The economic revolution in the countries of the South is underway. So much so that even the European Central Bank has echoed the growth differential between the two “regions” within the euro zone. Spain, Portugal and Greece have experienced growth much faster than that of the euro zone for several years, but above all more intense than that of Germany. The former engine of the euro zone lives in a sort of lethargy after having resisted covid better than the south. Its industry is going through a difficult period and success is not assured in a reconversion process. The combination of these two trends has made it possible to minimize the growth gap between Spain, Portugal and Germany.. It’s true that the growth gap is not synonymous with prosperity (it can grow for many reasons), but it is a good starting point to start closing the GDP per capita gap as well.
The gap started to develop rapidly and significantly with the great crisis of 2007. Spain and Portugal experienced a period of recession that only ended in 2013. The two economies that make up the Iberian Peninsula not only suffered from the financial crisis born in the United States with the appearance of loans subprime mortgages, but were also victims of their own real estate crisis (especially in Spain) and another sovereign debt crisis that drove Portuguese and Spanish debts out of the markets. This sort of “triple crisis” has widened the growth gap with Germany (which has become a sort of European refuge). The PIGS (Portugal, Italy, Greece and Spain), as the English press calls them, are becoming a problem for Europe. But today the situation is very different.
Much of this closing of the gap has occurred in recent years thanks to the “PIGS rebellion.” Isabel Schnabel, member of the executive committee of the European Central Bank, highlighted this curious situation last week in a long presentation accompanied by slides. The Eurozone is upside down, the countries that led growth for years and were an example of what to do (Germany or Finland) are today suffering from stagnation which weighs on the entire euro zone. Industry is stuck or in decline, while services are expanding. Today, the South’s productive model constitutes an advantage, at least for the moment.
“However, overall growth figures hide significant heterogeneity across eurozone economies. Since interest rates started rising, growth has become increasingly uneven,” Schnabel warned. Against all expectations, some of the countries which are net creditors and which should have benefited more from the rise in rates (or at least not have been as affected) are those which are suffering from the cooling of their economies, which is totally unexpected.
Spain, Portugal and Malta are growing
On the contrary, “in other Member States, such as Malta, Spain and Portugal, the product (GDP) has increased measurably. In Malta, for example, annual real GDP growth has averaged 6% since 2022. In Spain and Portugal, real activity has grown by almost 4% per year. In fact, a large part of the eurozone’s dismal growth can be explained since we started raising our policy rates. can be attributed to a small group of countries, including Germany, Finland and Estonia“Schnabel pointed out.
“If eurozone growth had been calculated excluding Germany, for example, activity in the currency area would have been remarkably resilient in the face of the most brutal monetary tightening in decades and a war that broke out on the doorstep. Only “a few advanced economies, particularly the United States, grew faster during this period,” wrote the German ECB economist.
Robin Brookssenior researcher of the Global Economy and Development program of the Brookings Institution and former general director and chief economist of the Institute of International Finance, published on the X network a revealing graph in which you can see how the GDP growth of Portugal and of Spain has reduced the gap with Germany by leaps and bounds. The comeback in Southern Europe is epic and if the current trend continues, this gap will disappear in 2025 or 2026. “Spain’s results post-covid are worth celebrating. Its GDP growth almost converged with that of Germany if we reduce it to 100 just before the 2008 crisis. This is the ideal time for Spain to reduce its enormous over-indebtedness. This is the real test…,” Brooks writes.
Germany is even richer
Bridging this gap This does not mean greater prosperity or productivity, nor does it mean that Spain or Portugal now have the same per capita income as Germany.. Overall GDP growth can be linked to higher population growth or more job creation (something very positive) which increases the country’s total output. The case of Spain is particularly representative of the latter, since it has experienced very intense job creation in recent years: since the second quarter of 2020 in Spain, three million jobs have been created.
There is not only a rebound effect after covid. Spain’s positive inertia continues while the end of the pandemic is already behind us. The latest reports from the Hamburg Commercial Bank (HCOB) on the purchasing managers’ indices (PMI) for September that S&P Global traditionally collects are very representative in this sense. In the case of the manufacturing PMI, an increase in orders and production was recorded, in addition to an improvement in employment and business confidence, as well as purchases of inputs. “It’s a real shame that Spain is only the fourth largest economy in the Eurozone. Although it has managed the global manufacturing downturn surprisingly well, Spain simply doesn’t have enough clout to take the rest of the eurozone with it,” he said. » said in the report is written by the economist Cyrus de la Rubia.
Spain’s good time
If in the manufacturing industry report Spain stood out amid European weakness, the surge was even stronger in the services report. “Summer is coming to an end and Spain brings us a little surprise because, although we expected a slight slowdown in growth in the second half of the year, the latest PMI data shows signs of accelerated growth in September. This again once to differentiate Spain from the rest of the main Eurozone countries, commercial activity and new orders increased against the backdrop of announcements of a further rebound in market demand. “It could be argued that private consumption remains the main growth driver of the economy, as retail trade has also expanded in recent months.”this time its economist Jonas Feldhusen congratulated the HCOB.
Regarding the future, Pedro del Pozo, director of financial investments at Mutualidad, goes further in one of his latest comments: “It should be added that the combination of good activity and inflation data places the Spain in a remarkably positive situation to see accelerate or, at least, maintain its growth, in a context of predictable decline in interest rates. In this sense, Spain would be an advantaged student in what the US Federal Reserve would call a “soft landing” of the economy. »
Germany is today the “sick” of Europe
On the other side of the coin appears a Germany stuck at a particular crossroads. Schnabel herself highlighted in her lecture the problems of Germany and its industry which, although they have manifested themselves very visibly in recent years, are a story that comes from afar and that the pandemic has “ hidden” for a year in the face of the sharp spike in consumption of durable goods around the world during confinements. The reopening of the economy, however, has caused a pendulum effect, the world has moved from the consumption of televisions, refrigerators or cars to the consumption of services, where the countries of the South have a competitive advantage, particularly in those linked to tourism and leisure.
This dynamic, the end of cheap Russian gas following the invasion of Ukraine and the reduction in the need to purchase high value-added goods from the Chinese “friend” have hit the traditional European economic locomotive hard, giving a clue to the convergence of the GDP growth of its Southern partners. For ING analyst Cartsen Brzeski, a regular “doctor” of the German economy, the situation can be summarized as follows: “Germany is still stuck between cyclical and structural headwinds and is finally realizing that the old macroeconomic model of cheap energy and large, easily accessible export markets no longer works. The damage suffered by its historically leading automotive sector, hit hard both by China’s weakness and, at the same time, by its competition, is particularly heartbreaking.
“To understand the main drivers of heterogeneity (in the euro area), it is necessary to analyze both those countries that have grown faster than would have been expected given a policy restrictive and those that have underperformed Let me focus first on the most dynamic countries. In many cases, trade has played an important role. In Spain, for example, net exports (including tourism) contributed on average around 0.4 percentage points. growth every quarter for two and a half years. This is a notable increase compared to the pre-pandemic period. The same general trend can be observed in Italy and Portugal,” Schnabel noted in his presentation. The strong recovery of tourism after the pandemic has been a key factor supporting the increase in exports in these economies. But trade n That’s not all.
Developments in the labor market have played an equally important role. Job creation stands out in Spain or Portugal, but “Greece is the most notable case. Unemployment fell from 13.7% at the start of 2022 to 9.9% in July this year, a level not seen since the global financial crisis. similar improvements in labor markets in the southern euro area. In Italy, for example, the number of employed people has increased by more than a million since 2022, which has significantly supported private consumption and confidence,” commented the German.
On the other hand, the ECB economist also attributes part of this stronger growth in the south to funds allocated under the Next Generation European Programwhich gave a new impetus to growth and employment in the countries which needed it most at the time of their creation. In 2022 and 2023, 37% of funds were allocated to the five fastest-growing countries, while their share in the eurozone economy is only 13%.
In a recent report, Paolo Grignani, an analyst at Oxford Economics, highlighted the larger rebound in public investment and consumption in these countries, likely due to the suspension of eurozone fiscal rules and the deployment of funds into as part of the NextGenerationEU program: “Despite some delays, these funds are allowing public investment in southern European economies to rebound after a decade of stagnation. » In addition, the analyst clarified, “several projects linked to the Resilience and Recovery Fund are co-financed, so it is possible that this has triggered private non-residential investments, partly explaining the excess growth”.
