Eurostat brought much-needed good news: the Eurozone returned to growth in the second quarter of 2023. Yet this modest success story has not applied to everyone.
Roaring tourism and demand for services, luxury goods, and other light manufactures are fueling the continent’s economic resilience. That means that countries that are more oriented towards these sectors, like France and Southern Europe’s major economies, have reaped the lion’s share of European economic growth. If we weight economic growth projections by each country’s share of European GDP, Spain, Italy, and France will likely be the largest contributors to the EU’s growth in 2023. This is despite the Italian economy’s surprise contraction in the last quarter, which partially reflects the one-off effects of curbing its ‘Superbonus’ tax exemption program. In its July World Economic Outlook update, the IMF upgraded Italy and Spain’s growth forecasts by 0.4 percentage points and 1 percentage points, respectively.
On the other hand, Europe’s traditional juggernaut has become its laggard. Germany’s economy, which is more dependent on heavy manufacturing exports than its peers, faces an uncertain global trade environment, worker shortages, and rising subsidies in the US and China. The IMF forecasts a 0.3% contraction this year.
Ten years ago, the map would have nearly been reversed, with Germany leading European growth and Southern Europe in dire straits. The 2008 financial crisis hit Southern Europe hard; after the collapse of asset bubbles prompted governments to increase stimulus spending, the resulting debt loads triggered a balance-of-payments crisis. To resolve their debt crises, these countries took austerity measures like painful cutbacks on government spending, largely at the behest of their northern neighbors.
Moreover, the region’s industry mix was unfavorable for years after the financial crisis. Resilient demand, especially from Asia, for essential industrial goods pulled Germany out of recession quickly, while tourism and other services sectors were slower to rebound as households pulled back on spending. While France’s economic experience was not as extreme, its recovery was also hampered by an economy dependent on services, tourism, and luxury goods.
Meanwhile in the South, poor consumer confidence and austerity contributed to a vicious cycle of contraction, amounting to a “lost decade” for growth. For instance, Italy’s GDP growth underperformed the EU average every year between 2008 and 2020.
Back to the future
How did Southern Europe bounce back? Some factors, like the strength of the services sector and a rebound in tourism, are more recent. Although Russia’s invasion of Ukraine drove up energy prices in all European countries, France, Spain, Italy were among the least affected countries. In 2021, Russian imports accounted for 6%, 9% and 23% of French, Spanish, and Italian fuel consumption, respectively, compared to 31% of German consumption. Southern European countries also received an outsized proportion (47%) of EU recovery funds from the pandemic.
Structural factors have also helped, particularly in Southern Europe. Austerity programs have ended, and many of the region’s most indebted countries have improved public finances. Greek bonds, for example, are now one upgrade away from being ‘investment grade’–a far cry from the early 2010s, when Greece was placed in ‘selective default.’
These improvements offer optimism that Southern Europe may be turning a page on its “lost decade.” It may be hard to imagine now, but rapid regional economic growth was once the norm before economic crises (starting with Italy in the 1990s) set the region back. From 1971 to 1990, nominal economic growth averaged 3.3% per year in Spain and 3.1% in Italy, compared to 2.6% in Germany and Britain. That might not sound like much, but sustained growth meant that Southern Europe was quickly catching up to its northern peers. In 1980, GDP per capita in Italy and Spain were 72% and 53% of Europe’s three largest economies (an average of Germany, France, and the United Kingdom, weighted by population). By the end of the decade, those figures were 98% and 62% respectively. Indeed, Italians of a certain generation still remember ‘il sorpasso,’ the point in 1987 when Italy’s economy surpassed Britain’s in size (in spite of its smaller population).
It is too soon to say whether Southern Europe is back on this trajectory, but the economic winds may be shifting. Ten years ago, Northern Europe could dictate its solutions to the sovereign debt crisis because Southern Europe needed a bailout. Now, southern capitals may call for a more balanced debate on Europe’s economic future.
Source : Atlaticcouncil