“The PIGS (Portugal, Italy, Greece, Spain) countries were overly dependent on domestic industries centered on tourism rather than on manufacturing-centered exports, and borrowed a lot of money from abroad, which led to excessive credit growth. In this situation, when the global financial crisis of 2008 and the austerity policies of major European countries hit in 2010, the bubble burst. If Korea does not want to follow in the footsteps of the PIGS, it must preemptively resolve issues such as debt and the real estate bubble.”
Chris Watling, CEO of Longview Economics, said, “There were many reasons why the PIGS countries experienced an economic crisis, but the most important one was ‘excessive credit growth. ’ He said, “From 2000 to 2007, there was a large-scale credit boom in the PIGS countries, and an enormous amount of credit was generated before the global financial crisis began.” He added, “The rapid growth of the real estate market led to a current account deficit, and in order to solve this, governments each raised more money from abroad. As the domestic economy became excessively leveraged, a situation arose where they could not handle excessive lending, and this led to the economic crisis.” He added, “As a result, the PIGS countries were able to reform their economic structures through the economic crisis, and they are currently continuing economic growth by taking advantage of the low-interest rate environment. Korea, which has serious household debt, should break away from its economic structure that relies on excessive credit.” Watling CEO said, “Unlike advanced countries like the U.S. where various industries such as information technology (IT), manufacturing, and energy are evenly developed, the economic structure of PIGS has been focused on specific industries such as tourism and service,” and added that industrial diversification has also emerged as a challenge.
Watling, CEO of Longview Economics, a financial consulting firm, has been leading the firm for over 20 years and is a macroeconomic expert. He provides financial consulting and economic structural reform consulting to governments and companies around the world. The following is a Q&A.
Industrial characteristics of PIGS countries that are different from advanced countries.
“Tourism is very developed in Spain. In particular, many foreigners, such as the British, Germans, and Dutch, are buying real estate. The automobile industry and the financial sector also play important roles. Before the 2008 global financial crisis, the construction industry accounted for 20% of GDP, but its share has since decreased. Portugal has many similarities with Spain. Tourism accounts for a large portion. Foreigners also own a large portion of real estate. Italy is different from Spain and Portugal. Italy has a low household debt ratio, but its national debt is very high. In particular, the economic gap between the north and the south of Italy is large. The north, including Milan, has developed manufacturing industries such as automobiles, but the south has high unemployment and corruption.”
I feel like there's a lack of industry diversity.
“The PIGS countries before 2010 were particularly severe. Unlike the U.S. economy, where various industries such as IT, manufacturing, and energy were evenly developed, the Southern European PIGS were highly dependent on specific industries such as tourism. In particular, they were overly dependent on domestic industries centered on tourism rather than exports centered on manufacturing, and excessive credit growth occurred as they borrowed a lot of money from abroad.”
Does this mean that excessive national debt is driving the PIGS countries into fiscal crisis?
“Yes. There are many reasons, but the core one was ‘excessive credit growth.’ Between 2000 and 2007, there was a massive credit boom in the PIGS countries, and before the global financial crisis, there was a huge amount of credit. The current account deficit was recorded due to the rapidly growing real estate market. To solve this, each country’s government started to raise more money from abroad. As the domestic economy became excessively leveraged, the situation of not being able to handle the excessive lending followed, and the economic crisis came.”
The background of the economic recovery of PIGS countries.
“In 2010, the PIGS countries were forced to reform their economies with the support of the European Union (EU) and the International Monetary Fund (IMF). This was not an effort of their own, but a demand for reform from outside. However, these reforms ultimately played a positive role in increasing the competitiveness of the PIGS countries. The most important were the improvement of productivity through labor market reform and the reduction of national debt. As a result, Greece became the most competitive country in Europe, and Spain and Italy also recovered their competitiveness considerably. Italy has managed its national debt well, recording a fiscal surplus for 15 consecutive years. Spain has reduced corporate debt by half over 15 years.”
Has the economy fully recovered?
“PIGS countries have steadily recovered their economies through labor market reforms, productivity improvements, and national debt reductions, but productivity improvements are essential to achieve sustained economic growth. In particular, the fact that most European countries, along with PIGS countries, are weakly competitive in the private sector is a task that needs to be addressed.”
What about political instability?
“The real problem is political instability. Most politicians tend to expand government spending for short-term popularity and elections. This makes long-term economic reform difficult. Ironically, historically, economic reforms often come after a crisis. Political instability is also resolved after such events.”
What can we learn from the economic recovery of the PIGS countries?
“Political instability must be resolved first. Korean politicians should also implement policies that consider long-term economic stability rather than short-term popularity. Korea is currently experiencing household debt and a real estate bubble. These problems should be resolved through preemptive domestic efforts, not external pressure. We should undertake economic reforms that reduce debt and increase productivity.”
PIGS Europe’s Growth Leader? “Thanks to Travel Recovery… Not Enough”
As the PIGS countries maintain their solid growth, some are predicting that they could become the “leaders” of European growth. The expectation is that the PIGS countries could lead the European economy instead of major European countries such as Germany and France. However, most experts are skeptical about this claim, citing high dependence on tourism and low productivity, saying that “it is not enough yet.” They say that the recent economic recovery in the PIGS countries is due to the revival of travel demand suppressed by the COVID-19 pandemic, and that more time is needed until fundamental economic structural reforms are implemented.
Watling CEO has a similar stance. He said, “In most European countries, including the PIGS countries, the public sector driven by the government accounts for too large a proportion of the overall economy,” and “the economic structural reform of the PIGS countries is currently in progress.” Paolo Grignani, an economist at Oxford Economics, also made a similar diagnosis in an interview with the Wall Street Journal (WSJ) in July 2024. It is true that the PIGS countries have reformed their labor markets to some extent while going through the financial crisis, but he pointed out that their low productivity has not improved since joining the eurozone in 1999.
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