Macroeconomic Report on PIIGS and BREXIT

Presented by

Murtaza Mannan (19BSP1631)

 TABLE OF CONTENT
1. Research Tittle (Introduction to PIIGS)
……………………………………1
2. Research Objective (Impact of PIIGS)
……………………………………..3
3. Research
Method……………………………………………………………
…….3
4. Data Collection
Method…………………………………………………………4
5. Critical
Analysis……………………………………………………………
………..5
6. Subtopics…….
………………………………………………………………………
.3
7. Webliography……..
…………………………………………………………………6
 1) Research Tittle
Introduction to PIIGS
PIIGS is an acronym which consist of a group of European countries that are supposed to share some features in common
by virtue of being at a similar stage of economic development and having similar growth prospects such as BRICS. The
reason why these countries were grouped together is the substantial instability of their economies, which was due to the
economic recession which started in 2008. These countries were the weakest economies in the eurozone during the
European debt crisis. PIIGS have a history of facing economic difficulties, high unemployment and political instability.
While some of their individual GDP growth rates are surprisingly impressive, most of it was financed, leaving these
countries with heavy debt burdens.

These five countries are considered to always be on the top of the list when it comes to high debt levels. Each country has
faced some sort of severe economic crisis—either massive debt as in the case of Greece, or slow growth and debt, in the
case of Italy. As a result, these countries seem to have heightened doubts about their abilities to pay back the
bondholders and spurred fears that these nations would default on their debts. According to the IMF, collectively, the
group’s Gross Debt stood at USD 3.9 trillion in 2018, with Greece accounting for the highest debt to GDP ratio at 185%,
followed by Italy (132%), Portugal (120%), Spain (97%), Ireland (64%). In terms of Real GDP growth, PIIGS economy as a
whole grew by 2.2% to USD 3.1 trillion in 2018, primarily driven by strong growth across all the members, particularly
Ireland. A part of the GDP growth in these countries are attributable to the strong growth in their tourism sector.

Origin of PIIGS
The so-called term ’PIIGS’ was introduced following the Financial Crisis, also dubbed the global recession in 2008, which
impacted these countries greater than those in the Eurozone. Each of these countries has had some previous experience
with growth and economic success, but since joining the highly touted EU, they have used their collective borrowing
strength to promote growth using debt instead of organically expanding their economies. During the early 2000's, fueled
largely by an extremely accommodative monetary policy, these countries had access to capital at very low interest rates.

Inevitably, this led to some of the weaker economies, especially the PIIGS, to borrow aggressively, often at levels that they
could not reasonably expect to pay back should there be a negative shock to their financial systems. The 2008 global
financial crisis was this negative shock that led to economic under-performance, which rendered them incapable of paying
back the loans they had procured. Furthermore, access to additional sources of capital also dried up.

Since these nations used the euro as their currency, they were under the dictates of the European Union (EU) and were
forbidden from deploying independent monetary policies to help battle the global economic downturn that was triggered
by the 2008 financial crisis. To reduce speculation that the EU would abandon these economically disparaged countries,
European leaders, on May 10, 2010, approved a 750 billion euro stabilization package to support the PIIGS economies.

The first recorded use of this moniker was in 1978, when it was used to identify the underperforming European countries
of Portugal, Italy, Greece, and Spain (PIGS). Ireland join this group in 2008, when the unfolding global financial crisis
plunged its economy into an unmanageable debt-ridden state and a deplorable financial situation akin to those of the
PIGS nations.

2) Research Objectives
Impact of PIIGS of Eurozone

Over the past few years, PIIGS nations have been blamed for slowing the eurozone's economic recovery following the
2008 financial crisis by contributing to slow GDP growth, high unemployment, and high debt levels in the area. At that
time, these were the weakest economies in the eurozone during the European debt crisis.
According to the IMF, the Eurozone would grow by 1.2% to around USD 6.8 trillion in 2019, a significant slowdown
compared to last year’s 1.9% expansion. The slowdown is mostly due to anemic growth in Germany, the eurozone’s
largest economy, and stagnation in Italy, the third-biggest. Brexit was also a cause of concern for the eurozone economy,
especially a no-deal departure. As you can see, until the time they recovered in 2014, Real GDP growth rate of these five
countries were lower than the Eurozone and the Global economy as a whole. There seems to be a high correlation
between the growth rate of PIIGS relative to the growth of Eurozone as this clearly supports the fact that PIIGS economy
had a negative impact on the Eurozone, while not as much for the World economy. The Unemployment rate of the
Eurozone peaked at 11.6% in 2014, driven by PIIGS nations, particularly Greece (27%) and Spain (24%). On the other hand,
the debt to GDP ratio of PIIGS nation was lower during the pre-crisis in 2008, however, the countries started taking huge
borrowings putting them on the top of the list among countries with high national debt.
The economic troubles of the PIIGS nations reignited debate about the efficacy of the single currency employed among
the eurozone nations by casting doubts on the notion that the European Union can maintain a single currency while
attending to the individual needs of each of its member countries. Critics point out that continued economic disparities
could lead to a breakup of the eurozone. In response, EU leaders proposed a peer review system for approval of national
spending budgets to promote closer economic integration among EU member states. Reports in 2018 have pointed to
improved investor sentiment toward the nations, as evidenced by Greece's return to the bond markets in July 2017 and
increased demand for Spain's longest-term debt.

BREXIT

Brexit - British exit - refers to the UK leaving the EU. On June 23, 2016, a public vote - or referendum - was held to decide
whether the UK should leave or remain. Leave won by 52% to 48%. The referendum turnout was very high at 72%, with
more than 30 million people voting - 17.4 million people opting for Brexit. The reason for UK leaving the EU as many cited
was the result of growing unpopularity toward the EU concerning issues such as immigration, sovereignty, and the
continued support of member economies suffering through prolonged recessions. This has resulted in higher tax burdens
and depreciating the euro. While political risks associated with the euro, brought to the fore by BREXIT, remain, the debt
problems of PIIGS (Portugal, Italy, Ireland, Greece, and Spain), have lightened in recent years.

Brexit was originally due to happen on 29 March 2019. That was two years after then Prime Minister Theresa May
triggered Article 50 - the formal process to leave - and kicked off negotiations. Under Mrs May, the deadline was delayed
twice after MPs rejected her Brexit deal - eventually pushing the date to 31 October 2019. After replacing Mrs May as PM,
Mr Johnson was required to seek a third extension after MPs failed to pass a revised Brexit deal into law. The new
deadline has been set for 31 January 2020, three and a half years after the referendum was held. The main sticking point
for many Conservative MPs and the DUP (the government's ally in Parliament at the time) was the Irish backstop. The
backstop was designed to ensure there would be no border posts or barriers between Northern Ireland and the Republic
of Ireland after Brexit. After MPs rejected the deal for a third time, Mrs May resigned as prime minister.

After winning the Conservative leadership contest, Mr Johnson took over as PM in July 2019 and set about renegotiating
Mrs May's deal. Mr Johnson succeeded in replacing the backstop with new customs arrangements. Unlike the previous
deal, the revised one will allow the UK to sign and implement its own trade agreements with countries around the world.
However, the revised deal effectively creates a customs and regulatory border between Northern Ireland and Great
Britain. This means some goods entering Northern Ireland from Great Britain would be subject to checks and pay EU
import taxes (known as tariffs). The rest of the deal remains largely unchanged from the one negotiated by Mrs May.
Known as the withdrawal agreement, it includes: the rights of EU citizens in the UK and British citizens in the EU, 2) how
much money the UK is to pay the EU (initially thought to be £39bn).

Mr Johnson tried to put his revised deal to a vote in Parliament on 19 October 2019. However, the vote did not go ahead.
Many MPs wanted to postpone it until the legislation needed to turn the deal into law had been approved. MPs said this
was to stop a possible no-deal Brexit. In a no-deal scenario, the UK would immediately leave the European Union (EU) with
no agreement about the "divorce" process. With Parliament in deadlock, Mr Johnson called an early general election, to
which MPs agreed. The election, which happened on 12 December, resulted in a Conservative majority of 80. Eight days
later, MPs voted 358 to 234 in favour of the Withdrawal Agreement Bill, which now goes on to further scrutiny in
Parliament. The remaining stages of the bill are expected to be completed quickly in January

Causes of BREXIT

In 2015, the Conservative Party called for the referendum. Most of the pro-Brexit voters were older, working-class
residents of England's countryside.1 They were afraid of the free movement of immigrants and refugees. They claimed
citizens of poorer countries were taking jobs and benefits. Small businesses were frustrated by EU fees. Others felt leaving
the EU would create jobs. Many felt the U.K. paid more into the EU that it received. Those who wanted to stay lived in
London, Scotland, and Northern Ireland. They liked the free trade with the EU. They claimed most EU immigrants were
young and eager to work. Most felt that leaving the EU would damage the U.K.’s global status.
Impact of BREXIT on the global economy

According to the IMF ‘World Economic Outlook’, the UK economy began suffering from Brexit in the second half of 2016
following the referendum that was held in June that year. UK’s GDP growth fell to 1.8% in 2016, compared to 2.3% in the
prior year. The growth has further declined to 1.4% in 2018, and 1.2% in 2019. Many businesses have moved their
headquarters to the EU, while some of the biggest players have even decided to list their IPO in the EU, such as Siemens
due to the fear of the BREXIT aftermath. On the other hand, the EU is also likely to slowdown post the BREXIT as the IMF
has forecasted the real GDP growth of the nation at 1.5% in 2019, down from 2.2% in 2018. Assuming the European
Parliament also gives the green light, the UK will formally leave the EU on 31 January 2020 with a withdrawal deal.
However, this would only mark the next step in the Brexit process. Following its departure, the UK will enter a transition
period until 31 December 2020. During this period, the UK's trading relationship with the EU will remain the same while
the two sides negotiate a free trade deal. At the same time, many other aspects of the UK's future relationship with the EU
- including law enforcement, data sharing and security - will need to be agreed. If a trade deal is ready in time, the UK's
new relationship with the EU can begin immediately after the transition. If not, the UK faces the prospect of having to
trade with no agreement in force. This would mean checks and tariffs on UK goods travelling to the EU. Mr Johnson has
also ruled out any form of extension to the transition period. The UK government estimated that Brexit would lower the
U.K.’s growth by 6.7% over 15 years. That’s if there is a trade agreement but restrictions on immigration. The British
pound fell from USD 1.48 on the day of the referendum to USD 1.36 the next day. That helps exports but increases the
prices of imports. The pound may strengthen once a deal is approved, depending on the trade terms.

Trade

Brexit would eliminate Britain's tariff-free trade status with the other EU members. Tariffs would raise the cost of exports.
That would hurt U.K. exporters as their goods become more expensive in Europe. Some of that pain would be offset by a
weaker pound. Tariffs would also increase prices of imports into the U.K. More than one third of its imports comes from
the EU. Higher import prices would create inflation and lower the standard of living for U.K. residents. The U.K. is already
vulnerable because heat waves and droughts caused by global warming have reduced local food production.

Ireland

Northern Ireland would remain with the United Kingdom. The Republic of Ireland, with which it shares a border, would
stay a part of the EU. However, Johnson's plan avoided a customs border between the two Irish countries.

London

Brexit has already depressed growth in The City, the U.K.'s financial center.21 Growth was only 1.4% in 2018, and was
close to zero in 2019. Brexit has diminished business investment by 11%. International companies would no longer use
London as an English-speaking entry into the EU economy.18 Goldman Sachs, JP Morgan, and Morgan Stanly have already
switched 10% of their clients. Bank of America has transferred 100 bankers to its Dublin office and 400 to Paris.21

Scotland

Scotland voted against Brexit.22 The Scottish government believes that staying in the EU is the best for Scotland and the
U.K. It has been pushing the U.K. government to allow for a second referendum. To leave the U.K., Scotland would have to
call a referendum on independence. It could then apply for EU membership on its own.23

Jobs

Brexit would hurt Britain's younger workers. Germany is projected to have a labor shortage of 3 million skilled workers by
2030. Those jobs will no longer be as readily available to the UK's workers after Brexit.

Employers are having a harder time finding applicants. One reason is that the number of EU-born workers fell by 95% in
2017. This has hit the low-skilled and medium-skilled occupations the most.
Inflation:

The UK would no longer enjoy tariff-free trading with the EU, depending on the new trade agreement. Tariffs will raise
prices of U.K. imports and costs of exports.

Restricted Labour Movement

Constraints on immigration would hurt Britain’s labor force.

Divorce Bill

The UK would pay billions in euros for its “divorce bill.

Consequences for the EU

The Brexit vote has strengthened anti-immigration parties throughout Europe. If these parties gain enough ground in
France and Germany, they could force an anti-EU vote. If either of those countries left, the EU would lose its most robust
economies and would dissolve. On the other hand, new polls show that the majority of EU citizens still strongly support
the Union. Almost 75% say the EU promotes peace, and 55% believe it supports prosperity. More than a third see the role
of the UK as diminishing.

3) Research Method
The research was done on the basis on data collected from the IMF ‘World Economic Outlook’ 2019. We extracted data by
countries and region to find the real GDP growth rate of PIIGS, EU, and UK.

4) Data Collection Method

The data was collected from various articles that were published last year to understand the dynamics and problem
statement. The study was further supported with the data collected from IMF, where we found the country wise
economic indicators mainly GDP (constant price), Unemployment rate, population, and Debt to GDP ratio

5) Critical Analysis
We analysed the impact of BREXIT and PIIGS nations on the rest of the world. We particularly calculated the real GDP
growth rate of PIIGS nation, as the data for this was no where to be found in Google or nor does IMF reports any kind of
growth for this segment. We computed the GDP by adding the GDP of the five countries and then compared the growth
with the precious year. On the other hand, we analysed how BREXIT will impact the UK economy as well as EU in the
coming years if the withdrawal deal comes into effect.

6) Subtopics
The report also sheds light on the PIIGS nation by countries as follows:

Portugal: Located on the tip of Spain in Southern Europe, this country ranks as the 14th largest
economy in the European Union. Hosting over 10 million people, Portugal exports over 75% of its agriculture-based
products, including grain, cattle, cork wheat and olive oil. While it's one of the smallest economies included in the original
PIGS, Portugal's economic woes include the same issues of slow economic growth, high unemployment and a high debt to
GDP rating that affect its Mediterranean cousins.
 Italy: The boot-shaped county, famous food and romantic nature, is third biggest economy in the EU after
Germany and France, and is one of the most visited countries in the world. About two-thirds of the 60 million residents
work in the service sector, which may explain part of its high unemployment. Tourism, a driving force in this country, has
been negatively affected since the world economy stumbled in 2008. Italy's economy is considered above average in
development, driven by an educated, efficient, hard working labor force. Italy boasts a very high standard of living, but it
has financed these standards by being one of Europe's biggest offenders of taking on debt. The country has reached an
above average GDP per capita, with a national debt in excess of 100% of GDP.

Ireland: Also called the Emerald Isle, Ireland is a famous tourist destination due to its rich history,
unique climate and terrain. Ireland has a population of around 4.5 million, and a small economy, which places it close to
Portugal in its ranking in the EU. Ireland was dubbed the Celtic Tiger, as it was once considered an economic anchor with
Asian-like growth characteristics. Ireland participated in the economic boom throughout the 1990s and 2000s, but
suffered from the same symptoms that affected many other countries, such as a housing bubble. Ireland fell as fast as it
grew, and was the first eurozone country to fall rapidly into recession in 2008. In order to avoid collapse, Ireland required
massive injections to its banks and significant government oversight and rebuilding efforts. While it emerged from the
recession with the rest of the world, the scars are deep, leaving the country with heavy debt and very high
unemployment.

Greece: The southernmost member of the EU hosts nearly 20 million tourists a year, which is almost
twice the size of its actual population. Due to its rich history, romantic stories and famous beaches, it is no wonder a
favourite destination for travellers around the world. Greece joined the EU in 2001, and its government began building a
mountain of debt that surpassed its GDP prior to the other EU countries. Greece also suffers from slow economic growth
and high unemployment, but it differs in its economic structure compared to other European nations; Greece has a very
large public sector workforce accounting for about half its GDP. This in itself has limited Greece, to a certain extent, in its
economic recovery, as the public sector is notorious for moving and reacting slowly. Since the end of 2009 and up to 2011,
Greece has been the most public, and most troubled, member of the PIIGS, seeing its fair share of corruption and political
unrest.

Spain is the fifth largest economy in the EU, and, despite its place in the PIIGS, it's the 12th largest in the
world as of 2010. Famous for its historical sites and diverse climates and locations, Spain also relies heavily on tourism to
drive its economy. With over 45 million residents and a large land mass, Spain is an important part of the EU, but it has
seen some of the worst economic damage. Part of the reason Spain was placed in this group was its dramatic economic
downfall that started in the late 2000s. Spain boasted 15 years of above average GDP growth and began to stumble in
2007 as a result of a similar property bubble that occurred in Ireland, high unemployment and a large trade deficit. With
such a successful run in growth and comparatively strong banking system, it was hard to imagine Spain falling so hard and
staying down so long; however, prolonged growth without assessing fundamental issues such as debt management and
employment, brought this country onto the brink of crisis.

7) Webliography
Tittle Source Link Date of
Publication
BREXIT https://www.bbc.com/news/uk-politics-32810887 2020
Economic Data https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx 2019
PIIGS https://www.investopedia.com/terms/p/piigs.asp 2019
PIIGS https://www.investopedia.com/articles/economics/12/countries-in-piigs.asp 2019
Impact of https://www.thebalance.com/brexit-consequences-4062999#consequences-of-
BREXIT brexit-for-the-uk 2019