"You can't put lipstick on a PIIG," analysts at Denmark's Danske Bank wrote in a report earlier this month, noting that the market had suddenly woken up to the long-running financial problems of the so-called European peripheral countries of Portugal, Ireland, Italy, Greece and Spain.
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These problems constitute the worst crisis the European Monetary Union (EMU) has faced in its short history, and ironically, have only really emerged as the eurozone area tips into economic recovery. The problem is that some European Monetary Union members are tipping into it swifter than others, creating diverging monetary needs and an almost two-tiered eurozone. The problem has become so pronounced that some are now seriously discussing a scenario that would have been unheard until recent months: countries leaving the eurozone and reverting back to national currencies.
"The economic recovery that the eurozone anticipates in 2010 could bring with it new tensions," Harvard economics professor Martin Feldstein presciently wrote in December. "Indeed, in the extreme, some countries could find themselves considering whether to leave the single currency altogether."
Officially, the idea of countries ditching the euro isn't on the radar screen on European Central Bank (ECB) authorities. ECB President Jean-Claude Trichet was quick to slap down the possibility of a eurozone member exiting the monetary union as an "absurd" hypothesis in mid-January. "In the euro area, the default does not exist," Commissioner Joaquin Almunia Mira glibly said last Friday.
But despite the certainty of senior officials, the questions persist.
A working paper published in December and written by the ECB's own legal counsel explored the legal possibility of withdrawal or expulsion from the European Union and EMU. While the research for the report was begun in 2008 and not intended to address the current crisis, it has been interpreted in the media as evidence that the PIIGS may be cut loose from the eurozone. Another piece of research, this time from the European Commission, mentioned the emergence of "competitiveness gaps" between EMU members.
The catalyst for recent concern is the expected tightening of ECB monetary policy. The central bank has signaled that it intends to slowly withdraw many of the extraordinary liquidity facilities it enacted in the wake of the financial crisis, as the larger members of the eurozone recover. This is leaving the still-recovering peripheral countries feeling left out in the cold.
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