The Economic Comeback of the PIIGS: Why They Are Outperforming Germany

The Resurgence of the ‘PIIGS’

Once criticized for their fiscal management and sluggish growth, Portugal, Italy, Ireland, Greece, and Spain, collectively known as the “PIIGS,” are now outpacing traditional economic powerhouses like France and Germany.
This shift is positively impacting investors who are taking notice of these rising economies.

To recover lost ground, Germany will need to implement counterintuitive policies that focus on more flexible monetary strategies.
The PIIGS nations have been pivotal in maintaining the Eurozone’s economic stability, with Spain recording an impressive annual growth rate of 2.9% in the second quarter, far surpassing the Eurozone’s average of just 0.6%.
Italy and Portugal have also shown stronger performances, while Ireland achieved the highest quarterly growth rate in the bloc.

Changing Economic Dynamics

The shift away from central economies towards these peripheral countries is not a mere coincidence.
Since 2019, economies such as Spain, Greece, Portugal, and Ireland have consistently outperformed Germany, with Ireland growing more than 20% faster.
Even Italy, with its aging population and bureaucratic hurdles, has managed to keep pace with both Germany and France.

One factor contributing to this turnaround is the PIIGS’ lower reliance on exports and manufacturing, sectors that have been heavily impacted by the pandemic and slowdowns in key markets like China.
In contrast, Germany’s manufacturing, which includes luxury cars and appliances, constitutes nearly one-fifth of its GDP, while Spain’s production contributes only 11% to its economic output, according to World Bank data.
The resurgence in tourism post-COVID-19 has also provided a significant boost, as international visitors flock to vibrant cities such as Barcelona, Rome, and Lisbon.

EU Pandemic Recovery Funds

The European Union’s post-pandemic recovery fund is another boon for these nations.
Nearly two-thirds of the €400 billion fund is allocated for Italy and Spain, and Greece is set to receive EU grants and loans that equate to nearly 12% of its GDP by 2026, as highlighted by research from TS Lombard.

Investors have taken note of these developments, as evidenced by the narrowing spreads between the ten-year government bond yields of the PIIGS and the corresponding German sovereign debt over the past two years.
This trend could continue if strong growth and new EU fiscal rules prompt enhanced budgetary discipline in capitals like Rome and Madrid.

Germany’s Economic Challenges

Conversely, Germany’s ability to borrow and spend more for its aging population, crumbling infrastructure, and defense needs is constrained by constitutional limits.
The country’s best hope for economic revitalization lies in boosting exports, which account for roughly 47% of its GDP.
However, achieving this requires lowering interest rates to devalue the euro, a policy the German government and its representatives at the European Central Bank have traditionally opposed to prevent inflation risk.

Now, they may need to reconsider their stance to prevent further marginalization of their economy.