Origins

Before the euro, governments in the PIGS countries (Portugal, Ireland/Italy, Greece and Spain) had to pay a lot more to borrow money than
governments of more developed countries like France and Germany. In addition, during the past decades, those countries have failed to grow
sufficiently to support their ability to pay loans.
After the euro was introduced, the process of convergence in the selling of euro-countries bonds emerged: all the Euro countries could borrow at
the same rate and with the same level of trust. This perception was supported by the European officials.
With that argument, banks and financial institutions didnt doubt to lend money to the weaker Eurozone countries, and their borrowing costs
plummeted. For a decade (during the early 2000s), the borrowing costs were almost identical for all of the countries in Europe.
Germany was the Big Brother economy in the EU, part of this process was fueled by its exports of goods and services to surrounding European
countries at a low cost (facilitated by the economic integration and the common currency). This process made it easier for weaker-European
countries to buy products and services from Germany by getting indebted without taking into consideration the consequences.
This situation made weaker European economies to have a false sense of prosperity; they borrowed a lot of money for imports and infrastructure
without strengthening their own infrastructure, export industry, or having a common-sense-spending process.
Then, the US financial crisis of 2008-2009 appeared and exposed the unsustainable fiscal policies of countries in Europe and around the globe.
Under this situation, the false convergence process in the economies of the Eurozone was clear. The Eurozone countries were not equally
developed or stable (in terms of economics). They were a bunch of different countries, with vastly different economies. So, not all Eurozone
government bonds or loans were identical; therefore, not all of them might be able to pay back their debts as easily.
The banks and financial institutions then established new and higher interest rates to lend to weaker countries. That, in turn, hammered the
banks that had loaned all that money to those weaker countries.
The core of the European crisis: rising borrowing costs for weaker countries, and trouble for banks that have loaned money to the PIGS
countries.

Greece

Greece spent a lot of money in governmental purchases and expenditures for years without a sufficient fiscal reform since it acceded to the EU
on 1981. So, the Greek economy was not able to grow at fast rates, its growth slowed, so do tax revenues, making high budget deficits
unsustainable.
The recently elected Prime Minister George Papandreou, in late 2009, was forced to announce that previous governments had failed to reveal
the size of the nations deficits. The debts of the country were larger than the complete size of its economy; the country could no longer hide the
problem.
Investors responded by demanding higher yields on Greeces bonds, which raised the cost of the countrys debt and needed some bailouts by
the European Union and European Central Bank (ECB).
This begins a vicious cycle: the demand for higher yields means having higher borrowing costs for the country in crisis, which leads to further
fiscal pressure, prompting investors to demand even higher yields, and so on.
A general loss of investor confidence typically causes the selling to affect not just the country in question, but also other countries with similarly
weak finances (the other PIGS countries for instance).

What was made about the crisis?

The primary course of action of the EU has been a series of bailouts for Europes troubled economies (PIGS countries).
First measure, bailout package for Greece: in spring, 2010, when the EU and International Monetary Fund (IMF) disbursed $163 billion to
Greece, the Greek government required a second bailout in mid-2011, about $157 billion.
Second measure, parachute for PIGS countries (7 times the size of the rescue package of 2010): is another rescue package that accounts
sevenfold the first measure. Is a short measure that will cease to exist on 2013, any Eurozone country can accede to the package if it takes
more responsibility and discipline in financial issues. On March 9, 2012, Greece and its creditors agreed to a debt restructuring that prepared
another round of bailout funds. Ireland and Portugal also received bailouts, in November 2010 and May 2011, respectively.
Third measure, the European Stabilization Mechanism (or the European Financial Stability Facility): is another amount of money that the
Eurozone members reached for almost 440 billion euros. This mechanism was created to provide emergency lending to countries in financial
difficulty.
Fourth measure, credits from the European Central Bank (ECB): the ECB announced a plan, in August 2011, to purchase government bonds if
necessary to keep yields from spiraling. it also announced, in December 2011, the creation of a Long Term Refinancing Operation (LTRO). This
operation made $639 billion available in credit to the regions troubled banks at ultra-low rates, then followed with a second round in February
2012. The main reason behind LTRO is that private banks are reluctant to disburse more money to Greece or other affected weak economies.
Fifth measure, Austerity Plan of the Greek Government: it is responsibility of the Greek government to adjust its spending mechanisms and
budgets so that a saving package could be approved (austerity plan). This plan not only includes having governmental savings, increasing the tax
rate, increment the regulation on supporting programs, privatizing certain State-owned businesses and reducing the wages of governmental
employees (of all levels).

Political and social issues

In the affected nations, the push toward austerity has led to public protests in Greece and Spain and in the removal of the party in power in both
Italy and Portugal.
On the national level, the crisis has led to tensions between the wealthier countries like Germany, and the higher-debt countries such as Greece.
Germany pushed for Greece and other affected countries to reform the budgets and fiscal framework as a condition of providing aid, leading to
elevated tensions within the European Union.
After a great deal of debate, Greece ultimately agreed to cut spending and raise taxes. However, an important obstacle has been Germanys
unwillingness to agree to a region-wide solution.
The tension has created the possibility that one or more European countries would eventually abandon the Eurozone. On one hand, leaving the
euro would allow a country to pursue its own independent policy rather than being subject to the common policy for the 17 nations using the
currency. But on the other, it would be an event of unprecedented magnitude for the global economy and financial markets.
Even if the German suggestion is to implement austerity, measures in the regions smaller nations are problematic because reduced government
spending can lead to slower growth, which means lower tax revenues for countries to pay their bills. This makes it more difficult for the high-debt
nations to dig themselves out.
Nevertheless, Europes richer countries need to pressure PIGS countries since they are facing pressure from their own citizens. Taxpayers in
countries such as Germany and France refuse to use their money to fund what is seen as the overspending of Greece and the other troubled
European countries.
Also, the Greek population is protesting against any attempt of their government to pass legislation that implements the austerity plan. The same
behavior is being observed in other PIGS countries such as Spain or Portugal.

General outlook for the crisis

All the measures taken to save Greece are based on the relatively small size of the Greek economy. Those measures are similar to the ones
taken in other PIGS countries such as Spain or Italy or even Cyprus today. If the crisis is not contained or the EU takes important decisions for
the future, economies of an important size in the union could not be saved.
Most investors are expecting a euro member country (possibly any PIGS country) to exit the Eurozone at some point in 2013.
Instability continues to affect the rest of Europe as well: i.e. former French President Nicolas Sarkozy lost power due in part to his support for
austerity measures, and the region had fallen into a recession.
Spain faces 25% unemployment with no clear path to growth and the indignant movement is being infecting other PIGS countries.
Certain sectors of the population in strong EU countries are protesting and acting against their established governments or parties because they
consider their taxes and national budget is being pulled to be used to bail out countries that havent had a correct economic management and
policy.
European policymakers, who already lack unity, face a difficult choice: keep the currency union together (with all of the challenges that would
include), or allow Greece (and possibly Spain and/or Italy/Cyprus) to exit, a path that would likely lead to financial market chaos.