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Introduction

PIGS refer to a group of nations that have economies ridden with debts namely Portugal, Italy, Greece, and Spain. The name is normally used to relate to issues closely related to debts that the government has. However, the name has raised eyebrows with top leaders of the government in those countries criticizing it. The governments in the four countries normally question whether the name is meant to drive away the attention of the world from the controversial financial situation and budgets.

Theory

The PIGS economies and labor laws contrast a little to that of Germany. Germany managed to implement reforms that enabled it to make its economy more competitive and flexible as compared PIGS economies (Kotlowski, 2000). During the period between 1990 and 1999, all the PIGS apart from Italy enjoyed a cyclical boost that led to overheating. Portugal though, was the first country to experience a breakdown of its economy. This was fed by a decline in borrowing costs on the prospects of euro membership and by EU financial aid. During that period, Portugal struggled but did not successfully manage to regain a cost advantage and get its economy back on track (Grolier Incorporated, 1997).

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Spain and Greece similarly benefited from the same booms that were driven by big spending and financial aid. For sometime, a majority of economists thought that they would be able to avoid a sharp downturn. Unfortunately, it was only a matter of time before they got Portugal's hangover and suffered from a rapid loss of international competitiveness. Currently, for the PIGS the stable euro has turned from a friend to foe, and unfortunately abandoning the euro poses a number of major risks (Kotlowski, 2000).

A critical study of Italy's case reveals that the country has suffered from similar ills, even though it missed out on the boom after the introduction of the euro. It exhibited a high exchange rate simply because of the fact that it lost its classical devaluation policy. It also exhibited a weak economy that was frequently shaken up by labor strikes and a current account deficit (Serfaty, 2003).

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All this challenges, together with the French's efforts to devalue the euro, confronted the European Central Bank with the challenging task of running a multispeed currency. Analyst projected that in the decade between 1999 and 2010, the European Central Bank would face the fact the PIGS would still be forced to abide by the old inflexible model of a highly structured labor market (Aslund, 2010). This then would hold them back from accruing benefits associated with a globalized economy. This was at a time when the globalized economy was expected to become more and more questionable.

It was ironical that during that decade, the effects of inaction had been highly variable. Portugal and Italy underwent longer-term stagnation as Italy's economy was being propelled by tourism. Toward the end of the decade, Greece and Spain were booming as France who tried to sabotage the BIGS growth process grew only modestly. The one thing that the PIGS to together with France shared in common during this period was the fact that the measures their governments took were very short-term (Aslund, 2010).

What they did basically was to treat the adoption of the euro as the end of their reforms, instead of treating it as the beginning as they ought to have done. This is the period when countries like the Netherlands, Austria and Finland left them behind simply because they looked at the common currency simply as the milestone for a new start for reforms (Aslund, 2010).

It is therefore, not shocking to find out that unit labor cost in all these four countries have gone up significantly, thus resulting in a sharp melt down in economic conditions and competitiveness. Economic analysts have suggested that it is necessary for the four PIGS countries to change their attitudes before they continue to go down the drains even further (Dunn, 2010). This is because they are likely to experience even worse conditions than they currently and maybe even the cross the point of no return. Still, it must be noted that, to go through the process of change, they should be prepared to undergo the necessary pain that is associated with this process. In fact, with the global financial crisis that occurred towards the end of the 1999 to 2010 period, structural change is in fact currently quite necessary to be able to welcome in greater competitiveness. This is also partly because the crisis made the global economy even darker than it has ever been in many years (Ashe, 2010). Therefore, there is no particular reason to wait for the ex-machine.       

One thing that the PIGS countries have in common is the fact that they are all in deep economic crisis. This has largely been contributed to by their insistence on sticking with euro and more so with the European Central Bank's interest rate policy. Before the EU entered they only had to deal with inflation risk issues and not sovereign risk issues since they could print money (Dunn, 2010). Unfortunately, after the introduction of the EU that they have stuck to, the sovereign risk came into play.

From 1999 to 2010, the PIGS countries pinned a lot hopes on the EU just as they did between 1990 and 1999, on the European Community's Project. However, it is important to note that, during this time, the restrictive fiscal and anti-inflation policies were really needed whether the EMU was introduced or not (Chatterjee, 2010). These essential incentives which were necessary to engage these policies had been missing though. One cannot underrate Greece's effort to join the club even before the euro was introduced as currency could not be underrated (Chatterjee, 2010). By the year 2002, it was projected that the country could be ready to join the club.

Literature Review

During the period between 1990 and 2010, Portugal was influenced by the need to attain increased wages and being unable to manage the policies of currency, its economy eventually failed. Italy on its part attempted to give increased wages and the economy suffered tremendously creating a deficit in the national budget. Increased corruption in organizations managed by the state also contributed a lot and its economy eventually crashed. Greece was suffering from under-developing economy and the urge to maximize wages and from 2000, the country took big loans with the thought of reviving its economy (Lorca, 2011). This was never to happen following the decline in tourism. Just like Italy, Spain was no different in terms of economy and wages. The country engaged in widespread importing of cheap goods threatening its local industries. The country was equally suffering from a housing problem. With all these problems ensuing, the economy of Spain tumbled down (Lorca, 2011).

Germany on its side has been doing well in terms of its economy. In a recent crisis, Germany disagreed with Greek on the interest rates they are required to pay on emergency mortgage. In the same breadth, Greek did not like the idea of involving IMF in the matter. In the bonds spread that was highlighted recently, the 10 year bond points between Germany and Greek stands at 370 points. The securities bonds of Germany have continued to improve and they have gone up with 200 points resulting to increased market bonds in Europe.

Empirical work

We can estimate Panel VAR (PVAR) model on the PIGS country after the introduction of the EU to be able to assess the qualitative and quantitative impact of public debt on interest rates.

The structural form can be given by:

AoZit=A(L)Zit-1+eit

Zit  is the vector of endogenous variables; Ao being a matrix; A(L) being a matrix polynomial in the lag operator L; last but not list we have the eit which is the structural disturbance vector. The results reveal that before the introduction of the euro an increase in public debt led to positive effects on long-term nominal interest rates. Towards the end of the period between 1999 and 2010, there were concerns about the fiscal solvency of the PIGS with a widening of the government bonds' rates spread. There were immediate talks of possible bailouts that challenged the Euro zone's stability.  

Conclusion

As I have earlier mentioned, the name PIGS is always used to relate to issues closely related to debts that the governments of Portugal, Italy, Greece, and Spain have. The name has however, raised eyebrows with top leaders of the government in those countries criticizing it. During the period between the first decade of the introduction of the EU i.e. 1990 and 1999, Portugal was influenced by the need to attain increased wages and being unable to manage the policies of currency, its economy eventually failed. Italy on its part attempted to give increased wages and the economy suffered tremendously creating a deficit in the national budget. Increased corruption in organizations managed by the state also contributed a lot and its economy eventually crashed.

Greece suffered from the effects of an under-developing economy and the urge to maximize wages. During the second decade that began in 2000, the country took big loans with the thought of reviving its economy. This was never to happen following the decline in tourism. Just like Italy, Spain was no different in terms of economy and wages. The country engaged in widespread importing of cheap goods threatening its local industries. The country was equally suffering from a housing problem. With all these problems ensuing, the economy of Spain tumbled down.

Unlike the PIGS countries, Germany on its side was doing quite well in terms of its economy. The PIGS economies and labor laws contrasted a little to that of Germany. Germany managed to implement reforms that enabled it to make its economy more competitive and flexible as compared PIGS economies. During the period between 1990 and 1999, all the PIGS apart from Italy enjoyed a cyclical boost that led to overheating. Portugal though, was the first country to experience a breakdown of its economy. This was fed by a decline in borrowing costs on the prospects of euro membership and by EU financial aid. During that period, Portugal struggled but did not successfully manage to regain a cost advantage and get its economy back on track.

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