Something remarkable is happening in the European economy: Southern nations that once caused turmoil in the euro currency bloc during the 2012 financial crisis are now outpacing Germany and other major countries that traditionally drove growth in the region.
This shift is strengthening the economic well-being of the region and preventing the euro zone from falling behind. In a role reversal, countries that were once behind are now leading. Greece, Spain, and Portugal experienced growth in 2023 that was more than double the euro zone average, with Italy not far behind.
Just over a decade ago, Southern Europe was at the forefront of a debt crisis that threatened the cohesion of the euro zone. It took years to recover from severe national recessions and significant international bailouts accompanied by strict austerity measures. Since then, these countries have worked to stabilize their finances, attract investors, revive growth and exports, and reduce high levels of unemployment.
Now, Germany, the largest economy in Europe, is dragging down the region’s overall performance. It has been struggling to overcome a downturn caused by escalating energy prices following Russia’s invasion of Ukraine.
This became evident on April 30 when new data revealed that the economic output of the euro currency bloc grew by 0.3 per cent in the first quarter of 2024 from the previous quarter, according to Eurostat, the European Union’s statistics agency. The euro zone had experienced a technical recession with a 0.1 per cent contraction in both the third and fourth quarters of 2023.
Germany, accounting for a quarter of the bloc’s economy, narrowly avoided a recession in the first quarter of 2024 with a growth rate of 0.2 per cent. In contrast, Spain and Portugal expanded at more than triple that rate, indicating the presence of dual-speed growth in Europe’s economy.
How did Greece, Spain, and Portugal gain momentum?
After enduring international bailouts and severe austerity measures, Southern European countries implemented key reforms that attracted investors, stimulated growth and exports, and reduced high unemployment rates.
Governments streamlined regulations, lowered corporate taxes to encourage business growth, and introduced changes to their rigid labor markets, such as making it easier for employers to hire and fire workers. They also reduced debts and deficits, attracting international investors back to their sovereign debt markets.
“These countries have significantly improved their economic structure and dynamism following the European crisis,” stated Holger Schmieding, Chief Economist at Berenberg Bank.
Additionally, these countries focused on their service sectors, particularly tourism, which has thrived post-pandemic restrictions and benefited from a portion of the €800 billion stimulus package provided by the European Union.
What does the two-speed economy look like?
Greece experienced growth in 2023 that was roughly double the euro zone average, driven by increased investments from multinational companies, thriving tourism, and renewable energy projects.
Portugal’s growth, fueled by construction and hospitality sectors, reached 1.4 per cent in the first quarter of 2024 compared to the same period in 2023. Spain exceeded this rate with a 2.4 per cent growth over the same period.
In Italy, a conservative government’s fiscal restraint policies paired with increased exports in technology and automotive sectors have led to economic growth matching the euro zone average, a significant improvement for a country previously considered an economic burden.
“These countries have rectified past mistakes, tightened their belts, and improved after living beyond their means before the crisis, resulting in leaner and more resilient economies,” commented Mr. Schmieding.
