Eurozone’s economic narrative is undergoing a major shift. Historically, the Eurozone was anchored by Germany and France.
As Germany struggles with stagnation, and France is battling fiscal uncertainties, the South European neighboring countries have been the surprising bright spots of the region in recent months.
Spain, Greece and Portugal are among the countries that have made impressive progress and become the Eurozone’s new growth drivers.
Southern Europe is resurging
Spain, Greece and Portugal are all in a much better place today than they were when their countries began the 2010s.
The fastest growing economies in the Eurozone are these countries.
Spain and Greece will grow faster than the Eurozone’s average growth rate of 0.8% this year. Portugal follows closely behind with a strong economy driven by tourism, exports and structural reforms.
These countries’ recovery isn’t just the product of factors such as a tourism boom after a pandemic.
Years of investment and reform have laid the foundations for a more sustainable economy.
Spain has benefited from the falling rate of inflation. Its rate cooled to just 1.7% in Septembre, which eased pressure on both households and business alike.
At the same time, Greece’s economic recovery has been largely driven by its return to an investment grade status. This is quite a feat, considering that it lost about a quarter its production during its decade long crisis.
Portugal has also managed to reduce its debt level, and the fiscal situation of Portugal is vastly improved in comparison to its dark austerity days.
Tourism continues to be a strong industry in the country, however there has been a shift towards higher-value sectors like biotechnology and technology.
Greece and Spain follow similar paths, moving away from low-cost travel to encourage investment in advanced industries.
What has happened to the former powerhouses?
Germany and France are the traditional Eurozone pillars. While Southern Europe has experienced a resurgence in economic activity, this cannot be said of Germany.
Germany’s economy is stagnant, and it’s the largest in Europe.
The industrial output is in a contractionary state for more than two years. Key sectors such as manufacturing and automobile are struggling to recover due to a combination energy price shocks and weakened Chinese demand.
Ifo Business Climate Index (which measures German sentiment) has been on a downward trend for the past five months. The index was 85.4 in September, which indicates a continuing decline.
Volkswagen, BMW and other carmakers are suffering. Volkswagen is even contemplating closing its first German factory in history as a result of cost-cutting.
France, on the other hand, faces different challenges. France’s fiscal situation is becoming more precarious, even though the inflation rate has dropped to just 1.5% – its lowest level in three years.
The government’s spending is high and its debt to GDP ratio remains a concern. S&P Global Ratings downgraded France’s rating in June 2024. This further highlighted the increasing fiscal risks.
The French bond yields are now higher than Spain, a change from the norm.
These economic problems are exacerbated by the political uncertainty that exists in Germany and France.
In France in particular there has been a surge in far-right and populist parties that threaten to disrupt the political scene.
These factors raise questions as to whether these countries can implement reforms that will boost their growth and restore trust.
What should we expect from a changing Eurozone narrative in the future?
Changes in Eurozone economic policy could have a lasting impact on the future of the Eurozone.
Germany and France have been seen for years as economic anchors in the Eurozone, driving stability and growth.
Now, Spain, Greece and Portugal have risen to the top, defying the myth that Southern Europe was economically weak, and dependent on the handouts of richer Northern nations.
The transformation of perceptions has also affected European policy.
Growing pressure is being placed on the European Central Bank to rethink their monetary policy.
There’s an argument to be made for lowering interest rates in order to boost growth, especially since inflation is under control.
The ECB’s policymakers do not take kindly to criticism.
The German government is concerned that the fragile economy will be further weakened by their continued emphasis on potential risks within the service sector.
This shifting narrative also raises questions regarding the future power balance within the Eurozone.
Can Germany and France regain the economic power they once had, or will rising stars in Southern Europe eclipse them?
Spain, Greece and Portugal have shown that they can lead the recovery of the entire region. Their success challenges the existing order.
What is the outlook for the future?
Investors may start to focus less on traditional markets such as the DAX or CAC 40, especially if Southern Europe’s economy continues to grow faster than the traditionally dominant economies in Germany and France.
Spain, Portugal and Greece are becoming increasingly appealing due to their ongoing transformation, fueled by robust economic growth, improved fiscal health and diversification of industries with higher value.
The Southern European markets may offer some hope for European investors, as the industrial downturn in Germany and France’s fiscal pressures weigh on their confidence.
These previously ignored economies, with their potential for growth and stability, could change the way capital is invested in Europe and create new investment opportunities both within Europe and internationally.
The post Is this the most dramatic change to occur in Eurozone economies since 2008? This post may change as new updates are released
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