Something unusual is happening in the European economy. The southern countries, which nearly collapsed the euro zone in the 2012 financial crisis, are growing faster than Germany and other large economies that have long served as the region's growth engines.
This dynamic strengthens the region's economic health and prevents eurozone overreach. Fortunes have reversed, and the laggards have become leaders. Greece, Spain and Portugal grew more than twice as fast as the euro area average in 2023. Italy was not far behind.
Just over a decade ago, southern Europe was at the center of the eurozone debt crisis, which threatened to split the bloc of countries that use the euro. It took years to recover from a deep national recession and a multibillion-dollar international bailout with harsh austerity programs. Since then, those same countries have worked to rebuild their finances, attract investors, revive growth and exports, and reverse record unemployment rates.
Currently, Germany, Europe's largest economy, is controlling the fate of the region. It is struggling to emerge from the recession caused by soaring energy prices after Russia's invasion of Ukraine.
That was clear on Tuesday as new data showed economic output in the euro currency area rose 0.3% quarter-on-quarter in the first quarter of this year, the European Union's statistics agency Eurostat said. The eurozone economy shrank by 0.1% in both the third and fourth quarters of last year, entering a technical recession.
Germany, which accounts for a quarter of the region's economy, narrowly avoided recession in the first quarter of 2024, growing by 0.2%. Spain and Portugal are growing at more than three times that rate, showing that Europe's economy continues to grow at two speeds.
How did Greece, Spain and Portugal move forward?
After years of international bailouts and harsh austerity measures, southern European countries have undergone decisive changes, attracting investors, reviving growth and exports, and reversing record unemployment rates.
Governments are pushing ahead with reforms to once-rigid labor markets, cutting bureaucracy and corporate taxes to stimulate business, making it easier for employers to hire and fire workers, and reducing the prevalence of temporary contracts. Ta. They moved to reduce soaring debt and budget deficits, enticing international pension and investment funds to start buying sovereign debt again.
“These countries have become very aligned in the wake of the European crisis and are structurally sounder and more dynamic than before,” said Holger Schmieding, chief economist at Berenberg Bank in London.
Southern countries have also doubled down on their service economies, particularly tourism, which has generated record revenues since the end of coronavirus restrictions. It also benefited from part of the 800 billion euro stimulus package rolled out by the European Union to help the economy recover from the pandemic.
So what is a two-speed economy?
Greece's economy grew by about twice the eurozone average last year, supported by increased investment from multinational companies such as Microsoft and Pfizer, record tourism and investment in renewable energy.
In Portugal, where growth has been driven by the construction and hospitality industries, the economy grew by 1.4% in the first quarter compared to the same period last year. Spain's economy grew even better during the same period, at 2.4%.
Italy's conservative government has reined in spending and increased exports of technology and car products while attracting new foreign investment in the industrial sector. The country's economy has grown roughly in line with the eurozone's overall growth rate, a notable improvement for a country long seen as a drag on the economy.
“They are correcting their excesses and tightening,” Schmieding said of southern European economies. “They got in shape by living beyond their means before the crisis, and as a result became thinner, healthier and meaner.”
What happened in Germany?
Germany had been growing steadily for decades, but instead of investing in education, digitalization, and public infrastructure during the boom years, Germans became complacent and risked putting Russian energy and exports to China at risk. I've become so dependent on it.
The result was two years of near-zero growth, leaving the country in last place among the G7 and euro area countries. Measured year-on-year, the country's economy in the first quarter of 2024 shrank by 0.2%.
Germany accounts for a quarter of Europe's economy, and the German government last week predicted economic growth would be just 0.3% this year.
Economists point to structural problems such as an aging workforce, high energy prices and taxes, and excessive red tape that needs to be addressed before major changes occur.
“Basically, Germany didn't do its homework when the economy was good,” said Yasmin Greschl, senior economist at Munich-based Allianz. “And now we feel the pain.”
Germany also bases its economy on an export-oriented model that relies on international trade and global supply chains, which have been disrupted by geopolitical conflicts and rising tensions between major trading partners China and the United States. It was constructed.
What about other large economies in Europe?
In France, the eurozone's second-largest economy, the government recently revised its outlook downward. The economy expanded by 1.1% in the first quarter compared to the same period last year.
France's finances are deteriorating, with the budget deficit at a record high of 5.5% of gross domestic product (GDP) and debt reaching 110% of the economy. The government recently announced that around 20 billion euros in savings will be needed this year and next.
The Netherlands has just emerged from a mild recession in which the economy contracted by 1.1% last year. The Dutch housing market has been particularly hard hit by Europe's tight monetary policy.
The economies of Germany, France and the Netherlands together account for about 45% of the euro area's gross domestic product. As long as we continue to hold back, overall growth will slow.
Can Southern Europe keep this up?
Yes, at least for now. High interest rates are starting to dampen economic growth, but the European Central Bank, which sets interest rates for all 20 countries that use the euro, has signaled it may cut rates at its next policy meeting in early June.
Eurostats reported on Tuesday that inflation in the euro zone remained stable at 2.4% in the year to April. This follows an aggressive campaign by banks to rein in runaway prices last year.
That should help tourism, a key driver of growth in Spain, Greece and Portugal. These countries will also increasingly benefit from efforts to diversify their economies into new international investment destinations in manufacturing and technology.
Greece, Italy, Spain and Portugal, which together account for around a quarter of the euro area economy, will also benefit from the EU recovery fund, which will see billions of euros in low-cost grants and loans invested in the digitalization of their economies and renewable energy. It has been strengthened.
But to ensure these gains are not temporary, economists say countries need to build on their momentum and become even more competitive and productive. Unemployment, although significantly reduced by the crisis, remains high and wage growth for many jobs has not kept pace with inflation.
Southern countries remain highly indebted, raising questions about the sustainability of improved public finances. Germany, by contrast, has imposed self-imposed limits on how much it can finance its economy through borrowing.
Bart Collein, chief eurozone economist at ING Bank, said such investments “will help boost the prospects of both economies.” “Will they challenge Germany or France as a European powerhouse? That would be too much.”
Eshe Nelson Contributed to the report.