Something extraordinary is happening to the European economy: the southern countries that nearly broke up the euro currency bloc during the 2012 financial crisis are growing faster than Germany and other major countries that have long served as the region's growth engines.
The momentum strengthens the region's economic health and prevents the eurozone from slipping too far. In a twist of fate, the laggards have become leaders. Greece, Spain and Portugal grew more than twice as fast as the euro zone average in 2023. Italy was not far behind.
Just over a decade ago, southern Europe was at the center of a eurozone debt crisis that threatened to tear apart the bloc of countries that use the euro. It has taken years to recover from severe national recessions and multi-billion dollar international bailouts with tough austerity programs. Since then, the same countries have worked to improve their finances, attract investors, restart growth and exports and reverse record-high unemployment.
Now Germany, Europe's largest economy, is weighing on the situation in the region. It is struggling to emerge from the doldrums caused by rising energy prices after Russia's invasion of Ukraine.
That was made clear on Tuesday when new data showed the euro bloc's economic output grew 0.3 percent in the first quarter of this year compared to the previous quarter, according to the European Union's statistics agency Eurostat. The euro zone economy contracted by 0.1 percent in both the third and fourth quarters of last year, a technical recession.
Germany, which accounts for a quarter of the bloc's economy, narrowly avoided recession with growth of 0.2 percent in the first quarter of 2024. Spain and Portugal grew more than three times as fast, showing that the European economy continues to grow at two speeds.
How have Greece, Spain and Portugal progressed?
After years of international bailouts and strict austerity programs, southern European countries have made crucial changes that have attracted investors, revived growth and exports and reversed record high unemployment.
Governments cut red tape and corporate taxes to stimulate the economy and imposed changes in their once-rigid labor markets, including making it easier for employers to hire and fire workers and reducing the widespread use of fixed-term contracts. They sought to reduce sky-high debts and deficits, thereby enticing international pension and investment funds to start buying up their government bonds again.
“These countries have done very well after the European crisis and are structurally healthier and more dynamic than before,” said Holger Schmieding, chief economist at Berenberg Bank in London.
Southern countries have also strengthened their service economy – particularly tourism, which has generated record revenues since the end of coronavirus restrictions. And they benefited from part of an 800 billion euro stimulus package launched by the European Union to help economies recover from the pandemic.
So what does the two-speed economy look like?
Greece's economy grew about twice as fast as the euro zone average last year, buoyed by rising investment from multinationals such as Microsoft and Pfizer, record tourism and investments in renewable energy.
In Portugal, where growth is driven by construction and hospitality, the economy grew by 1.4 percent in the first quarter compared to the same quarter last year. The growth rate of the Spanish economy was even higher at 2.4 percent in the same period.
In Italy, the conservative government has held back 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 overall growth rate of the euro zone, a significant improvement for a country that has long been considered an economic slowdown.
“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 are leaner, fitter and meaner as a result.”
What happened in Germany?
Germany grew steadily for decades, but instead of investing in education, digitalization and public infrastructure during these boom years, the Germans became complacent and dangerously dependent on Russian energy and exports to China.
The result was two years of near-zero growth, leaving the country in last place in the Group of Seven and among eurozone countries. Year-on-year, the country's economy shrank by 0.2 percent in the first quarter of 2024.
Germany accounts for a quarter of Europe's total economy, and the German government forecast last week that the economy would grow by just 0.3 percent this year.
Economists point to structural problems, including an aging workforce, high energy prices and taxes, and excessive bureaucracy, that need to be addressed before significant change can occur.
“Basically, Germany didn’t do its homework when it was doing well,” said Jasmin Gröschl, senior economist at Munich-based Allianz. “And now we feel the pain.”
In addition, Germany built its economy on an export-oriented model based on international trade and global supply chains, which were disrupted by geopolitical conflicts and growing tensions between China and the United States – its two main trading partners.
What about Europe's other major economies?
In France, the euro zone's second-largest economy, the government recently cut its forecasts. The country's economy grew by 1.1 percent in the first quarter compared to the same period last year.
France's finances are deteriorating: the deficit is at a record high of 5.5 percent of gross domestic product, and debt has reached 110 percent of the economy. The government recently announced that it will have to find around 20 billion euros in savings this year and next.
The Netherlands recently emerged from last year's mild recession, when the economy contracted by 1.1 percent. The Dutch real estate market was particularly hard hit by the more restrictive monetary policy in Europe.
Together, the German, French and Dutch economies generate around 45 percent of the eurozone's gross domestic product. As long as they remain sluggish, overall growth will remain subdued.
Can southern Europe keep up?
Yes – at least for now. High interest rates have begun to cool their 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 monetary policy meeting in early June.
Inflation in the euro area was stable at 2.4 percent for the year to April, Eurostat reported on Tuesday, after the bank launched an aggressive campaign last year to curb runaway prices.
This should benefit tourism, an important growth driver 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, investing billions of euros in low-cost grants and loans in economic digitalization and renewable energy.
But to ensure these gains are not temporary, economists say countries need to build on the momentum and further increase their competitiveness and productivity. Unemployment, although sharply reduced by the crisis, is still high, and wage increases for many jobs have not kept pace with inflation.
Southern countries also still have high debt burdens, raising questions about the sustainability of their improved finances. In contrast, Germany has a self-imposed limit on how much it can finance its economy through loans.
These investments “will help make their economies more future-proof,” said Bert Colijn, chief euro zone economist at ING Bank. “Will they challenge Germany and France as European power centers? This is a step too far.”
Eshe Nelson contributed reporting.
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