Southern Europe: Italy, Spain, Portugal and Greece

Why several southern European economies have struggled with slow growth, high unemployment and debt, and the signs of recovery.

The economies of southern Europe, including Italy, Spain, Portugal and Greece, share some strengths, such as tourism, food, design and manufacturing, but have faced serious difficulties in recent decades.

Italy’s long stagnation

Italy is the euro area’s third-largest economy, with world-famous brands and a strong manufacturing base in the north. But its income per person barely grew for about two decades after 2000. Explanations include slow productivity growth, many small firms that struggle to scale up, an ageing population, slow courts and bureaucracy, and high public debt, well over 100 percent of GDP.

Spain’s unemployment

Spain grew rapidly in the 2000s, driven partly by a construction boom. When the property bubble burst after 2008, unemployment soared to over 25 percent, with youth unemployment above 50 percent. Spain’s labour market had a sharp divide between protected permanent workers and temporary contract workers. A 2021 labour reform limited temporary contracts. Spain has since grown faster than most large European economies, helped by tourism, renewable energy and immigration.

Greece and Portugal

Both needed bailouts during the eurozone crisis. Greece suffered a depression in which its economy shrank by about a quarter. Portugal received a bailout in 2011. Both have since recovered, with Portugal’s tourism and technology sectors growing and Greece returning to investment-grade credit ratings in 2023.

The two-tier labour market

In Spain, older workers on permanent contracts were expensive to dismiss, so firms hired young people on temporary contracts that could be ended easily. In downturns, temporary workers lost their jobs first. Young people bounced between short contracts, making it hard to build careers, buy homes or start families. Economists saw this as a major cause of Spain's high youth unemployment.

Common themes

Common challenges include low productivity growth, high public debt, ageing populations and emigration of young people. Recent recoveries show that reforms, investment and EU recovery funds can make a difference.

Thinking southern Europe's problems are about work ethic

Southern Europeans work more hours on average than many northern Europeans. Their challenges relate to productivity, institutions, firm size, labour market structure and debt, not effort.

Key takeaways

Italy's income per person stagnated for about two decades, with high public debt.
Spain's unemployment soared after 2008, and a 2021 reform limited temporary contracts.
Greece and Portugal needed bailouts but have since recovered.
Low productivity, debt, ageing and youth emigration are shared challenges.