Lack of Restructuring, Reform Doom PIIGS Economies

○ Used to inefficiency

The fiscal deficit to GDP ratio of Greece was 13.6 percent last year. The figure for Spain was 11.2 percent, Portugal 9.4 percent, and Italy 5.3 percent.

The so-called PIIGS group of countries -- Portugal, Ireland, Italy, Greece and Spain – could face bankruptcy due to their excessive fiscal deficits. Yet this is not the first time for the countries to suffer from severe fiscal problems.

The fiscal deficit ratios of Greece and Italy were above 10 percent in 1992. Spain and Portugal were better off but their ratios exceeded seven percent in 1993. The deficits fell in 1998 after the Asian financial crisis broke out, but rose again afterwards.

Their failure to implement public sector reform is the fundamental reason for their economic woes.

The ruling Greek Socialist Party pledged pay raises for employees of publicly funded corporations. Greece’s fiscal deficit snowballed due to its heavy wage burden for workers at state-funded companies that account for a quarter of government spending.

When Dong-A Ilbo reporters visited Greece late last month, the street protests in Athens showed a typical example of such inefficiency. Some 300 laid-off workers of Olympic Airways were chanting slogans against pension reform.

Spain and Portugal have also been slow in restructuring their state-run corporations due to unions.

The excessive size of the countries’ underground economies seems to have fueled their fiscal deficits, but their governments were slow in trying to attract the underground money to their official economies.

Greece’s tax office estimates 31 billion euros in taxes went uncollected in 2007 due to heavy dependence on tourism and maritime shipping. Despite frequent warnings of significant damage from the global economic slump, the country failed to restructure its industrial structure.

○ Financial crises spark fiscal meltdown

PIIGS economies had several opportunities to take action. They could have implemented independent foreign exchange policies before introducing the euro in 1999. They could have also improved their current account balances and cut fiscal deficits via industrial restructuring and maintenance of their currency value in accordance with their economic situations.

Instead, they allowed speculative investors to take the lead in their foreign exchange markets, while leaving their current account deficits as they were.

The implementation of the euro currency has significantly reduced the PIIGS ability to resolve fiscal deficits through exports. The countries’ current account deficits grew bigger as they appreciated the value of their currencies to the level of Germany and France despite deteriorating industrial competitiveness.

Spain’s current account deficit to GDP ratio hovered around an average 0.7 percent from 1994 to 1998. After the introduction of the euro, however, the ratio surged to 5.5 percent from 1999 to 2007 after the same exchange rate was applied to all EU economies regardless of economic situation.

With PIIGS economies failing to improve economic fundamentals and adopting the euro without proper preparation, the global financial crisis that began in 2008 was a nightmare for them. Their governments were forced to inject bailout funds into shaky financial companies on the verge of collapse.

Spain bore a significant fiscal burden to prevent the insolvencies of savings banks. As a result, the ratio of Madrid’s debt guarantees for the banks has exceeded 15 percent of GDP.

Korea’s fiscal deficit ratio was just 4.1 percent last year, putting Seoul in a far better fiscal situation than the PIIGS group. The fear is, however, that the combined debts owed by 23 state-funded corporations have increased 20.4 percent in value to 36.1 trillion won (32.4 billion U.S. dollars).

At a time when household and corporate debts have reached alarming levels, the possibility of Korea’s non-government debts being transferred to the government cannot be ruled out. Experts say Seoul must manage public and private debts to preemptively respond to signs of an economic crisis.

legman@donga.com lovesong@donga.com