When PIGS Fly: Europe’s Basket Cases Recover, While US Drowns in Debt

The Ham-let flying pig hot air balloon takes flight at sunrise during the Albuquerque International Balloon Fiesta in Albuquerque, N. M., on Oct. 13, 2023. Patrick T. Fallon/AFP via Getty Images

Commentary

A decade ago, the biggest economic story in the news for many weeks concerned the PIGS of Europe: Portugal, Italy (or Ireland, take your pick), Greece and Spain, the sickest economies of Europe.

Greece was the worst of the lot, with 10-year sovereign debt yields rising to 30 percent at one point, and one bailout plan after another offered, with a “Grexit” nuclear option for throwing Greece out of the European Union.

In contrast, you probably haven’t heard about Greece balancing its budget four years in a row (2016-2019) or its deficit-to-GDP ratio, about one-third that of the United States.

Greece isn’t alone. Ireland will have a budget surplus for the second straight year this year. Portugal also has a budget surplus this year, according to Eurostat data released last week. Spain and Italy still lag, but the Eurozone as a whole has a 3.2 percent deficit-to-GDP ratio, half the U.S.’s 6.4 percent 2023 deficit-to-GDP ratio.

According to Eurostat data released on Oct. 23, five major European nations reported an annualized budget surplus in 2023’s second quarter, the latest quarter with complete data. Those nations are Denmark (+2.8 percent), Ireland (+2.4 percent), Portugal (+2.4 percent), Switzerland (+1.4 percent) and The Netherlands (+0.2 percent).

Two of those—Portugal and Ireland—comprise the first half of the PIGS acronym. Good going, porkers!

Europe is Now Prepared to Lead—No Uncle Sam Needed

At the start of this year, on Jan. 23, Foreign Policy printed an article saying that Europe doesn’t need Uncle Sam anymore, and I welcomed that article, long having argued that Europe needs to stand on its own two legs in its defense spending.

Entering the second year of the Ukraine war, the author, Rajan Menon, argued that Russia is a poor nation and Europe is rich. At the start of the Ukraine war, Russia had barely one-tenth the GDP of Europe. Russia ranks #44 among the world’s most technologically advanced countries, and Russia has just one-third the people as Europe, so Europe can take care of helping Ukraine.

Then, on July 16, The Financial Times published an influential article taking this argument further, titled “The Trouble with American Exceptionalism,” bringing forth some astounding “exceptionalism” now evident in America, most notably our level of overspending, vis a vis Europe.

“The U.S. has started to look exceptional in a bad way…. During the pandemic, the U.S. budget deficit tripled to more than 10 per cent of gross domestic product, more than double the peak in other developed economies. In coming years, the U.S. deficit is expected to average close-to 6 per cent of GDP—well above its historic norm, and a full six times the average in other developed economies.” That’s way too “exceptional” for my taste.

Most countries ended their limited COVID-19 stimulus spending quickly after their more limited pandemic-induced lockdowns. “But,” the FT countered, “all the $6.7 trillion in new spending from the Biden administration came after 2020 was over. Most of it had nothing to do with pandemic relief.

Instead, Joe Biden used the sense of crisis to launch a latter-day New Deal.”

“America,” the FT wrote, is “now one of the most fiscally irresponsible nations. Its deficit has climbed the ranks to worst in the developed world.”

Two weeks after this article was published, the market peaked, and Fitch downgraded U.S. sovereign debt on Aug. 1. That’s three months ago, and that’s the day the stock market started collapsing.

It appears that Washington D.C.’s chronic over-spending, with no thought or intent of addressing that over-spending, is the source of the recent rapid rise in the benchmark 10-year Treasury bond yield, and the resulting demise of the housing market, a slowdown in the auto and EV market, and decline of the major stock market indexes after the downgrade of U.S. Treasury vehicles three months ago.

And now we see that Europe has quietly adopted the old-time religion of balancing budgets in several nations. The Wall Street Journal’s Paul Hannon wrote about this new austerity in his Oct. 23 article, “Europe, Unlike U.S., Tackles its Deficits,” saying that the IMF expects the combined deficits of the eurozone governments to fall to 2.7 percent next year, barely one-third of the expected 7.4 percent ratio in the United States.

The cumulative national debt (in terms of GDP) for the EU and the United States before the Great Financial Crisis of 2008 was about equal at 65 percent, but since then, the U.S. ratio has doubled to about 130 percent while the EU has put the PIGS on a diet and brought most nations into reasonable discipline.

OK, if US Stocks are Down, Why is the US GDP Rising So Fast?

Figure this out: while the market was falling 10 percent or so, and Treasury rates were soaring, the GDP was more than doubling its growth rate of the first half of 2023. It turns out that the Atlanta Fed GDPNow estimate (of 5.4 percent) wasn’t far off the Bureau of Economic Analysis (BEA) initial estimate of 4.9 percent.

Perhaps the best answer for this surging GDP figure came on the same day and in the same publication as Mr. Hannon’s report on Europe’s shrinking debt in the article “Get Ready for a Short-Lived Economic Boom“ with a deck that read: ”Third-quarter economic growth may run at 5%, but the bubble is sure to deflate quickly after that” written by Stephen Miran, an adjunct fellow at Manhattan Institute.

His main point is the same as mine here, “A deficit more than 7% of GDP can lift growth, but outside war or severe recession, it is irresponsible fiscal management, for which we are paying the price through higher interest rates.”

In his article, Mr. Miran reminds us that the day after the Fitch debt downgrade last Aug. 1, “The Treasury informed the market in its August 2 Quarterly Refunding Announcement that it would auction more than $1 trillion of debt in the third quarter to fund deficits and refill the accounts it drained in the spring. The huge supply of bonds has pushed yields higher, reversing the easing of financial conditions, and the market is on tenterhooks over the agency’s next refunding announcement, due November 1,” so, he retorts, “One thing seems clear, the economy’s performance in the third quarter will be difficult to repeat.”

Looking at October, the first month of the fourth quarter, nearly every asset class is down. Through to Oct. 27, almost every index and asset class was down except Gold (+8.9 percent) and Natural Gas (+8.3 percent), with smaller gains in Silver (+4.3 percent). The biggest decline among indexes was the Russell 2000 (-8.3 percent).

Who would have believed a decade ago that the Euro PIG (Portugal, Ireland, and Greece) would balance its budget while the richest country in the world would run up the worst deficits in the developed world?

With Halloween goblins and witches assaulting your door, I hate to be the bearer of any bad news, so I’ll close by saying November is the best month in market history, so we might get some Thanksgiving relief.