Something extraordinary is happening in the European economy: the southern countries that nearly broke up the eurozone during the 2012 financial crisis are growing faster than Germany and other major countries which have long been the engines of growth in the region.
This dynamic strengthens the economic health of the region and prevents the euro zone from sinking too far. In a twist, the laggards became leaders. Greece, Spain and Portugal experienced growth in 2023 more than twice the euro zone average. Italy was not far behind.
Just over a decade ago, southern Europe was at the center of a eurozone debt crisis that threatened to split the bloc of countries using the euro. It took years to recover from deep domestic recessions and multibillion-dollar international bailouts coupled with harsh austerity programs. Since then, these same countries have worked to clean up their finances, attract investors, revive growth and exports, and reverse record unemployment.
Today, Germany, Europe’s largest economy, is weighing on the region’s fortunes. The country is struggling to emerge from the slump caused by soaring energy prices following Russia’s invasion of Ukraine.
This was clear on Tuesday, when new data showed that economic output in the euro zone increased by 0.3% in the first quarter of this year compared to the previous quarter, according to the European Union statistical agency Eurostat. The euro zone economy shrank 0.1 percent in the third and fourth quarters of last year, a technical recession.
Germany, which accounts for a quarter of the bloc’s economy, narrowly avoided a recession in the first quarter of 2024, with growth of 0.2%. Spain and Portugal grew more than three times, showing that The European economy continues to grow at two speeds.
How have Greece, Spain and Portugal progressed?
After years of international bailouts and harsh austerity programs, southern European countries made crucial changes which attracted investors, revived growth and exports and reversed record unemployment.
Governments have cut red tape and corporate taxes to boost business and pushed to change their once-rigid labor markets, including making it easier for employers to hire and fire workers and reducing widespread recourse to temporary contracts. They decided to reduce debts and staggering deficits, attracting international pension and investment funds to start buying their sovereign debt Again.
“These countries have really pulled together following the European crisis and are structurally stronger and more dynamic than before,” said Holger Schmieding, chief economist at Berenberg Bank in London.
Global South countries have also doubled down on their service economies, particularly tourism, which has generated record revenues since coronavirus restrictions ended. And they enjoyed part of a A recovery plan of 800 billion euros deployed by the European Union to help economies recover from the pandemic.
So what does the two-speed economy look like?
Greece’s economy Growth was around twice the euro zone average last year, supported by rising investment from multinational companies like Microsoft and Pfizer, record tourism and investment in renewable energy.
In Portugal, where growth was driven by construction and hotels, the economy expanded by 1.4 percent in the first quarter compared to the same quarter last year. The Spanish economy’s rate over the same period was even higher, at 2.4 percent.
In Italy, the conservative government has cut spending and the country is exporting more technology and automotive products while attracting new foreign investment in the industrial sector. The economy there has roughly matched the euro zone’s overall growth rate, a marked improvement for a country long seen as an economic drag.
“They are correcting their excesses and tightening their belts,” Schmieding said of southern European economies. “They have evolved from living beyond their means before the crisis and, as a result, they are leaner, fitter and meaner. »
What happened in Germany?
For decades, Germany experienced steady growth, but instead of investing in education, digitalization and public infrastructure during these boom years, Germans became complacent and dangerously dependent on Russian energy and exports to China.
The result was two years of near-zero growth, putting the country in last place among its peers in the Group of 7 and eurozone countries. Year-on-year, the country’s economy shrank by 0.2% in the first quarter of 2024.
Germany accounts for a quarter of Europe’s overall economy, and the German government predicted last week that the economy would grow by only 0.3 percent for the year.
Economists point to structural problems, including an aging workforce, high energy prices and taxes, and excessive administrative formalities which need to be resolved before there can be significant changes.
“Basically, Germany didn’t do its homework even though it was doing well,” said Jasmin Gröschl, senior economist at Munich-based Allianz. “And now we feel the pain.”
Furthermore, Germany also built its economy on an export-led model that relied on international trade and global supply chains disrupted by geopolitical conflicts and growing tensions between China and the United States. United – its two main trading partners.
What about other major European economies?
In France, the second largest economy in the euro zone, the government recently lowered its forecast. Its economy grew by 1.1% in the first quarter compared to the same period last year.
France’s finances are deteriorating: the deficit has reached a record level of 5.5 percent of gross domestic product and debt has reached 110 percent of the economy. The government recently announced that it would need to find around 20 billion euros in savings this year and next.
The Netherlands only recently emerged from a mild recession that hit last year, when the economy contracted by 1.1 percent. The Dutch real estate market has been particularly affected by the tightening of monetary policy in Europe.
Together, the German, French and Dutch economies account for around 45% of the eurozone’s gross domestic product. As long as they drag on, overall growth will remain moderate.
Can Southern Europe hold on?
Yes, at least for now. High interest rates have started to dampen their growth, but the European Central Bank, which sets rates for the 20 countries that use the euro, has signaled it could lower rates during its next political meeting in early June.
Euro zone inflation remained stable at 2.4% for the year through April, Eurostat reported on Tuesday, following an aggressive campaign by the bank to calm the year’s surge in prices. last.
This should help tourism, a major driver of growth in Spain, Greece and Portugal. These countries will also increasingly benefit from efforts to diversify their economies into new destinations for international investment in manufacturing and technology.
Greece, Italy, Spain and Portugal – which together account for around a quarter of the eurozone economy – have also been boosted by EU recovery funds, with billions of euros in low-cost grants and loans invested in economic digitalization and renewable energy.
But to ensure these gains are not fleeting, economists say, countries must take advantage of this dynamic and further increase their competitiveness and productivity. All also still carry a heavy debt burden that raises questions about the sustainability of their improved finances. Germany, on the other hand, has self-imposed a limit on the amount it can finance its economy through borrowing.
These investments “will help make their economies more sustainable,” said Bert Colijn, chief euro zone economist at ING bank. “Will they challenge Germany and France as European powers? This goes too far.
