For thirty years, European prosperity had a home address: the North and center of the continent. Germany exported machines, Sweden innovated in services, the Netherlands managed global trade from Rotterdam. The South fixed its public finances and the rest of Europe watched.

This geography is changing. Spain is progressing at a pace that Berlin no longer achieves. Bulgaria and Cyprus are outperforming economies that believed themselves structurally ahead. This shift deserves to be read seriously, and with the right analytical tools, because it is not uniform, and because the question of its sustainability has no simple answer.

The Essential Points

  • In the first quarter of 2026, Spain shows growth of 0.6% in quarterly terms and 2.7% year-on-year, according to Eurostat.
  • Over the same period, the eurozone caps out at +0.1% in quarterly terms, or even -0.2% according to June 2026 revisions, and at 0.8% year-on-year, as reported by Euronews.
  • Cyprus and Bulgaria are performing three to four times better than the European average.
  • The solidity of the motors in the South and East—tourism, European funds, labor immigration—remains to be proven against the productivity ceilings that only export-oriented industry can overcome.

Germany Pays the Price of Its Model

The contrast is striking. Germany, the eurozone’s largest economy, is traversing prolonged stagnation. Its model—heavy industry, exports to China, cheap Russian energy—has fractured on three fronts simultaneously: the war in Ukraine exploded energy costs, the transition to electric vehicles caught the automotive sector, built on combustion engines, off guard, and Chinese demand for German investment goods is flagging.

The result is visible in the figures. Where the eurozone shows 0.8% year-on-year in the first quarter of 2026, Germany is faltering. Volkswagen factory closures and BASF restructuring are not cyclical accidents; they are signals of an industrial model searching for its next configuration.

Philippe Aghion, whose work on Schumpeterian growth earned him the Nobel Prize in Economics in 2025, offers a useful framework for reading this situation. His central thesis is that sustainable growth results from cycles of innovation and creative destruction, and that it seizes up as soon as market concentration protects dominant players from competition. Applied to Germany, this reading suggests that the problem is also structural: an industrial fabric too concentrated around a few major sectors dampened pressure to innovate for two decades. When disruptions arrived—electric, digital, energetic—they all arrived at once.

The challenge for Berlin, therefore, is not to recover its old model. It is to build a new one, which requires active competition policy and massive investment in future sectors. Two conditions the current coalition struggles to meet.

Spain Finds Its Cruising Speed

Spain presents a radically different picture. Growth of 0.6% in the first quarter of 2026 in quarterly terms, or 2.7% year-on-year, fueled by several mutually reinforcing engines. Tourism first: the country welcomes more than 85 million international visitors annually, a flow that generates revenues in constant euros and supports employment in services. Labor immigration next: facing sluggish demographics across much of the EU, Spain has absorbed cohorts of young workers from Latin America and the Maghreb, limiting bottlenecks in certain sectors.

European funds also play a role. The NextGenerationEU recovery plan channeled tens of billions toward energy transition and digitalization of Spanish businesses. The multiplier effect of these investments shows up in growth data.

But these figures demand nuanced reading. Spain still shows one of the highest unemployment rates in the eurozone, and youth unemployment remains structurally above the European average. A growth model built on tourism and services creates jobs, but not always well-paid or sufficiently productive jobs to support wage convergence with Germany or Sweden. Economist Dani Rodrik formulated this tension with precision in his work on premature deindustrialization: countries of the Global South, and some of Southern Europe, shifted to services before passing through the industrialization phase that generates lasting productivity gains.

Spain is a special case because it has a more substantial industrial base than other Mediterranean economies. But the question remains: does its current growth rest on sustainable catch-up, or on engines that plateau when the tourism cycle flags or European funds dry up?

Bulgaria, Cyprus: Convergence Through Funds and Fiscal Attractiveness

Cyprus and Bulgaria show growth rates three to four times the eurozone average. These performances deserve to be deciphered because they rest on very different springs than the Spanish economy.

Cyprus benefits from a hypertrophied financial and legal services sector, attractive fiscal treatment for European holding companies, and strong post-pandemic tourism recovery. Its growth is real, but it is exposed to risks of reputation and regulation: Brussels closely monitors small island economies’ fiscal practices.

Bulgaria combines several factors: European structural funds accelerating as the country builds administrative absorption capacity, a skilled workforce still cheaper than other Central European economies, and faster digital transition than expected in certain sectors. Sofia attracts IT service outsourcing investments that might have gone to Warsaw or Prague a decade ago.

These engines are real. They are also fragile. An economy growing primarily through European transfers and cost differentials is an economy whose convergence remains conditional—conditional on maintaining funds, on capacity to move upmarket, and on the regional geopolitical environment.

Data on the Durability of New Growth Engines

The issue is whether this growth differential between Spain or Bulgaria and Germany can hold over ten years.

BBVA Research’s work on the structure of Spanish growth offers an answer: current Spanish growth incorporates a significant investment component, notably in renewable energy and agrifood industry. Spain has become Europe’s leader in large-scale photovoltaic solar, attracting industrial capital not limited to services alone, even though its offshore wind development still needs to be built, with no commercial offshore capacity yet operational.

Aghion’s reading takes on its full relevance here. Growth driven by services and tourism can sustain employment and improve living standards in the short term. But sustainable productivity growth—the kind that allows real wage increases without destroying competitiveness—requires innovation cycles in sectors exposed to international competition. Export-oriented industry has this property because it forces innovation under pressure. Non-tradeable services, including tourism, lack this constraint. They grow when demand grows, and stagnate when it stagnates.

Spain is better positioned than other Southern economies to cross this threshold precisely because it invests in new industrial sectors. But the worksite remains open. As illustrated by difficulties faced by developing countries analyzed by the journal in the context of development financing, mobilizing capital is one thing; directing it toward sustainable productive uses is another.

Two-Speed Europe Is a Political Opportunity, Not Just a Threat

It is tempting to read this reversal as European fragmentation. A zone at two speeds, Germany in difficulty, peripheral economies overperforming on fragile bases.

The reverse reading is more productive. Europe possesses a rare capacity: to redistribute growth among its members through institutional mechanisms—structural funds, the single market, labor mobility. That Bulgaria, which entered the EU in 2007 with GDP per capita below 40% of the European average, now shows among the continent’s highest growth rates is precisely what these mechanisms are meant to produce. It works.

The fragility lies elsewhere: in the capacity to transform this catch-up growth into frontier technology growth. To achieve this, Aghion and other economists emphasize the central role of competition policy and research investment. Europe has assets—universities, researchers, institutions—but struggles to convert these assets into commercializable innovations, partly due to an insufficiently deep venture capital market. This is the subject the Draghi and Letta reports placed on the Brussels table, and whose stakes far exceed Germany’s case alone.

There is also a lesson for low-growth economies within each country. The mechanisms that worked at the European scale—access to financing, reduction of entry barriers, worker mobility—are the same ones that allow businesses to grow where they establish themselves. Growth geography obeys the same laws at all scales.

Blind Spots That Growth Does Not Hide

None of these performances should be read without its blind spots.

Spain shows annual growth of 2.7%, but according to Eurostat (December 2025), youth unemployment there stands at 23.4%, down 2.3 points over a year. It remains among the EU’s highest, however, and is the symptom of a dual labor market, where part of the active population, often the youngest, most precarious, does not benefit from growth on the same terms as the rest.

Bulgaria grows fast, but its GDP per capita in purchasing power parity remains below 70% of the European average according to Eurostat. Its growth is real and welcome, but it starts from a low enough level that high rates do not yet mean comparable prosperity.

Cyprus, like other small highly open economies, is exposed to external shocks it does not control. A fiscal decision from Brussels, a crisis in its main tourism market, and the figures change sign.

These fragilities do not invalidate performance. They recall that GDP growth is a flow indicator, not a stock indicator. What matters in the end is accumulated productive capacity—human capital, infrastructure, institutions, technological base. It is on this terrain that the debate between advocates of directed public investment growth and defenders of competition as an innovation engine takes on all its interest. Mariana Mazzucato defends the entrepreneurial state capable of directing investment toward long-term missions; Aghion stresses market conditions that make innovation inevitable for survival. These two readings complement each other while setting different political priorities, and Southern and Eastern European governments will have to choose between them.

The Map of European Prosperity Is Being Redrawn, Trade-offs Remain Open

The reversal of the European growth hierarchy is real and documented. Spain, Bulgaria, Cyprus are progressing. Germany is searching. This reversal reflects a structural recomposition, beyond a simple calendar accident.

The coming years will tell whether Southern and Eastern economies have the conditions to cross the threshold separating catch-up convergence from frontier growth. For Spain, bets on renewable energy and business digitalization are tangible elements. For Bulgaria and Cyprus, the question of the productive base remains open.

For Europe as a whole, the question is as political as economic: will it use this moment, when dynamism comes from the periphery rather than the center, to refound a common industrial and competition policy capable of transforming current engines into lasting advantages? The tools exist. Their use depends on choices governments and institutions make over the next two to three years.

Sources

  1. Euronews / Economic Essentials, Growth of European Economies, Q1 2026: https://www.euronews.com/business/2026/05/13/which-european-economy-is-growing-the-fastest-in-2026
  2. BBVA Research, Structural Analysis of Spanish Growth, March 2026 (no link, report not available as open online resource)
  3. Eurostat, GDP Growth Rates by Country, Q1 2026 (ec.europa.eu/eurostat)
  4. Eurostat, Youth Unemployment Rates by Member Country (ec.europa.eu/eurostat)
  5. Philippe Aghion, work on Schumpeterian growth and competition policy; Nobel Prize in Economics 2025
  6. Dani Rodrik, work on premature deindustrialization and growth models in emerging economies
  7. Draghi and Letta Reports, European competitiveness and single capital market, 2024
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  20. Eurostat – Youth Unemployment (December 2025): https://ec.europa.eu/eurostat/fr/web/products-euro-indicators/w/3-30012026-bp
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