Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. This alarming speech by Mario Draghi in 2012, then governor of the European Central Bank, aimed to reassure financial markets concerned about the Eurozone's sustainability. Originating in Greece, the Eurozone crisis spread across other periphery European economies including Ireland and later Spain and Italy (termed the PIIGS).
Despite fear of economic chaos, a Grexit, and a permanent economic depression, these economies have experienced a remarkable transformation in economic prospects. For example, Spain was the fastest growing major economy in the OECD (exceeding the US) in 2024 and Portugal was one of two Eurozone economies to see fiscal surpluses and Greek unemployment is at record lows. A case-study of the transformation of Southern European economies provides hope that despite economic malaises facing other nations, sustained long-term economic growth is still possible with rigid economic policy. With the newly elected Labour government desperately seeking economic growth in Britain, studying the recoveries of economies such as Spain, Portugal and Greece may help Kier Starmer and Rachel Reeves in steering the UK towards a healthier economy.
The Eurozone in Crisis
The collapse of Lehman Brothers in 2008 and the wider financial crisis caused by the downturn in the US subprime mortgage market quickly spread to Eurozone banks. European banks – largely from Southern European economies – were heavy lenders for southern European countries, particularly after the introduction of the Euro. These banks called in debts to cover their losses, resulting in mass bankruptcies across economies which were already grappling with the economic fallout of the Great Recession. Governments were forced to bail out a range of institutions, most importantly banks such as the Banco Espirito Santo in Portugal, leaving high levels of public debt prevalent across the affected economies.
Market panic was triggered when the Greek government revealed its fiscal deficit was much higher than previously reported. The deficit stood at 15.4%, rather than the 12.5%, resulting in credit rating agencies downgrading Greek debt and investors dumping it en masse. Bond vigilantes, now anxiously studying the debt burdens of other Eurozone economies, turned to other weakened European economies such as Portugal, Ireland and later Spain and Italy. The Greek debt crisis had by then spread to the rest of the Eurozone, threatening to collapse the monetary union. Greek 10-year bonds peaked at ~36% in 2012, threatening the economy with bankruptcy and economic ruin. This upheaval in bond markets, worryingly mirrors recent volatility in British gilt markets following the so-called mini budget of 2022. The subsequent Eurozone bailout scheme, designed to save Southern European economies from crashing out of the Eurozone or facing national insolvencies, prescribed harsh fiscal cuts and economic reforms to affected economies. Referred to as the troika, some of these policies were so unpopular that Greek Finance minister Yanis Varoufakis referred to it as terrorism transforming Greece into a debt colony.
Painful Medicine – Troika Austerity
Initially, the policies prescribed by the IMF, the ECB and Northern European creditors involved unpopular austerity and structural reforms. Most radically, this involved a 32% reduction in public expenditure within Greece – triggering mass unemployment and a deep recession. Greek GDP in nominal terms has yet to recover to its pre-2008 peak. While the harshness of austerity measures, particularly in Greece, are heavily debated amongst economists, it is a matter of fact that bailed out economies have all regained international investor confidence as a result of these measures. Meanwhile, established Northern European economies such as the UK and France, are increasingly victim to nervous bond investors.
The PIIGS' remarkable turnaround in investor confidence is evident in the sharp decline of Greek and Portuguese 10-year bond yields, which once spiked to crisis levels but have since steadily converged toward those of Britain, France, and Spain. Alarmingly, British 10-year bonds now exceed those of Greece and recent political instability in France has resulted in rising borrowing costs compared to those seen for the Spanish or Portuguese governments. These falling bonding yields reflect the reduced debt burdens, rising economic growth and primary budget surplus' across Spain, Portugal and Greece.
As Britain scrambles to increase defence spending and Rachel Reeves contemplates breaking her own fiscal rules (despite recent tax hikes). Portugal has announced tax cuts for all citizens under the age of 35. These contrary fiscal positions demonstrate the extent to which fiscal discipline is rewarding in the long run.
Structural Reforms – Lessons for Britain?
In Spain and Portugal, following the liberalise Labour markets have made wages less sticky. Essentially meaning employers have greater power to lower wages, sack workers and extend working hours. In the years 2011-2015 this resulted in high levels of unemployment, especially amongst Spanish youth (peaking at 56.1%), high levels of emigration and falling wages. However, proponents of the Troika reform will argue it has resulted in the increased competitiveness of the Iberian economies with labour markets fit for the twenty-first century. Both economies have jumped up the OECD export competitiveness rankings, this is reflected in the rapid export growth both economies have experienced – Spanish exports tripling since 2010. Furthermore, Portugal has witnessed its employment rate reach a record high of 72% in 2024, despite global trends post-covid towards falling employment rates – as has occurred in Britain and the US.
Other reforms, including to the Iberian Energy market have resulted in a green re-industrialisation. In 2023 Spain alone received the highest amount of green energy investment in the world, a remarkable achievement for the world's 15th largest economy. This has been accredited to a streamlined, open approach towards FDI as well as a deregulated planning process. Due to this investment, which has reduced dependence on Natural Gas, Spain and Portugal now have the lowest energy costs within the European Union. The Iberian energy market, therefore, serves as an example for Britain's new government. While reforming and expanding Britain's outdated energy market may result in significant local opposition, given its potential to re-industrialise and level up much of the country it is an opportunity we cannot miss. Changes could include relaxing planning controls regarding the energy grid, for example by allowing Scotland to maximise its vast generation of Wind Energy and export to the rest of the UK. Thus, demonstrating the great opportunity the carbon transition offers Britain.
More than a Lads' Holiday
The surge in tourists visiting bailed out economies such as Spain, Portugal and Greece has also supported their rapid economic recovery since the crisis. In July 2024 alone tourism revenues accounted for over 12 billion Euros in Spain. The standard economic benefits of tourism are well documented, with foreign tourists increasing domestic consumption, stimulating demand and employment. However, another underrated benefit of tourism is the increased international awareness of destinations, greatly enabled by social media. Portugal and Spain have been at the forefront of the digital nomad revolution, being the first to introduce digital nomad visas. This has resulted in cities such as Lisbon and Madrid becoming European start-up centres for a range of firms specialising in technology or financial services. Both cities have successfully attracted talent from South America as a result of linguistic ties, but equally importantly from countries such as the US or UK. This has famously included Goldman Sachs opening an office in Malaga. Spain for employees looking for a different lifestyle. This demonstrates the unique role tourism has had in increasingly FDI and high-skilled immigration to Portugal, Spain and Greece. UK government policy should aim to mirror this, encouraging tourism in Britain's great historical towns and cities – ideally outside of the South East – to support the government's 'levelling-up' pledges.
An Opportunity to be Grasped
The fact that in 2012, Greece, Portugal, Ireland and Spain were, in essence, shut off from global capital markets, but in 2024 economic growth is nothing but an economic miracle. Demonstrating that implementing tough fiscal and structural reforms to an economy successfully encourages sustainable long-run growth – as is sought after in the U.K. With a government serious about sustained economic growth and committed to structural reforms and fiscal discipline there is no reason why Britain too shouldn't be able to transform its economic prospects.