There are common threads running through the economic crisis of the PIIGS (Portugal, Ireland, Italy and Greece). Corruption, lacklustre fiscal policies that for decades has seen low income and corporate tax rates, bloated public sectors and wage inflation were all contributing factors to the current crisis that has plunged the future of the eurozone into uncertainty.

The European debt crisis forced the European Union (EU) into finally accepting an ugly truth; despite the efforts of the EU to aid its weaker economies through structural funding and rigorous preparation to enter the Economic and Monetary Union (EMU), the underlying structural weakness of the PIIGS remains. As former British prime minister Tony Blair argued, we can no longer pretend that the Italian and German economies are on par. It is hard to imagine that a bailout for any of the PIIGS could be the magic remedy the eurozone is searching for; it is now time for change.

But were the PIIGS predisposed to crisis and collapse?  It can now be argued that the nature of their entry into the EU as semi-peripheral economies created situations of moral hazard. The combination of a continuing flow of structural funds coupled with the framework of the eurozone allowed the PIIGS to view the EU as an exchequer for funding short-sighted fiscal policy.

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EU structural and cohesion funding was designed to reduce differences in prosperity and living standards across regions and states. Through funds such as the European Social Fund (ESF) and the Common Agricultural Policy (CAP), economies that entered the EU on the semi-periphery were able to finance initiatives such as subsidising tertiary education to produce a skilled workforce.  The funding still continues to this day with the ESF providing €76 billion in funding between 2007-2013, and the total worth of  EU structural and cohesion  funds during this period is estimated at €308 billion.

Upon joining the EMU, member states were required to hand over autonomy over monetary policy to the European Central Bank. This meant that a centralised body was now in charge of administrating policy on interest rates and inflation. However, fiscal policy remained in the hands of the individual members and this is where part of the problem of the PIIGS began.

Take the Republic of Ireland as an example. Ireland was seen as the “shining light of Europe” by The Economist not so long ago after it transformed from a semi-peripheral, agricultural-based economy to one that became highly skilled based and attractive to Foreign Direct Investment (FDIs) from companies such as Microsoft and Google. Through using structural funds and the fiscal discipline by adhering to the Maastricht Criteria, which was compulsory when joining the EMU, Ireland was able to transform into one of the wealthier members of the EU.

For a short period, it appeared that the initial aims of EU structural funding was finally being achieved in the Republic. As a net beneficiary of this structural funding, the Irish economy began transforming rapidly towards becoming a net contributor. However, critics now argue that the Irish government developed “begging-bowl syndrome”; Irish policy makers attempted to maximise receipts from Brussels while ensuring that fiscal policy remained in Dublin’s control. Eurozone members still retained autonomy over fiscal policy so while Ireland continued receiving funding from the EU it was able to develop policies that were initially effective in creating its economic boom but would also contribute to its downfall.

Ireland has had a notoriously low corporate tax rate of 12.5% for more than a decade. This policy was designed with the sole intent of attracting FDIs and making Dublin a gateway for foreign investment into Europe. The constant flow of structural funds from Brussels coupled with low interest and taxation rates gave Irish policy makers a false sense of security and lead to the creation of short-sighted fiscal policy that did not plan for the post 9/11 slowdown and then the global financial crisis.

The boast of former Taoiseasch (Irish Prime Minister) Bertie Ahern that the “boom is getting boomier” spoke volumes of the recklessness of Irish policy making. We witnessed the fallout of 2010 bailout when Ireland made a formal request to the EU and International Monetary Fund for a for an international financial rescue package of €90 billion.

So where to from now? Earlier last week, the idea of a “two-speed” eurozone was floated by French President Nicolas Sarkozy, who suggested that the PIIGS would be pushed to the outer of this arrangement. The collapse of the Euro would be a global economic disaster, and the creation of a two-speed eurozone would spell disaster for an export-based economy like Ireland as moving to the outer core of the eurozone may stigmatise the Irish economy to FDIs.

It is hard to imagine Sarkozy and his German counterpart Angela Merkel sitting through another round of negotiations over a bailout for any of the PIIGS. At this moment in time, it is hard to predict what the solution to the current crisis may be but it is obvious that the current structure can no longer create or support this moral hazard.

What is left is the realisation that the EU can no longer labour under the misapprehension that the PIIGS could soon fly alongside their wealthier neighbours. The gap between member states that entered the EU on the semi-periphery and those that entered with a developed economy is more apparent than ever.

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Peter Fray
Peter Fray
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