RaboResearch - Economic Research

The eurozone crisis - where are we right now?

Economic Report


To the Eurzone (debt) crisis overview page 

  • Five years after the outbreak of the eurozone crisis, the peripheral countries are at very different stages of economic recovery and rebalancing.
  • Growth has returned and private sector and government balances have improved almost everywhere.
  • Unemployment and public debt levels remain high, whilst part of the rebalancing may be only cyclical.  


In this report, we outline how far rebalancing has progressed in the peripheral member states, i.e. Greece, Ireland, Portugal, Italy, Spain and Cyprus. We look at progress in terms of economic growth, external rebalancing, fiscal rebalancing and private sector rebalancing.  

In terms of economic growth

In all crisis countries except Greece economic recovery has kicked in. Growth has been triggered by various developments, such as less uncertainty, lower interest rates on both public and private lending, a restructuring of the financial sector, improved competitiveness, a more favourable external environment and a reduction of the pace of fiscal consolidation. But, especially in 2015, also more temporary factors such as the strong fall of energy prices and the depreciation of the euro seem to have played a role.

More specifically, economic growth in Ireland and Spain has returned and gathered pace since late 2013 (figure 1). In fact, these two countries are now the fastest growing economies in the eurozone. The Portuguese economy has also been continuously growing since 2014, though at a slower pace. A roll-back of reforms could threaten growth prospects. In Cyprus and Italy, economic growth only turned positive in 2015 and especially in Italy the short-term growth outlook remains rather weak. Greece’s economic prospects have recently deteriorated dramatically. The outlook started to very slowly improve in 2014. The instalment of a bank holiday and capital controls, and the economic uncertainty before the third bailout was concluded in August, are likely to have affected economic growth severely.

So far, in most of the crisis countries the recovery has not been strong enough to significantly reduce unemployment (figure 2) and restore household disposable income and per capita GDP to pre-crisis levels (figure 3).  

Figure 1: GDP volume has returned in most crisis countries
Figure 1: GDP volume has returned in most crisis countriesSource: Macrobond, Eurostat
Figure 2: Unemployment rates have increased significantly
Figure 2: Unemployment rates have increased significantlySource: Macrobond, Eurostat
Figure 3: Per capita GDP still below pre-crisis peak in most crisis countries
Figure 3: Per capita GDP still below pre-crisis peak in most crisis countriesSource: Macrobond, IMF

External rebalancing

The current account balance of all peripheral member states has improved significantly since the outbreak of the crisis (figure 4), which has strongly reduced the reliance on foreign finance. However, given that the current account has only turned positive in 2013 in most countries, the net international investment position (NIIP) is still deeply negative (figure 5).  These large net liabilities pose less direct risk though due to the following factors: (i) ample liquidity in financial markets (ii) the fact that bail-outs have turned a significant share of debt into long maturity and low interest debt (iii) the fact that the ECB is now de facto acting as a lender of last resort, and (iv) the creation of the European Stability Mechanism. Improving the NIIP will require those countries to run big current account deficits for many years to come. It remains to be seen whether they are able to do so, as the recent improvements in the current account balance are not only structural, but also cyclical. 

Figure 4: Strong improvement in the current account balance
Figure 4: Strong improvement in the current account balanceSource: Macrobond, IMF
Figure 5: NIIP remains deeply negative                 
Figure 5: NIIP remains deeply negativeSource: Macrobond

Cyclical improvement

Part of the improvement in the current account balances is expected to be undone as the economic recovery strengthens. First, economic recovery will  fuel import demand again. This already happened in 2014 in all peripheral countries (figure 6)[1]. Second, economic recovery could again result in pressure on prices, wages and the euro exchange rate. This could be especially problematic for Portugal, Greece, Spain and Italy. In these countries the share of high-tech exports is low (figure 7), due to which they have to compete more on prices (with low-cost countries) than their Northern eurozone peers. However, given that unemployment is still very high in all countries except Ireland, price and wage pressure is unlikely to become strong in the near term. Moreover, given that it primarily trades within the eurozone,  exchange rate shocks do not have much impact on Portugal. The opposite is true for Ireland.

Figure 6: Import volume is starting to recover
Figure 6: Import volume is starting to recoverSource: Macrobond
Figure 7: Share of high-tech exports
Figure 7: Share of high-tech exportsSource: Macrobond, Eurostat

Third, as the economic recovery may (seemingly) reduce credit risk and increase the appeal of investing in crisis countries, it could lead to renewed large scale capital inflows, which might result in an increase in import demand, primary income deficits and foreign liabilities. However, greater use of macroprudential policies and tighter regulation of the financial sector may act as brakes on intra-eurozone capital flows. Currently, the total amount of foreign bank claims outstanding in the crisis-hit countries (excluding Cyprus) is less than half the amount before the outbreak of the crisis (figure 8).

The recent strong fall in energy prices could also turn out to be cyclical. A renewed rise would lead to a deterioration of the current accounts again, whereby Cyprus and Portugal would be particularly vulnerable (figure 9). Furthermore, external rebalancing in Ireland has greatly benefited from the fact that the economic (and import demand) recovery has progressed much further in the US, and ,to a lesser extent, in the UK. More than one-third of its exports in terms of total value added is directed towards these countries. Given that the economic outlook of these countries remains relatively favourable, the resulting improvement is unlikely to be reversed though.

Figure 8: Total exposure BIS reporting banks
Figure 8: Total exposure BIS reporting banksSource: Macrobond
Figure 9: Dependence on energy imports
Figure 9: Dependence on energy importsSource: Macrobond

Structural improvement

Part of the improvement in the current account balances has a more structural character, however. For example, product markets have become less regulated, which should boost competition and thus competitiveness. In addition, labour market reforms in especially Spain and Portugal[2] should cap future increases in unit labour costs. More recently, Italy has also started to reform its labour market, yet so far improvements have been smaller than in the Iberian countries. According to the OECD, Ireland already has the most flexible labour market of the entire eurozone[3].

In theory, lower unit labour costs could result in an improvement of the current account both via lower imports and higher exports. Import demand could fall as producing goods at home becomes cheaper compared with importing goods produced abroad. Export demand will rise if lower producer costs are translated into lower export prices or via higher profits into a higher quality of goods. In all peripheral countries except Italy, unit labour costs in the overall economy have fallen sharply relative to most other industrialised countries since 2008 (figure 10). However, relative unit wage costs in the manufacturing sector have barely decreased, except in Ireland and Spain and, to a lesser extent, in Portugal. Export prices have fallen, but substantially less than unit labour costs (figure 11). In Greece export prices are in fact almost equal to those in 2008. Taken into account a wide variety of indicators, it seems competitiveness in Italy and Greece has not substantially improved in recent years. On the other hand, the improvement of the current account might have been partially the result of penetration of new export markets and a higher quality of goods in Spain and perhaps also in Portugal. The picture for Ireland is rather mixed and also blurred by the fact that Ireland’s exports have a high import content.

Figure 10: Strong fall in relative unit labour costs
Figure 10: Strong fall in relative unit labour costsSource: Macrobond
Figure 11: REER export prices                         
Figure 11: REER export pricesSource: Macrobond 

Fiscal rebalancing

All crisis-hit countries have managed to lower public deficits substantially from crisis peak levels (figure 12), with the exception of Cyprus[4]. In particular, structural budget deficits[5] have improved strongly in recent years (figure 13). In most countries this balance is still negative, however.

This improvement of fiscal deficits has not led to a reduction in the debt ratio due the fact that since the outbreak of the crisis, nominal GDP growth, i.e. GDP volume growth plus inflation, has been negative or at least too low to compensate for the remaining public budget deficits (for more information on the build-up of debt see Europe’s (public) debt challenge). During the crisis years public debt increased significantly. By 2014, sovereign debt-to-GDP stood at 100% of GDP or more in all peripheral member states (figure 14). By 2014, only Ireland had managed to start building down its public debt ratio.

Figure 12: Significant reduction in public budget deficits
Figure 12: Significant reduction in public budget deficitsSource: Macrobond, Eurostat
Figure 13: Significant improvement in structural budget balance
Figure 13: Significant improvement in structural budget balanceSource: Macrobond, Eurostat
Figure 14 : Public debt remains elevated
 Figure 14 : Public debt remains elevatedSource: Macrobond, Eurostat

Looking forward, the low inflation and still rather subdued growth environment in most peripheral member states will make it difficult to rapidly reduce the debt-to-GDP ratio in the coming years. As mentioned before, especially for Ireland, but also for Spain, the growth outlook for the next few years is rather positive, which means that these countries might be relative outliers in this respect. In the longer-term, building down debt will be difficult in all crisis countries except Ireland as their potential GDP growth is low. As a result, governments cannot simply grow their way out of debt, especially not in Greece and Italy. Consequently, governments will either have to undertake structural reforms and other measures to raise the growth potential of the economy and/ or will need to run large budget surpluses for multiple years, in order to significantly reduce public debt. Both will prove difficult, but the only alternatives are debt write-downs or restructurings

All in all, governments in peripheral member states remain vulnerable to increased financial market stress, i.e. less liquidity and higher interest rates, for quite some years to come. We do note that in the short-term risks associated with refinancing and affordability are substantially reduced by the ECB’s quantitative easing programme. Moreover, the maturity structure of public debt in these countries has improved in recent years, especially in Ireland, Portugal and Greece. In the latter, this has solely been the result of official support, while in Ireland and Portugal the term structure of market financing has also improved.  


[1] The significant deterioration of the current account balance of Cyprus in 2014 is mostly due to a worsening of the primary income balance and not cyclical demand factors. The current account balance in Ireland improved on the back of a larger secondary income balance.

[2] Such as decentralisation of wage bargaining and lower social contribution and severance payments for employers. However, the new Portuguese government is expected to reinstall centralised wage bargaining and raise minimum wages.

[3] The gap with for example the United States and the United Kingdom is large, though.

[4] We note that the large 2014 government budget deficit in Cyprus stems from an one-off expenditure, namely banking sector capitalisations (worth 8.6% of GDP). Without this expenditure, the public budget was almost in balance. Also in Portugal the budget deficit is notably lower when adjusted for banking sector capitalisation in 2014 (4.5% of GDP instead of 7.2% of GDP).

[5] This is the cyclically adjusted budget balance excluding one-off payments and revenues, i.e. more or less the average public budget balance to be expected over the long run.

Private sector deleveraging

Progress in the field of private sector deleveraging has been mixed. All countries experienced sharp shifts in sectoral balances. In the countries that suffered big housing busts, i.e. Ireland and Spain, the household sector has increased its net saving strongly since the start of the crisis. As a result, household financial liabilities have fallen in these countries, though they remain above the eurozone average. In Cyprus household financial liabilities have continued to grow. In all countries except Italy, household debt is still above the Eurozone average. Sectoral balances suggest that the financial position of households remains weak in Greece, which is likely to be caused by the deep economic crisis the country has experienced in recent years. Household debt in Italy was already low before the crisis and has remained so, reflecting many years of net saving by the household sector.

In all countries non-financial corporations (NFCs) are now net savers in the aggregate. However, this has not resulted in a strong reduction of the indebtedness of NFCs in most countries. Only in Spain and, to a lesser extent, Portugal, NFCs have decreased their indebtedness. On the other hand, already high indebtedness of NFCs has increased strongly in Ireland and Cyprus, which might linked to offshore activities. Greece, Italy and Spain the indebtedness of NFCs is close to the Eurozone average, while NFC indebtedness in Portugal also remains relatively high. 

Figure 15: Household debt has fallen in several countries …
Figure 15: Household debt has fallen in several countries … Source: Eurostat
Figure 16: … corporate debt less so
Figure 16: … corporate debt less soSource: Eurostat
Figure 17: Greece
Figure 17: Greece Source: Eurostat
Figure 18: Ireland
Figure 18: IrelandSource: Eurostat
Figure 19: Italy
Figure 19: Italy Source: Eurostat
Figure 20: Portugal
Figure 20: PortugalSource: Eurostat
Figure 21: Spain
Figure 21: Spain Source: Eurostat

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