PARIS.- Something extraordinary is happening to the European economy: the southern countries that almost broke up the eurozone during the 2012 financial crisis They are growing faster than Germany and other large countries which were for a long time the engines of growth in the region.
The dynamic is strengthening the economic health of the region. In a reversal of fortune, the laggards have become leaders. Greece, Spain and Portugal grew more than twice as fast as the eurozone average in 2023. Italy was not far behind.
A little over a decade ago, Southern Europe was the center of a eurozone debt crisis that threatened to split the bloc. of countries that use the euro. It has taken years to recover from deep national recessions and multibillion-dollar international bailouts with harsh austerity programs. Since then, the same countries have worked to improve their finances, attract investors, revive growth and exports, and reverse record unemployment.
Now Germany, Europe’s largest economy, is dragging down the region’s fortunes. It has been struggling to emerge from a crisis caused by rising energy prices after Russia’s invasion of Ukraine.
That became clear on Tuesday, when new data showed that the euro currency bloc’s economic output grew 0.3% in the first quarter of this year from the previous quarter, according to the European Union’s statistics agency, Eurostat. The eurozone economy contracted 0.1% in both the third and fourth quarters of last year, a technical recession.
Germany, which represents a quarter of the bloc’s economy, barely avoided a recession in the first quarter of 2024, with growth of 0.2%. Spain and Portugal grew more than three times that rate, which shows that The European economy continues to grow at two speeds.
After years of international bailouts and harsh austerity programs, the countries of southern Europe carried out crucial changes that attracted investors, revived growth and exports and reversed record unemployment.
The governments They reduced bureaucracy and corporate taxes to stimulate businesses and drove changes in their once rigid labor markets, including making it easier for employers to hire and fire workers and reducing the widespread use of temporary contracts. They took steps to reduce sky-high debts and deficits, attracting international pension and investment funds to start buying their sovereign debt again.
“These countries acted very well after the European crisis and are structurally sounder and more dynamic than before”said Holger Schmieding, chief economist at Berenberg Bank in London.
Southern countries too they doubled their service economy, especially tourism, which has generated record revenue since the end of coronavirus restrictions. And they benefited from part of an €800 billion stimulus package implemented by the European Union to help economies recover from the pandemic.
The economy of Greece grew around twice the eurozone average last year, driven by increased investment from multinational companies such as Microsoft and Pfizer, record tourism and investments in renewable energy.
In Portugal, where growth has been driven by construction and hospitality, the economy expanded 1.4% in the first quarter compared to the same quarter last year. The rate of the Spanish economy during the same period was even stronger, at 2.4%.
In Italy, the Conservative government has been restricting 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 eurozone’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 the southern European economies. “They have bounced back after living beyond their means before the crisis and are leaner, fitter and tighter as a result.”
For decades, Germany grew steadily, but instead of investing in education, digitalization, and public infrastructure during those boom years, the Germans became complacent and dangerously dependent on Russian energy and exports to China.
The result has been two years of almost zero growth, pushing the country to last place among its peers in the Group of 7 and eurozone countries. When measured year-over-year, the country’s economy contracted 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 expand just 0.3% over the year.
Economists point out structural problems including an aging workforce, high energy prices and taxes, and excessive bureaucracy that needs to be addressed before there can be meaningful change.
“Basically, Germany did not do its homework when it was doing well”said Jasmin Gröschl, senior economist at Munich-based Allianz. “And now we are feeling the pain.”
Furthermore, Germany also built its economy on an export-oriented model that depended on international trade and global supply chains that have seen disturbed by geopolitical conflicts and the growing tensions between China and the United States, its two main trading partners.
In France, the eurozone’s second-largest economy, the government recently lowered its forecasts. Its economy expanded 1.1% in the first quarter compared to the same period last year.
France’s finances are worsening: the deficit is at a record level of 5.5% of GDP and debt has reached 110% of the economy. The government recently announced that it would need to save around €20 billion this year and next.
Holland recently from a mild recession that hit last year, when the economy shrank 1.1 percent. The Dutch property market was particularly affected by tighter monetary policy in Europe.
Together, the German, French and Dutch economies account for around 45% of the eurozone’s GDP. As long as they remain slow, overall growth will be moderate.
Yes, at least for now. High interest rates have begun to cool its growth, but the European Central Bank, which sets rates for the 20 countries that use the euro, has signaled it could cut rates at its next policy meeting in early June.
Inflation in the euro zone remained stable at 2.4% in the year to April, Eurostat reported on Tuesday, following an aggressive campaign by the bank to cool runaway prices over the past year.
That should help tourism, a major driver of growth in Spain, Greece and Portugal. Those countries too will increasingly benefit from efforts to diversify their economies towards 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 bolstered by EU recovery funds, with billions of euros in grants and low-cost loans. cost invested in economic digitalization and renewable energy.
But to ensure that those gains are not fleeting, economists say, Countries must build on the momentum and further increase competitiveness and productivity. All of them also carry heavy debt loads that raise questions about the sustainability of their improved finances. Germany, by contrast, has a self-imposed limit on how much it can finance its economy through debt.
Those investments “will help make their economies more prepared for the future,” said Bert Colijn, chief eurozone economist at ING Bank. “Will they challenge Germany and France as European powers? “That’s going too far.”
By Liz Alderman and Melissa Eddy
