Take Greece as an example. A job which pays 55,000 euros in Germany, pays 70,000 euros in Greece, despite Germany being a more productive country. To get around pay restraints in the calendar year, the Greek government simply paid employees a 13th and even 14th monthly salary. Furthermore, the Greek government categorizes certain jobs as arduous which have a retirement age of 55 for men and 50 for women with generous pensions. More than 600 Greek professions somehow managed to get themselves classified as arduous like hairdressers, radio announcers, musicians etc. All these goodies required substantial government funding which far exceeded their national income. Greece had to borrow money to pay for the expenditures via government bonds etc. As a result, national debts gradually built up.
On 1 January, 1999, the EU launched euro as its official currency. Most EU countries (called the eurozone) uses euro as a common currency among themselves. Before the euro, the PIIGS countries had to borrow money at interest rates much higher than the rates at which Germany paid since Germany was an economically better managed country and hence had a very good credit rating and enjoyed low interest rates. When these countries started to use the euro, they could borrow money at interest rates close to that of Germany. So taking advantage of the lower interest rates, they kept borrowing to buy stuffs that they couldn't afford.
Apart from the low interest rates, the inflation in the PIIGS countries was higher than the rate of interest. In simple terms, if the borrowing rate is 3% and the inflation is 5%, one can gain 2% by borrowing to buy things. So borrow and borrow they did. Over the years, PIIGS countries, especially Greece, amassed an enormous amount of debts in euros which then became unmanageable, and made the governments difficult, if not impossible, to repay.
As an indication of the problem, the following shows the deficit to GDP ratios and the debt to GDP ratios of the PIIGS countries (figures being 2010 estimates based on Eurostat - Apr11):
| Country | Deficit to GDP (%) | Debt to GDP (%) |
| Greece | 10.5 | 142.8 |
| Italy | 4.6 | 119 |
| Ireland | 32.4 | 96.2 |
| Portugal | 9.1 | 93 |
| Spain | 9.2 | 60.1 |
And so the problems went on, and finally became a crisis and brought to the world's focus at end 2009. Greece got the worst situation among others. The country hired Wall Street firms, most notably Goldman Sachs, to help hide its debt so as not to run afoul of EU rules. In December, 2009, Greece was forced to admit that its debts were much higher than previously estimated, reaching 300 billion euros, the highest in modern history. Rating agencies started to downgrade Greek banks and government bonds. In the following few months, Greece responded with a series of austerity programs sparkling serious strikes and riots in the streets. Greece's borrowing costs reached yet further record highs.
By May, 2010, euro members and the International Monetary Fund (IMF) provided a 110-billion euro bailout package to rescue Greece. The situation in Ireland also deteriorated, and in November, 2010, the EU and IMF provided a 85-billion euro bailout package to Ireland. Ireland soon passed the toughest budget in the country's history in return.
Attempting to stop the crisis from spreading, in February, 2011, eurozone leaders established a 500-billion European Financial Stability Fund (EFSF) to provide loans to any euro countries with financial difficulty. In April, 2011, Portugal asked for assistance and was provided with a 78-billion euro bailout package. In July, 2011, Greece passed another round of drastic austerity program, and was provided a second bailout package of 109-billion euros, sparkling even more serious civil unrest though.
While bailouts had so far only been provided to Greece, Ireland and Portugal, situations in Spain and Italy began to look worrying, with interests on government bonds rising sharply and credit ratings being downgraded. In September, 2011, Spain passed constitutional amendment to impose rule to keep future budget deficit to strict limit. Italy passed an austerity budget to balance the country's budget by 2013. Italy and Spain, being the third and fourth largest economies in eurozone after Germany and France, were then put under the world's spotlight.
In October, 2011, eurozone finance ministers approved another 8-billion bailout to Greece, which the country needs desperately before running out of cash by 15 December, 2011.
It now seems almost certain that Greece will not be able to repay its debts by itself. Situations in Ireland, Portugal, Spain and Italy are not too better off. Because of the continued downgraded credit ratings, these PIIGS countries find it harder and harder to borrow as lenders will charge more for further loans. Coupled with austerity measures that these countries must take in order to seek assistance from the EU, economies of these countries are contracting. Many European banks, as well as the European Central Bank, own bonds issued by these governments. Should any of them go default (Greece is the most likely one), many of those banks will have big losses. If some of Europe's biggest banks suddenly look dangerously weak, then other banks may hesitate to extend credit to each other, fearing they too could get dragged down. A banking crisis could begin, resulting in recessions in Europe.
The European problem could potentially spread across the Atlantic to the US because US money market funds hold substantial amount of short-term debts of European banks. If European banks can't find lenders to allow them to routinely issue short-term debts, financial markets could start to freeze up, causing turmoil in US money market funds. As the EU and the US are big economic partners, recession in Europe will ultimately lead to a recession in the US. Slower growth in the EU and the US will then hurt the Asian economies which depend on the West to buy their manufactured goods. As a result, the global economy could fall into a profound recession.
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