Having survived more than a decade of upheaval, Greek hotelier Yiannis Retsos believes he has honed the ability to withstand any form of adversity. “I’m the ideal [person] to deal with crises,” says the 55-year-old chief executive of Athens-based luxury hospitality group Electra Hotels & Resorts.
Retsos sees himself as part of a lost generation of Greek businesspeople whose ambitions were crushed as they grappled with the worst economic slump in a developed country since the Depression. “You learn to be defensive,” he says. “You stop dreaming.”
But following the end of the pandemic, Retsos and many of his peers are facing an entirely new challenge. All of a sudden, they have to contend with an unexpected economic boom in their region.
The same is true for other European countries whose excruciating debt crises once pushed the euro area close to breaking point. Now, some 15 years later, for Portugal, Italy, Ireland, Greece and Spain — ignominiously labelled the ‘PIIGS’ by some analysts in the past — the tables have turned.
Ireland, the first to emerge from the crisis long before the arrival of Covid-19, has recently been joined by the other hard-hit countries as Europe’s biggest drivers of growth. In a stark reversal of fortune, the once-ailing “periphery” countries have stolen the lustre of its previously dominant “core”, including Belgium, the Netherlands, Austria and, at the centre, Germany.
In the 15 years to the pandemic, German GDP on average grew by 1.5 per cent a year while the four southern states eked out just 0.3 per cent on average. Since 2020, Spain, Italy, Portugal and Greece have on average expanded by 1.3 per cent a year — underwhelming compared to the booming US economy — but, on average, the four economies are nearly 6 per cent larger than they were at the start of the pandemic.
Meanwhile, Europe’s largest economy Germany had no increase in economic activity at all over the past four years, and the Bundesbank has warned that this stagnation may drag on well into 2025. By contrast, the EU commission expects that Spain and Greece will grow by 2.3 per cent this year, Portugal by 1.9 per cent and Italy by 1 per cent.
For Davide Oneglia, an economist at macroeconomic forecasting consultancy GlobalData TS Lombard, the positive news from the south is one of the few reasons “to be more optimistic on the Eurozone than the current gloomy consensus”.
Because Mediterranean countries are less exposed to potential US tariffs, “more sensitive to rate cuts” and still benefiting from large EU transfer funds, Oneglia predicts that the outperformance will continue.
Europe’s south has a far higher exposure to service sectors and is less reliant on struggling manufacturing than “core” countries such as Germany, where the automotive and chemical sectors have been dominant forces.
Another bright spot is tourism, which was boosted by pent-up demand for travel and higher savings during the pandemic. In Spain and in Greece, tourist arrivals are up at double-digit rates in 2024 on an annual basis.
“This has gone a long way because tourism disperses very deep in the economy,” says Tasos Anastasatos, chief economist at Greek lender Eurobank, adding that hospitality relies on local workers and produce. Including such indirect effects, tourism accounts for at least a fifth of economic output in Greece.
But the Euro area countries bordering the Mediterranean — in particular Italy and Greece — continue to be burdened by high government debt, ossified labour markets, an abundance of red tape and a rapidly ageing workforce. The travel boom has also led to concerns about overtourism in some popular regions.
This is leading some economists to question whether the current growth is a sign of a more permanent shift or merely a short-term aberration. Commerzbank’s chief economist Jörg Krämer is “sceptical” that the “above-average development of the countries in the south of the monetary union will continue for much longer”, arguing that structural problems remain largely unresolved.
But Christian Schulz, Euro area economist at Citi, says “the higher growth rates . . . are driven by real improvements”, pointing to years of below-average price and wage increases as well as some limited reforms of the labour market. “A 30 per cent disadvantage in unit labour costs that existed over the first decade of the currency union has been offset,” he adds.
For these reasons, he is adamant that the upside-down performance reflects something more significant than just German weakness.
Southern countries, many of which once received massive bailouts, have now turned into an “anchor of stability” for Europe, says Schulz, at a time when the bloc is trailing the US in terms of growth and competitiveness.
The newfound economic fortunes of Europe’s debt crisis countries can in part be traced right back to Brussels itself: A €800bn debt-funded investment programme that the EU launched during the pandemic.
Through the so-called NextGenerationEU, member states are being provided with funds to invest in transportation and digital infrastructure, green energy generation, research and development among other areas, in exchange for undertaking productivity-enhancing structural reforms.
Portugal, Italy, Spain and Greece are the main recipients. Though the four countries account for just 28 per cent of the Euro area’s GDP, they are expected to receive 78 per cent of all funds through the programme, according to ECB data. The scheme is currently set to run until mid-2026.
In Italy, around €25bn of NextGenEU funds is being used for a major upgrade of the railway network, including new high-speed train lines into the country’s south, where travel is far slower than in the prosperous north.
Billions of euros in infrastructure investment are generating much-needed employment in a region that has historically been short of jobs. Rome-based WeBuild, the engineering company carrying out some of the projects, has even set up special training programmes to teach relevant technical expertise to unskilled workers.
To unlock the funds, Italy has had to undertake major reforms of its public administration and judicial systems, with the aim of streamlining, simplifying and accelerating procedures and decision-making to boost efficiency and the country’s long-term competitiveness.
The structural reforms demanded by Brussels are more important than the money itself, argues Yannis Stournaras, the governor of the Bank of Greece.
“If implemented, the reforms will improve the basic functions of the state as they will reduce bureaucracy and inefficiency and improve the justice system,” he says.
Stournaras points to research by the Greek central bank suggesting that those measures alone could lift GDP up to 10 per cent by 2040. “That’s a huge and unique opportunity,” he adds.
Out of all the former debt crisis countries, it is Spain that has risen to become the best performing large European economy of late. In 2024, its GDP grew 3.1 per cent and its central bank predicts 2.5 per cent this year.
The boom is partly being fuelled by increasing investment in wind and solar parks. Spain attracted $33bn of foreign direct investment between January and November 2024, matching the amount it received in the whole of 2023, according to fDi Markets, an FT-owned database that tracks greenfield announcements. In renewable energy, Spain welcomed 54 new projects in the same period of 2024, ranking third behind the US and UK, after ranking joint first with 77 new projects alongside the US in 2023.
According to Spanish grid operator Red Eléctrica, renewables in 2024 accounted for 56 per cent of all electricity production — the second year in a row that they generated more electricity than fossil and nuclear fuel combined. At its disposal are its natural advantages: an abundance of sun, plenty of wind and a relatively thinly populated countryside.
As a result, electricity costs are lower than in many other EU countries — a benefit that is increasingly wooing energy-hungry firms. In May, Amazon Web Services announced that it would invest nearly €16bn to expand its existing data centres in Spain.
Madrid-based Moeve — formerly known as Cepsa and owned by Abu Dhabi’s sovereign wealth fund and US private equity firm Carlyle — has earmarked more than €3bn to invest into hydrogen infrastructure in Andalusia, an autonomous region in southern Spain.
One of its landmark projects is a plant in Huelva province, an Atlantic Ocean-facing corner of southern Spain, that will use wind and solar power to generate green hydrogen to be used in nearby chemical plants, including a Moeve factory making isopropyl alcohol.
Other companies could follow suit, fuelling a new era of prosperity for southern Europe as the energy transition gathers pace.
Energy-intensive companies in the past chose bases in “northern Germany and the Netherlands where the natural gas was the cheapest,” says Maarten Wetselaar, chief executive of Moeve. “If you accept that industry will need to consume green molecules, then over time it will need to move to where green molecules are the cheapest,” adds Wetselaar, singling out southern Spain and Portugal as likely options.
Construction of Moeve’s hydrogen plant is due to start in the first half of the year, but funds from the projects are already flowing into the local economy as the company hires design, engineering and construction firms. Masa, an industrial service group, said it had won a contract to install 525 tonnes of structural metal and 1,486 metres of piping for the isopropyl alcohol factory, which is already being built.
“Clean energy at competitive prices is a great opportunity to industrialise Andalusia,” says Jorge Paradela, industry adviser for the Andalusian government, adding that Moeve’s hydrogen investment could generate more than 10,000 jobs for the region.
But job creation requires finding people to fill those vacancies. To keep its economy moving, Madrid is relying on foreign workers. Over the past three years, 700,000 working-age migrants, many from Spanish-speaking Latin America, have entered Spain’s labour force, according to Funcas, a savings bank foundation.
Prime Minister Pedro Sánchez stands out as one of the few EU leaders who is celebrating the importance of migration.
“There are 150,000 job vacancies in Spain,” he said in October. “There is a need for labour. Therefore it is imperative that Europe builds a positive discourse on migration.”
Though many economists are excited about the growth of Europe’s southern countries, some sceptics warn that the drivers of the outperformance may just be temporary.
Specifically, they point to Italy’s frenzied, post-pandemic home improvement boom that was unleashed by lavish subsidies for energy-efficiency-enhancing renovations.
Dubbed the “superbonus scheme”, homeowners between 2020 and 2023 could deduct 110 per cent of the cost of the work from their tax bills. The controversial programme is estimated to have cost the public exchequer €220bn since its launch. While it boosted the construction sector, critics argue it encouraged fraud, put public finances under severe strain and led to excessive spending.
“Italy spent a huge amount of money, and the impact was pretty small in growth terms,” says economist Lorenzo Codogno, a former senior official at the Italian treasury. He argues that the subsidies artificially inflated Italy’s construction industry and crowded out “a lot of other work that was due to be implemented.” “It’s a terrible legacy,” Codogno adds.
Another widespread fear is that the crisis in German industry will drag down the southern countries. For example, Italy’s northern industrial heartland is home to many manufacturers supplying components to German brands. “Italy depends to a very large extent on demand from the German automotive sector,” says Francesco Giavazzi, a former adviser to Mario Draghi during his brief stint as Italian prime minister, who warns that “the death of the German auto-sector” will be “a big shock” for Italian manufacturers.
In Greece, despite the years of growth, economic output is still a fifth below its peak in 2008 once adjusted for inflation. Wages and pensions also remain far below pre-crisis levels, with the average monthly salary 22 per cent below living costs in Athens, the capital. A staggering 67 per cent of Greeks consider themselves “poor”, and analysts warn that the country is producing a new class of “working poor”, those who have full-time jobs, but are struggling to make ends meet, especially in expensive cities like Athens where housing costs have skyrocketed.
“Many Greeks have degrees and postgraduate education and are seeking high-skilled jobs. But the economy still doesn’t have the depth to produce enough of them,” says Eurobank’s Anastasatos.
At the same time, the Greek boom is so intense that employers are increasingly desperate in their quest for workers — a trend that is replicated across Europe. In Portugal, this has been exacerbated by a brain drain of young talent to richer European countries, which the conservative government is trying to reverse with tax incentives.
In Greece, it is the buoyant construction industry feeling the sharp end of labour shortages. Orestes Konstantinou, managing partner of Athens-based construction company Stepsis, says that building projects on Greek islands have turned into a “nightmare”.
In tourist hotspots, daily wages for unskilled construction workers are now higher than in the capital. “We ship [labour] from Athens to the islands,” he says, adding that unskilled workers now earn as much per day “as a technician with 30 years of experience” did a few years ago.
Demand is so high that supply chains have reached a breaking point, Konstantinou says. “If you order [building materials] today, they will tell you it’s going to be delivered in one month but in reality it will take six months,” he adds. “It’s a mess.”
Retsos, who operates six upmarket hotels across Greece, is facing similar problems in the hospitality industry. New international luxury hotel operators, who are investing heavily in Greece, are trying to poach his best employees.
“You have to constantly improvise,” says Retsos, who has decided to keep investing and is currently building a seventh hotel in Greece.
But after the lasting trauma of the crisis, and given the uncertainty stemming from the war in Ukraine and the Middle East conflict and the many unresolved structural problems in Greece, the businessman says he remains cautious and vigilant: “[I] have a feeling that maybe from one day to another, something [bad] could happen.”
Additional reporting by Malcolm Moore, Alex Irwin-Hunt and Carmen Muela
Data visualisation by Keith Fray
