Southern Europe Seeks to Boost Middle Class After Years of Pain

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“It’s the center ground that is key to win. And the center ground has been under significant pressure,”said Wolfango Piccoli, Teneo Intelligence co-president of political risk advisory. “If you look at all the elections and the polls, you have to target the middle class.”

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Cost of living has risen across the world amid the post-pandemic inflation surge and a spike in energy prices, yet in many ways Southern Europe stands out. That’s because its nations spent the prior decade tightening their belts to bring their finances in order, giving citizens little reprieve. 

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While the region was once a synonym for economic mismanagement its nations now boast some of the continent’s best budget numbers. Deficits in Spain and Italy are around the EU’s 3%-of-output limit while Portugal and Greece are among a handful of countries in the bloc that have budget surpluses. 

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Investors have taken notice and successive European Central Bank rate cuts have also been a boon. That’s led the spread between Italian and German 10-year bonds — a measure of risk in the region —  to fall to a 15-year low while that between Greek and German debt has been even lower. Spanish and Portuguese borrowing costs have also fallen substantially, generating further budget savings through cheaper debt refinancing. 

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“It’s a mix of factors that has created this fiscal space,” said Piccoli, pointing to inflation and job growth in the region as driving higher tax take and, in turn, giving governments more money to spend. This extra space is also “a result of the measures taken during the euro-zone crisis” and the reduced cost of financing, he added.

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Yet even as the fiscal breathing room has been a welcome surprise and allowed for some handouts, it hasn’t come without scars. 

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Countries in Southern Europe remain below the EU average when it comes to GDP per capita. Unemployment has dropped significantly from the height of the crisis but remains above the EU average — though only slightly for Italy and Portugal. Wage growth in the region has been modest, and below that of many peers. 

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“Having lived through the trauma of the euro crisis, a broad majority of citizens in these countries now accept that fiscal prudence is the price of stability,” said Fabrizio Pagani, former chief of staff at Italy’s Finance Ministry. 

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While the public broadly acknowledges the need for sounder finances, they also list the increased cost of living as one of their top concerns, according to polls.

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What Bloomberg Economics Says…

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“After years of inflation eroding real wages, middle-income families — who often pay most of the labor taxes — have been hit the hardest. Temporary tax cuts help at the margin – only by addressing public spending pressures can governments create the space for lasting, structural tax relief.”

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—Simona Delle Chiaie, euro-area chief economist. For more research, click here

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While Mitsotakis’s center-right New Democracy party maintains its lead in opinion polls, it has seen support weaken amid growing voter discontent. In Meloni’s case, next year’s budget will also be a litmus test for the coalition’s cohesiveness, even though her popularity remains largely unchanged. 

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Montenegro’s minority government in Portugal was elected in May after the country held its third election in about as many years.  

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Whether the relief measures manage to win over disenchanted electorates will likely hinge on how big and lasting their impact is. 

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While the cuts announced by Mitsotakis in Greece won’t have an immediate impact, “they will make a difference within 2026,” said Ilias Lekkos, Group Chief Economist at Piraeus Bank.