2024-04-04 17:50:46
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A recent growth spurt in southern Europe is reviving hopes of a faster convergence between the eurozone’s traditionally lacklustre Mediterranean economies and its industrial powerhouses in the north. Portugal, Italy, Greece and Spain have collectively outgrown Germany — the bloc’s largest economy — by about 5 per cent since 2017. Together they have added over €200bn to their gross domestic product, in price-adjusted terms.
This is a welcome development for the eurozone. Following the 2008 financial crash, the southern economies suffered sovereign debt and banking crises, and some needed large bailouts. A subsequent fiscal squeeze restrained their economies further. Recent growth helps make up for lost ground. It also supports the economic performance of the common currency area as a whole, as it faces competition from the US and China.
Growth in peripheral Europe comes on the back of positive economic reforms too. After more than a decade, last year credit rating agencies returned Greece’s bonds to “investment-grade”, following improvements in its fiscal management. Spain enacted labour market reforms which have helped reduce precarious work contracts. Southern nations’ export performance and unit labour costs have also improved.
But there are questions over just how sustainable the periphery’s recent economic growth is. First, it has been propped up by large capital investment from the EU’s €800bn recovery fund. Grants and loans under its Recovery and Resilience Facility have been focused on the southern economies, with some being allocated support worth over 10 per cent of their gross domestic product until 2026.
Second, part of the Mediterranean nations’ recent strength comes from temporary factors, including a rebound in tourism following the lifting of pandemic restrictions. Italy’s growth has also been supported by a loose fiscal stance, particularly a costly tax incentive which has boosted construction. Last year, its budget deficit was 7.2 per cent of GDP.
Their strong performance has come alongside a weakening in northern economies. Germany’s more export-orientated economy has been hit harder by the pandemic, surging natural gas prices following Russia’s invasion of Ukraine, and rising global trade tensions. This year, the GDP growth rates of Germany, the Netherlands and Austria, are all expected to be below that of each of the four southern economies, according to European Commission forecasts. France is expected to grow slightly faster than Italy.
The big picture remains one of wide disparities in GDP per capita between the north and the south. What the eurozone needs is sustainably higher growth in Mediterranean nations, alongside recovery in the north. Indeed, if the German economy remains weak, it will sap trade and investment across the eurozone. Berlin must continue efforts to modernise the country’s economic model. Meanwhile, southern nations must step up structural reforms, including to improve public sector efficiency, private sector competition, and innovation — as well as ensuring remaining EU recovery funds are deployed effectively. Just on Thursday, Italian authorities said they had made arrests and seized assets worth around €600mn as part of a suspected fraud involving the fund.
But national reforms can only go so far. Important initiatives to support eurozone-wide growth will need to come from a more effectively co-ordinated common economic policy. For instance, a true banking and capital markets union would help investment and savings flow between the north and the south. Further efforts to integrate energy networks, improve supply chain resilience, and boost digital and green investment will also support competitiveness.
Southern Europe’s recent economic performance must now be built upon, both to consolidate its own emergence from a long period of poor growth and to lift the eurozone’s long-term prospects as a whole. That will require the north and south to work together.
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