Are the tides turning in European economics?
For years, the European economic story has been shaped by a familiar divide: a fiscally disciplined north and a more fragile, debt-laden south. Greece and Italy were once at the heart of the Eurozone debt crisis, while northern neighbours such as France and Germany were seen as the bloc’s economic anchors. Yet in 2024, The Economist ranked Greece, Spain, and Italy among the top five best-performing economies1. Weak growth and widening deficits now afflict the north, while the south is experiencing a notable economic revival – a shifting economic scene reflected in sovereign bond markets that few would have predicted a decade ago.
In this article, we take a closer look at this reversal and some of the driving factors.
From crisis to comeback in southern Europe
Greece’s debt crisis began in 2009, leading to EU and IMF bailouts and years of austerity that triggered civil unrest, emigration, and unemployment nearing 28% by 20132. By the time the bailout ended in 2018, Greece had lost a quarter of its GDP3. But economic reforms and fiscal consolidation have supported growth and strengthened the sustainability of public finances in recent years. In fact, growth has outpaced the eurozone average since 20214. In a major vote of confidence, Greece’s credit rating has been restored to investment grade by major ratings agencies – a move that has significantly lowered its borrowing costs. That said, Greece’s debt levels remain high, and while progress has been made, economic output, wages, and pensions have yet to return to their pre-crisis peaks.
While Italy had a slower and more uneven recovery from the financial crisis compared with other advanced economies, its longer-term outlook is showing signs of improvement. Years of political instability and sluggish growth weighed heavily on investor confidence, but recent developments suggest a turning point, reflected in the narrowing spread between Italian and German 10-year bond yields. With a stable government now in place practicing a good degree of fiscal caution, Italy’s 2026 budget targets a reduction in the deficit-to-GDP ratio below 3%, potentially opening the door to a credit rating upgrade.
Spain’s financial crisis stemmed from a housing bubble and excessive private borrowing, leading to a severe recession and requiring EU-backed intervention to stabilise the economy. Yet today, Spain stands out in Europe’s economic landscape, with 2024 GDP growth of 3.5%, up from 2.5% in 20235 . It is now borrowing at lower rates than France, with spreads against German Bunds continuing to converge6. A major driver of growth has been immigration, which has expanded the labour force, pushed employment to record highs, and helped Spain avoid the acute skills shortages affecting other European economies. This demographic boost has also supported consumer demand, contributing to strong economic momentum. A post-pandemic tourism rebound, infrastructure improvements funded by the EU Recovery Fund, and rising foreign investment in renewable energy have also each contributed to Spain’s economic growth. However, Spain’s recovery is not without its challenges. The tourism boom has reignited concerns around overtourism and the associated pressure on housing, infrastructure, and the environment. And while immigration has bolstered economic growth, difficulties managing the large number of undocumented migrants arriving have sparked fierce political debate.
Greece and Italy have also made strategic use of the EU Recovery Fund, positioning themselves among its key beneficiaries. Like Spain, both countries have channelled the funds into modernising infrastructure, advancing green and digital transitions, and enacting long-needed structural reforms. These investments have not only bolstered fiscal stability but also played a crucial role in restoring investor confidence and laying the groundwork for more resilient, future-facing economies.
Weak growth and widening deficits now afflict the north, while the south is experiencing a notable economic revival.”
Northern Europe’s economic malaise
Germany, long the continent’s industrial powerhouse and a symbol of fiscal prudence, is experiencing its longest economic stagnation since World War II. Its GDP shrank in both 2023 and 20247, while the IMF projects a modest 0.2% growth for 20258 – the slowest rate among major advanced economies. Trump-era tariffs have disproportionately affected its export-heavy industries, particularly cars, machinery, and metals. Intensifying manufacturing competition from China and high energy prices have further eroded Germany’s industrial competitiveness. In response, Germany has pivoted away from austerity, launching a historic stimulus package that includes a €500 billion fund for infrastructure and defence, marking a significant shift in fiscal policy. While this investment aims to modernise the economy and stabilise the eurozone, it also raises concerns about long-term debt sustainability and inflationary pressures. Germany has seen upward pressure on sovereign bond yields amid concerns over its growth stagnation and the fiscal implications of its large-scale stimulus spending.
France, meanwhile, is facing mounting economic and political challenges. In September and October, the country was hit with three credit rating downgrades, driven by rising debt levels and ongoing political instability. The country has cycled through five prime ministers in less than two years, with parliament now unable to produce a majority capable of passing a budget. Investor confidence has weakened, borrowing costs have increased, and France faces growing pressure to restore fiscal discipline to avoid further downgrades and long-term economic strain. Although France’s growth outlook for 2025 actually outpaces Germany’s, its fiscal deficit remains significantly above the Eurozone average.
Germany, long the continent’s industrial powerhouse and a symbol of fiscal prudence, is experiencing its longest economic stagnation since World War II.
A new European balance?
Clearly, the old narrative of a fiscally reckless south and a disciplined north no longer holds. Southern Europe is demonstrating that with the right mix of reform, investment and resilience, recovery is possible – even after a decade of crisis – and this has been reflected within sovereign bond markets. Nonetheless, challenges persist across the continent, and the picture is more complex than a simple divide between southern winners and northern losers.
