As leaders in the European Union (EU) struggle to reach some sort of agreement over a bailout for Greece, some investors have been left wondering whether the EU's economic structure makes sense. After all, given the incredibly diverse nature of the EU's member states, is it possible for less prosperous countries to share an economic system with some of the largest powers in the world? Here's a look at the fallout from the Greek debt debacle.

What Is the EU?
The EU is an economic and political union that's made up of 27 European member states. The EU collectively represents member states politically through its political apparatus, but politics have taken a back seat to the organization's economic role in 2010. Earlier this year, investor anxiety swelled over the level of debt carried by Greece – as well as the country's ability to meet its financial obligations. Credit ratings agencies have slashed the countries sovereign debt as a result.

Now, with Greek officials having to assuage fears on a month-to-month basis, the country is turning to bigger EU powers, like Germany and France, for assistance. To be fair, Greece isn't alone in its financial woes. Investors are keeping a watchful eye on all of the "PIIGS" economies right now – that is, the economies of Portugal, Italy, Ireland, Greece, and Spain. (Find out how these worldly offerings can spice up your portfolio, in Go International With Foreign Index Funds.)

PIIGS in a Blanket
Each of those five countries is carrying significant debt loads and deficits as a percentage of GDP. That's a problem for the EU, particularly given the fact that the Stability and Growth Pact, one of the EU's governing agreements, disallows countries from carrying sovereign debt in excess of 60% of GDP or a deficit in excess of 3% of GDP. Despite these mandates, Greece, for example, is expected to carry a 125% gross debt relative to its gross domestic product through 2010, while Spain has an 84.6% ratio.

Spain currently has an unemployment rate that is nearing 20%, while other countries such as Italy are finding themselves of verge being overwhelmed with debt as well. Concerns have even emerged about the United Kingdom who is likewise facing tough economic conditions. Many analysts view Germany and France as the only truly stable countries within the EU.

Debt Repayment
On an absolute level, Greece's $270 billion debt load pales in comparison to the $700 billion U.S. bank bailouts – by a factor of more than two – but it's the systemic problems that have people worried. Currently, Greece is paying 2% more in interest than the Germans pay on its debt. To minimize the risk of additional financial problems, EU member states are hoping to neutralize the fallout from Greece's straits, but that bailout cash won't come without harsh stipulations. (Should The U.S. Switch To A Flat Tax? Some countries have begun charging a flat tax rate instead of the gradual tax system of the Western world.)

Strings attached to bailout funds include stringent reforms to cut back the country's deficit immediately, and it seems unlikely that the Germans and French will agree to shell out any of their euros without them.So, will fast action save the system, or are economic inequities going to pose serious economic problems in the future?

PIIGS Flying
It's important to remember that the PIIGS countries aren't the poorest countries in the EU – far from it. In fact, all five nations are among the 15 largest EU member economies, making up a substantial portion of the EU's total GDP. And four of the five have per capita GDPs that are higher than the EU average.

Just as Americans spent their way into a serious financial disaster in the years leading up to 2008's meltdown, the PIIGS countries were busy undertaking colossal government spending and making risky investments. Ultimately, the key to shoring up European nations' economies is going to be reigning in crippling deficits and limiting government outlays.

The Bottom Line
With economic fundamentals recovering in Europe, it's likely that fast action on the part of the European Union will stave off a serious crisis in Greece. A shared currency and interwoven economies ensure that the EU's member countries share each other's fates as we roll into 2010. Currently, there is much speculation about the fate of the European Union and the euro; while breaking news seems to be making the headlines on a day by day basis, the one thing that remains certain is that Greece and the other troubled nations are in need of financial reform.

Related Articles
  1. Credit & Loans

    A FICO-free Loan? See SoFi's Super Bowl Ad

    Non-bank lender SoFi will air its first TV ad during Super Bowl 50. Here's how it's challenging big banks by providing an alternative approach to loans.
  2. Economics

    The 2007-08 Financial Crisis In Review

    Subprime lenders began filing for bankruptcy in 2007 -- more than 25 during February and March, alone.
  3. Investing News

    Brazil's Latest Export To China: Soccer Players

    Why are Brazilian soccer players moving to China?
  4. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  5. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  6. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  7. Economics

    Governments Ask Tech Giants to Join War on ISIS

    In the US and Israel, governments have asked their respective nations' tech industries to help in the war against ISIS.
  8. Economics

    Lehman Brothers: The Largest Bankruptcy Filing Ever

    Lehman Brothers survived several crises, but the collapse of the U.S. housing market brought the company to its knees.
  9. Economics

    4 Ways China Influences Global Economics

    Learn the four ways China's economy can influence the global economy. The recent decline in Chinese stock markets should be the least of your worries.
  10. Economics

    Three Reasons 2016 Could Be A Better Year for the Global Economy

    The diminishing commodities market and China's slowing growth hurt a lot of companies and economies worldwide. However, there is a chance that much of the shaking out has already occurred.
RELATED FAQS
  1. How many free credit reports can you get per year?

    Individuals with valid Social Security numbers are permitted to receive up to three credit reports every 12 months rather ... Read Full Answer >>
  2. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  3. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  4. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  5. How can I use the funds from operations to total debt ratio to assess risk?

    The funds from operations (FFO) to total debt ratio is used in fundamental analysis to determine a company's financial risk. ... Read Full Answer >>
  6. How stable are municipal bonds?

    Stability is relative in the municipal bond market. Municipal bonds tend to be safer than many other types of investments, ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center