Who Says PIGS Can’t Fly?

Markets reacted negatively on Friday to renewed concerns over a potential escalation in the U.S.–China trade conflict. President Trump threatened additional tariffs on Chinese imports and indicated he might forgo attending the upcoming APEC Summit, which Chairman Xi is expected to attend. The remarks followed China’s announcement last week of expanded restrictions on rare earth exports. However, President Trump now appears to be moderating his stance, signaling a willingness to de-escalate tensions. Both Washington and Beijing recognize the significant global economic risks posed by a full-scale trade confrontation.

The PIGS looks good.  No, I’m not talking about a herd of animals of the porcine variety. Rather, I’m referring to the pejorative acronym defining the poster children of the European debt crisis—Portugal, Italy, Greece, and Spain. Emerging from the Global Financial Crisis with massive levels of debt, crippling unemployment, and stagnating economies, few thought these Southern European nations could meaningfully recover given the painful remedy of fiscal austerity and difficult-to-implement market reforms. Ah, but transform they did. No longer just tourist destinations, they’re now known as European growth champions, reshaping Europe’s economic landscape. More than just a recovery in one portion of Europe, we think the key investment theme resides in the broader implications for the continent.

The reversal of fortune did not come easily. All except Italy required bailouts, with Greece undergoing multiple interventions from EU, IMF, and ECB programs. This tested the very fabric of the European Union. Northern Europe—those providing the financing and guarantees, primarily Germany, the Netherlands, and Austria—required harsh austerity plans of wage cuts, pension freezes, layoffs, and tax hikes to fix the overspending of Southern Europe. This engendered resentment and anger in the southern countries, leading to extensive legal challenges, political brinkmanship, frequent leadership changes, and general distrust of EU institutions. Ultimately, however, public support held through 2015, and the EU not only survived but used this formative experience to develop a more cohesive fiscal and banking system, generally strengthening the Union.

The reforms brought much-needed fiscal discipline, both at the government and corporate level. Non-financial corporate debt fell by 17 to 27 percentage points for three of the PIGS, with Italy registering a modest decline. The ratios now measure in a reasonable range of 57% to 66%. State finances also improved. All except Italy made notable progress in cutting their fiscal deficits, with Portugal and Greece posting surpluses in 2024. Debt-to-GDP ratios declined significantly over the last 10 years in Greece and Portugal, moved down slightly in Italy, and remain at a reasonable level for Spain. Far from a complete fiscal reform, however, the ratios remain high in three of the four countries—but the trajectory is clearly positive.

Vital to the recovery, policymakers addressed a core underlying problem: the inflexible and uncompetitive labor market. Prior to reform, the region’s central governments set high minimum wages, mandated generous severance packages, and legislated centralized wage bargaining. Unable to easily reduce their labor forces during downturns, companies tended to minimize hiring throughout the business cycle, stifling investment and growth across industries. With PIGS governments instituting decentralized collective bargaining, wage negotiation shifted from the national to the firm level. This helped companies run their businesses more effectively by allowing labor-force adjustments according to industry conditions. Other reforms included reduced overtime and holiday pay premiums, shortened unemployment benefits—linking them to job training and active job searches—and new youth job training programs. Policymakers also simplified dismissals, reduced severance pay, extended retirement ages, and overhauled pension systems. These steps helped stabilize long-term finances.

The result? Truly astounding. Unemployment dropped across the region—from levels of 20% to 27% to single digits, or close to single digits in the case of Spain. Notably, Spain’s youth unemployment fell by more than 30 percentage points. Unit labor costs declined dramatically; in Greece, for example, the drop measured 25% compared to 2009 levels. Crucially, the improvement extends beyond mere numbers. Job training programs helped workers move into higher-skilled jobs with faster wage growth. Industries leading this shift include biotech services, renewable energy, technology, advanced manufacturing, and other innovative sectors. Indeed, robust employment growth created a problem most thought impossible here—labor shortages. Immigration, once actively discouraged due to fears of job loss to foreigners and the hollowing out of the younger generation as they sought opportunities abroad, is now seen as essential to maintain growth rates. No longer in the death spiral of rising joblessness and declining incomes, the cycle has become virtuous—with rising employment, increased wages, and greater consumer spending. In short, this comprehensive restructuring of the employment framework enhanced labor productivity and cost competitiveness, raising these countries’ growth potential and improving adaptability to changing economic conditions.

GDP growth rates reflect this impressive transformation. Driven by a post-Covid tourism rebound and pent-up consumer demand, 2022 economic growth ranged from 3.7% in Italy to 6.8% in Portugal. Surprising to many, the region maintained its momentum, especially in Spain, Greece, and Portugal, where growth continued between 1.9% and 4.1% annual rates over the 2023–24 period. Forecasts for 2025 show the PIGS continuing to power the continent’s economy, outpacing Northern Europe and the European average. This is not a temporary bounce but a new foundation for sustainable growth. Interestingly, the new “sick men” of Europe appear to be Germany, France, and Northern Europe in general. Germany, once the economic engine of the continent, continues to struggle with its reliance on exports and the auto industry. Part of this favorable comparison for Southern Europe stems from less trade and tariff exposure to the U.S., but clearly, the region has moved beyond its traditional dependence on tourism. Robust domestic consumption, especially in Spain and Portugal, demonstrates that these countries now enjoy greater economic diversity and vibrancy.

To be sure, structural weaknesses remain, especially in Italy. But the stark reversal in business conditions challenges long-held assumptions about European economic dynamics. Once the epicenter of crisis, these nations now provide a stabilizing force for the broader European continent. Rising credit ratings and better growth among the PIGS lower systemic risk and credit costs throughout Europe, freeing the European Central Bank from acting as the perpetual backstop. Importantly, the revitalized Southern European region fosters a newfound unification of North and South—marked by solidarity, shared fiscal responsibility, and collective stability.  Moreover, Germany’s fiscal stimulus, just starting to permeate its economy, should further boost growth in Germany and Northern Europe next year. This could create a faster growth scenario for the entire continent.  As more investors believe in the flying PIGS, their lipstick may even beautify their ugly Northern neighbors, creating a broadening positive investment climate.

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