"The Eurozone Crisis Is One Crisis."
Hardly. It's at least four, and possibly more depending on how one counts. Europe's peripheral states have a host of problems, and to some degree demand similar short-term responses. But seeking a one-stop solution by lumping them together (as the "PIIGS," a common acronym for Portugal, Ireland, Italy, Greece, and Spain) ignores the very real differences that separate them and that will over the longer term require different policy interventions. Even referring to a singular eurozone "crisis" is something of a misnomer; the label actually encompasses sovereign debt, banking, growth and competitiveness, and structural crises -- all of which, unfortunately, feed on one another.
Take Ireland, for example, which suffered from a banking crisis in 2010 that became a sovereign-debt crisis. Irish banks financed a real-estate-driven domestic bubble, and when the bubble burst the Irish government moved quickly to nationalize some banks and take the financial risks of others onto its balance sheet. As a result, the Irish debt-to-GDP ratio ballooned from 34 percent to well over 100 percent, crippling Ireland's ability to borrow.
Spain's problems are somewhat similar to Ireland's, but with a twist. Like Dublin, Madrid finds itself confronted with a banking problem born of a real estate bubble. But the Spanish autonomous communities or regions, which under the devolved Spanish federal structure manage their own budgets, systematically over-borrowed and overspent during the past decade, all while apparently lying about it to the center. When the real-estate bubble popped, the regions felt the pinch as much as the banks, and now the Spanish federal government may have to prop up both.
Portugal, by contrast, had and has a competitiveness problem. Lisbon feasted on cheap euro financing and for a while enjoyed the benefits. But instead of investing in its economic future, it plunged its European windfall into an unsustainable services-sector boom that masked, for a time, the need to undertake structural reforms. When economic reality hit and demand for services fell, Portugal's economy was crippled. Its path to competitiveness remains an enormous question mark, though its banks remain generally healthy.
Italy's current predicament likewise stems from structural and competitiveness issues. Italian growth has declined in an almost directly linear fashion for 60 years, from 5 percent in the decade after World War II to a virtual flat line in the 21st century. Corruption is endemic, higher education is mediocre, and antipathy toward reform is high. In spite of its strong and industrious north, Italy's growth prospects as a whole are bleak without structural reforms. The country was the largest issuer of euro-denominated sovereign debt, with total indebtedness of 2 trillion euros placing it at the very edge of what the IMF deems "sustainability." Although the country's annual budget deficit is relatively healthy, without reform the country could find itself unable to fund itself and spiral downwards quickly.
Greece is the closest to a perfect storm of the various gales lashing Europe. It has structural and competitiveness issues, and Athens's serial dishonesty over the state of its finances remains in a class of its own. The country has already undertaken one messy and painful debt exchange and with its second troika program at risk, another may follow. Greek financial institutions only became an issue, however, once the value of their holdings of Greek government bonds was slashed and the downturn crushed economic activity in the country, so much so that recent projections see a nearly 7 percent contraction in GDP this year. In some ways, Greece is a reverse of the Irish situation: a sovereign-debt crisis begat a banking crisis, rather than vice versa. Add to that the ongoing risk that Greece may be the one country that really might be forced to leave the euro, and the country and its banks suffer from almost all that ails the eurozone.
The crises of the eurozone's peripheral countries undoubtedly share commonalities, but that doesn't mean that their causes or potential solutions are the same. What it does mean is that Europe's way out of this morass promises to be even more complicated than it appears.
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