Why Pigs Can't Fly.(Business)(Portugal, Italy, Greece, Spain)

Byline: Juliane Von Reppert-Bismarck

Economists have a new theory as to why the porcine economies of Southern Europe are still so sluggish.

It's just over a year since the European Union celebrated its half century. Yet the EU looks ever less like a happy family. Last month euro-zone inflation hit its highest level since 1992, raising expectations that the European Central Bank will raise interest rates next month. That could exacerbate the economic divide in the 15-nation euro zone, split between those who've capitalized on globalization, and those who haven't.

Those at risk are the PIGS--Portugal, Italy, Greece and Spain--who earned their nickname by staying stuck as their nimbler competitors revived export and job growth by venturing abroad. Now higher rates designed to slow inflation in hot economies like Germany could choke what little growth is left in the PIGS. That's stoking political tension already peaking over a new EU constitution, and raising divergences in bond prices, which further exacerbate the two regions' fortunes. "The disparity in performance is putting stress on the currency union that binds the region together," says Walter Molano of BCP Securities. "Countries with large current account deficits and currency pegs are being slaughtered by the de-leveraging process like PIGS in an abattoir."

Diverging economies are not new in Europe. The old consensus was that Southern Europe was held back by a more protective attitude toward social policy. The new view is that the south missed the boat on making labor flexible, outsourcing and selling to emerging markets.

Geography, flexible labor policy and a Soviet legacy of skilled workers played a part in placing Northern Europe ahead. Nations such as Germany and Austria shifted labor-intensive production to their high-skill, low-wage and culturally similar neighbors in the east--including Hungary, the Czech Republic and Slovakia--after the fall of the Soviet Union in 1991. Soon after, they began moving plants into China, and ...