Inside the Eurozone’s periphery comeback
Wednesday, 23 April 2025
From crisis epicenter to growth engine
In the aftermath of the eurozone sovereign debt crisis, countries such as Spain, Portugal, Greece, Ireland, and Italy became synonymous with economic fragility. Yet, under a decade on, a remarkable narrative shift is underway, with these so-called peripheral economies now outpacing Europe's traditional economic powerhouses in growth, investor confidence, and reform momentum.
To dissect this intriguing turnaround, in our latest Future is Blue episode we talked to Alice Faibishenko, Senior Advisor at Funcas. Our guest laid out the diverse experiences of these countries, explaining how their varied circumstances shaped their recovery paths.
A crisis with many roots
"While all five countries were hit hard by the crisis, their situations going into it were notably different," she noted. Greece and Portugal, already plagued by substantial fiscal imbalances, faced an immediate sovereign debt crisis. Conversely, Spain and Ireland, initially buoyed by healthy public finances, succumbed due to ballooning private sector debts linked to real estate bubbles.
Despite these different starting points, each country experienced severe recessions, sharp rises in unemployment, and heightened social tensions. Faibishenko emphasized the pivotal role of structural reforms, including labor market adjustments that introduced flexible hiring practices, and financial sector overhauls like Spain’s Sareb and Ireland’s Nama, institutions designed to manage non-performing assets and stabilize banking systems.
"Each country tailored these efforts to its own context," Faibishenko explained. "But the overall effect really has been greater stability and a stronger foundation for improved competitiveness across the periphery."
The fruits of reform
These structural changes seem to have paid off. Between 2021 and 2024, the periphery economies averaged a robust 5% annual growth rate—double that of core eurozone countries like Germany and France. While Faibishenko acknowledged some of this surge as cyclical—driven by post-pandemic recovery and fiscal and monetary stimulus—she pointed to longer-term structural factors.
"The implementation of labor market reforms, banking sector cleanups, and stronger fiscal frameworks has contributed significantly to increased potential growth," Faibishenko stated. The result is a notable convergence in economic performance with the core economies.
Investor confidence returns
This convergence is not just anecdotal—it’s also backed by empirical data. Key financial indicators point to a recovery: FDI flows into the periphery have outpaced those of Germany since 2013, and sovereign risk premiums have narrowed considerably. This reflects renewed investor confidence, driven by the perception that these economies have finally gained fiscal credibility and structural resilience.
The periphery’s resurgence also owes much to its handling of the post-pandemic economic landscape. Expansionary monetary and fiscal policies, combined with less exposure to the energy shock stemming from Russia’s invasion of Ukraine, gave southern Europe an edge. As Faibishenko put it, “the periphery has benefitted more from both cyclical and structural drivers than the core economies.”
Hard choices and bold policies
Moreover, the wave of reforms implemented in the 2010s targeted some of the region’s most entrenched vulnerabilities. Spain, for instance, overhauled its labor market, enabling companies to adapt more flexibly to economic shifts. Italy’s Jobs Act, Greece’s reduction in minimum wage, and Portugal’s public administration streamlining were all painful but ultimately significant steps toward modernization.
Investor sentiment echoes this optimism. Indeed, apart from FDI inflows, Faibishenko pointed out that non-resident investor interest in peripheral sovereign bonds has resurged, signaling genuine confidence in the region's long-term economic health. The uptick in non-bank foreign investors—particularly into sovereign debt—suggests the rebound is not merely speculative but underpinned by real economic improvements.
Obstacles on the horizon
Yet, despite these encouraging signs, challenges persist. Faibishenko cautioned that productivity and competitiveness gains are uneven across the periphery. "Ireland and Greece have made significant competitiveness gains," she noted, "but Spain and Portugal face rising labor costs and weaker productivity growth, potentially limiting further convergence."
While Ireland has emerged as a standout performer—buoyed by a strong export sector and high levels of FDI—Spain and Portugal must address rising unit labor costs and flatlining productivity. These are risks that, if not tackled, could stall the convergence narrative.
Staying the course
Looking forward, Faibishenko identified key indicators to monitor, including continued strength in FDI inflows, sustained productivity growth, and responsible fiscal policies. However, she underscored that the ultimate determinant of lasting convergence will be the ongoing commitment to reform by peripheral governments.
"The biggest question is whether these countries stay committed to reform," Faibishenko concluded. "If they do, we could see lasting convergence and a real shift in the eurozone's economic landscape."
A lesson in resilience
The eurozone periphery’s journey from crisis to recovery demonstrates the transformative power of bold economic reforms. Their story offers valuable lessons for Europe and beyond about the challenges and potential rewards of structural adaptation.
Listen to the full podcast episode here.
Carlos Carnicero Urabayen