Just a few years ago, Portugal, Italy, Spain, and especially Greece were considered the problem children of the , especially within the group of 20 countries that form the so-called .
This has fundamentally changed, with Spanish Prime Minister Pedro Sanchez recently emphasizing at the in Davos that the EU’s southern periphery could also “contribute solutions to common problems.”
More than a decade after the European sovereign debt crisis brought the four countries close to financial collapse, robust growth has returned to the continent’s South.
, for example, has become a veritable producer and exporter of — especially solar power — helping itself and others amid the energy crisis triggered by .
The EU’s new North-South divide
From a broader European perspective, however, the outlook is far from bright. The eurozone economy as a whole is stagnating. area growth in the fourth quarter of 2024 remained unchanged compared to the previous quarter, and only the summer quarter was a trifle brighter, with gross domestic product (GDP) growing 0.4% over the year.
Many experts blame the persistent weakness of for the stagnation.
in both the fourth quarter and the full year of 2024. Alexander Krüger, chief economist at Hauck Aufhäuser Lampe Privatbank, told news agency Reuters that Germany is “increasingly falling behind” both within the eurozone and globally.
Not enough steam to keep the whole train running
With the eurozone’s largest economy struggling, can Europe’s southern periphery become the new growth engine for the EU?
Economist Gabriel Felbermayr believes they cannot because “they are simply too small economically.”
The director of the Austrian Institute of Economic Research (WIFO) told DW that Germany and France alone account for more than 50% of eurozone output. Additionally, Austria, Slovenia, Slovakia, and the Netherlands must also be considered part of a “strong, industrialized northern bloc” in the eurozone that has problems currently.
He also said that non-eurozone countries in the EU, especially the Czech Republic and Poland to some extent, are “suffering from the weakness of the EU’s industrial core.”
Energy prices key to eurozone growth
So, why are the southern economies so strong while the traditionally dominant economies struggle?
Hans-Werner Sinn, one of Germany’s most prominent economists and former head of the think tank Ifo Institute, sees both external factors and political decisions at play. “Germany has suffered significantly in recent years from the energy crisis, which was caused by a combination of the war in Ukraine and a self-inflicted energy shortage,” he told DW.
He criticizes the push to transition from fossil fuels to green , arguing that “the EU and Germany have lost a sense of balance” which has resulted in Germany currently paying “the highest electricity prices in the world.”
This affected particularly the chemical industry, said Sinn, and . “EU fleet consumption regulations have robbed the auto industry of its competitiveness.”
Felbermayr shares Hans-Werner Sinn’s view, saying the economic sectors most important for southern EU countries, for example, and , have “significantly lower industrial input in overall economic value creation.” This means that factors like high energy costs, , and decarbonization challenges affect the North more than the South.
Felbermayr also noted that inflation rates in the South have been lower than in northern EU countries since 2010, adding to their competitiveness. “The reform efforts following the eurozone debt crisis have paid off — for Greece, Spain, and Portugal in particular,” he added
Trump tariffs set to weigh on sentiment
Jörg Krämer, chief economist at German lender , believes there is little hope for a swift economic recovery in the euro area and expects a “sluggish rebound at best.” Speaking with the news agency Reuters, he said the “deep structural crisis in industry and Trump’s tariff threats are weighing everything down.”
US President has threatened Europe with higher tariffs, which would hit Germany’s export-driven economy particularly hard.
Sebastian Dullien, director of the Institute for Macroeconomics and Business Cycle Research (IMK) in Germany, also sees no signs of recovery. He told the same news agency that there were several factors contributing to Germany’s prolonged economic slump. Most significantly among them were “aggressive industrial policies, which are hurting exports,” and the (ECB’s) “still-high interest rates, which are dampening investment.”
Speaking at the WEF in Davos recently, German Economy Minister appeared to finally accept a major growth problem when he said that Germany has “somewhat overlooked the fact that this is not just a temporary crisis but a structural one.”
The challenges are particularly evident in the industrial sector, he added, which is grappling with high electricity costs. Germany’s crucial foreign trade sector is weakening, and consumer confidence is deteriorating, he said, acknowledging that “we need to reinvent our business model.”
The way ahead
Despite the current economic problems, the is confident that a slight economic recovery will emerge in 2025 and sees the eurozone economy growing by 1.3%. And the ECB, , is expected to continue on its downward rate path throughout the year.
As far as the growth imbalance between the eurozone’s North and South is concerned, WIFO chief Gabriel Felbermayr thinks this is not unusual. “At times, the industrially strong North is ahead, and at other times, the service-oriented South takes the lead. It’s no different in other large economies, such as the US.”
What’s currently important, he said, is for northern countries to “push forward with , while the South must continue its efforts.”
In doing so, the single European market would be strengthened and serve as a “mechanism to balance regional differences within the EU,” he said.
This article was originally written in German.
The post Why Europe’s southern periphery props up eurozone growth appeared first on Deutsche Welle.
