lucky? Is there any chance that the snowball of debt, dysfunction, and doubt will fall apart harmlessly before it gathers more force?

Amidst so much uncertainty, anything is possible. If eurozone growth wildly outperforms expectations in the next few years, banks’ balance sheets would strengthen and German taxpayers’ pockets would deepen. The peripheral countries might just experience enough growth to sustain their ambitious austerity commitments.

Today’s strategy, however, is far more likely to lead to blowup and disorderly restructuring. Why should the Greek people (not to mention the Irish and the Portuguese) accept years of austerity and slow growth for the sake of propping up the French and German banking systems, unless they are given huge bribes to do so?

As Stanford professor Jeremy Bulow and I showed in our work on sovereign debt in the 1980’s, countries rarely can be squeezed into making net payments (payments minus new loans) to foreigners of more than a few percent for a few years. The current EU/International Monetary Fund strategy calls for a decade or two of such payments. It has to, lest the German taxpayer revolt at being asked to pay for Europe in perpetuity.

Perhaps this time is different. Perhaps the allure of belonging to a growing reserve currency will make sustained recession and austerity feasible in ways that have seldom been seen historically.  I doubt it.

True, against all odds and historical logic, Europe seems poised to maintain the leadership of the IMF. Remarkably, in their resignation to the apparently inevitable choice for the top position, emerging-market leaders do not seem to realize that they should still challenge the United States’ prerogative of appointing the Fund’s extremely powerful number-two official.

The IMF has already been extraordinarily generous to the PIGs. Once the new bailout-friendly team is ensconced, we can only expect more generosity, regardless of whether these countries adhere to their programs.

Unfortunately, an ultra-soft IMF is the last thing Europe needs right now. With its constitutional crisis, we have reached exactly the moment when the IMF needs to help the eurozone make the tough decisions that it cannot make on its own. The Fund needs to create programs for Portugal, Ireland, and Greece that restore competitiveness and trim debt, and that offer them realistic hope of a return to economic growth. The IMF needs to prevent Europeans from allowing their constitutional paralysis to turn the eurozone’s debt snowball into a global avalanche.

Absent the IMF, the one institution that might be able to take action is the fiercely independent European Central Bank. But if the ECB takes over entirely the role of “lender of last resort,” it will ultimately become insolvent itself. This is no way to secure the future of the single currency.

The endgame to any crisis is difficult to predict. Perhaps a wholesale collapse of the euro exchange rate will be enough, triggering an export boom. Perhaps Europe will just boom anyway. But it is hard to see how the single currency can survive much longer without a decisive move towards a far stronger fiscal union.

The views expressed in this article are solely those of Kenneth Rogoff. Copyright: Project Syndicate, 2011. Click here for a podcast of this commentary.


soundoff (15 Responses)
  1. j. von hettlingen

    The 3 PIG's have been long time members of the EU. Portugal joined the club in 1986, Ireland 1973, Greece 1981.
    The three countries are more or less known as periphery regions and have no heavy industries. They had been able to thrive thanks to massive subsidies. For a long time the 3 countries had been able to live on tourism and services. The people had been living beyond their means. Social transfers, public spendings and low revenues are the few reasons why the treasury in those countries was empty.

    June 3, 2011 at 6:33 pm | Reply
    • marc

      get your facts right mate...Ireland has an industrial base and is a decent size producer of software, pharmaceuticals and machinery parts ...Our problem here is that the stupid government has saddled the Irish tax payer with the gambling debts of criminal real estate investors and over gambling German, French and other so called "core" country speculators and gamblers...We neither want your help or pity...We should leave the German serving euro and get our own currency back...or perhaps leave the EU and get our fishing grounds back that you lot have plundered over the years...Dont be ignorant by thinking that you are doing us a favor...you re helping your own gambling banks and bondholders ....PIGG countries indeed...how dare you you arrogant s..t

      June 12, 2011 at 6:46 pm | Reply
  2. james2

    If you think about it, Europe is making a similar mistake that they made during the conclusion of World War I. Why do the Europeans have to fight amongst themselves so much?

    June 3, 2011 at 10:28 pm | Reply
  3. Akbar

    And moslems can't participate in a solution because of our hatred of pork. "smirk"

    June 6, 2011 at 2:48 pm | Reply
  4. kelly

    Sell Ireland to North America, take the money to pay off the problems elsewhere. If we can get more than a couple million, that's a good deal.

    June 6, 2011 at 2:49 pm | Reply
    • marc

      how about sell you to the ass hole association ???maybe get a few cheap cents

      June 12, 2011 at 6:48 pm | Reply
  5. che-3

    Did I read this right "The Euro’s PIG-Headed Masters"?
    Hey, those are their words as GREEDY PIG HEADS not ours on struggling Main Street. In the words of Brother, Malcolm X: The Chickens Coming Home To Roost.

    June 6, 2011 at 3:46 pm | Reply
  6. Hase

    The only reason why anglo-saxon pundits are having opinions such as these is because it diverts from the real conundrum: when are the US paying the Chinese back? In comparison to US deficits, Greece is probably indeed not doing that bad. The point: better austerity measures today than disaster later. Infinite financial surfing on the wave of growth is a physical impossibility in a world of limited resources. Americans (and Brits) still don't want to see that. With the current amount of counter evidence, ranging from Madoff to 9/11, that's plain irresponsible.

    June 6, 2011 at 6:40 pm | Reply
  7. scriss

    This all comes down to having Germany pay for everyone else's debt. There is no reason why they should. Germany should leave the EU, re-implement the Deutsch Mark and spend their tax money taking care of their own citizens. The German people worked for what they have – they don't need to give it away to anyone else.

    June 7, 2011 at 11:11 am | Reply
  8. Roelof

    The problem is very simple. Only by export an economy can grow. Greece, Ireland, Portugal and Spain don't belong in the eurozone. For them the euro is too expensive. They don't export, means their economy can't grow. Causes them to find out that every time again that their wages are too high, because the euro doesn't adapt to their situation. Spain 20% unemployment, Greece 17% unemployment, Ireland 14% unemployment, Portugal 15% unemployment. That's the result of allowing countries into one currency that totally can't compete with other economies. When their currecy could devaluate, their goods become less expensive and they start exporting. Means their economy starts growing. As long they are in the eurozone, they can forget about economical growth.

    June 7, 2011 at 1:03 pm | Reply
    • marc

      get your facts right mate and dont be arrogant andignorant
      http://www.irishtimes.com/newspaper/breaking/2011/0610/breaking23.html

      June 12, 2011 at 7:04 pm | Reply
  9. EURO

    " Germany should leave the EU, re-implement the Deutsch Mark and spend their tax money taking care of their own citizens "

    Those very same Nazi scums are again profiteering, Germany in Euro zone gets to print unlimited Euros to funding other countries in Europe and the world. when they say bailout they mean printing unlimited money

    June 7, 2011 at 9:59 pm | Reply
  10. match contents´

    obligation i supeprb speech doesn´t an cout anymore. Far, far a near future makes you believe things that ever exist itself. In walk the thog.

    December 23, 2012 at 9:36 pm | Reply
  11. so marry christmas

    and happy new year

    December 23, 2012 at 9:52 pm | Reply
  12. the blindest girl by t time

    you are so beautiful

    December 23, 2012 at 9:56 pm | Reply

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