Why Europe’s southern periphery props up eurozone progress – DW – 02/13/2025 | EUROtoday

Just just a few years in the past, Portugal, Italy, Spain, and particularly Greece had been thought of the issue kids of the European Union (EU), particularly inside the group of 20 international locations that kind the so-called eurozone.

This has basically modified, with Spanish Prime Minister Pedro Sanchez lately emphasizing on the World Economic Forum (WEF) in Davos that the EU’s southern periphery may additionally “contribute solutions to common problems.”

More than a decade after the European sovereign debt disaster introduced the 4 international locations near monetary collapse, sturdy progress has returned to the continent’s South.

Spain, for instance, has turn into a veritable producer and exporter of renewable vitality — particularly solar energy — serving to itself and others amid the vitality disaster triggered by Russia’s battle in Ukraine.

The EU’s new North-South divide

From a broader European perspective, nevertheless, the outlook is much from vibrant. The eurozone financial system as an entire is stagnating. Euro space progress within the fourth quarter of 2024 remained unchanged in comparison with the earlier quarter, and solely the summer season quarter was a trifle brighter, with gross home product (GDP) rising 0.4% over the 12 months.

Many specialists blame the persistent weak point of Europe’s largest financial system, Germany, for the stagnation.

Germany’s GDP contracted by 0.2% in each the fourth quarter and the total 12 months of 2024. Alexander Krüger, chief economist at Hauck Aufhäuser Lampe Privatbank, advised information company Reuters that Germany is “increasingly falling behind” each inside the eurozone and globally.

Not sufficient steam to maintain the entire practice operating

With the eurozone’s largest financial system struggling, can Europe’s southern periphery turn into the brand new progress engine for the EU?

Economist Gabriel Felbermayr believes they can not as a result of “they are simply too small economically.”

The director of the Austrian Institute of Economic Research (WIFO) advised DW that Germany and France alone account for greater than 50% of eurozone output. Additionally, Austria, Slovenia, Slovakia, and the Netherlands should even be thought of a part of a “strong, industrialized northern bloc” within the eurozone that has issues at the moment.

He additionally stated that non-eurozone international locations within the EU, particularly the Czech Republic and Poland to some extent, are “suffering from the weakness of the EU’s industrial core.”

Energy costs key to eurozone progress

So, why are the southern economies so robust whereas the historically dominant economies battle?

Hans-Werner Sinn, one in all Germany’s most outstanding economists and former head of the suppose tank Ifo Institute, sees each exterior elements and political choices 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 advised DW.

He criticizes the push to transition from fossil fuels to inexperienced vitality, arguing that “the EU and Germany have lost a sense of balance” which has resulted in Germany at the moment paying “the highest electricity prices in the world.”

This affected notably the chemical trade, stated Sinn, and the German automotive trade. “EU fleet consumption regulations have robbed the auto industry of its competitiveness.”

Felbermayr shares Hans-Werner Sinn’s view, saying the financial sectors most necessary for southern EU international locations, for instance, tourism and agriculture, have “significantly lower industrial input in overall economic value creation.” This implies that elements like excessive vitality prices, commerce wars, and decarbonization challenges have an effect on the North greater than the South.

Felbermayr additionally famous that inflation charges within the South have been decrease than in northern EU international locations since 2010, including 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 Commerzbank, believes there’s little hope for a swift financial restoration within the euro space and expects a “sluggish rebound at best.” Speaking with the information company Reuters, he stated the “deep structural crisis in industry and Trump’s tariff threats are weighing everything down.”

US President Donald Trump has threatened Europe with greater tariffs, which might hit Germany’s export-driven financial system notably onerous.

Sebastian Dullien, director of the Institute for Macroeconomics and Business Cycle Research (IMK) in Germany, additionally sees no indicators of restoration. He advised the identical information company that there have been a number of elements contributing to Germany’s extended financial hunch. Most considerably amongst them had been China’s “aggressive industrial policies, which are hurting exports,” and the European Central Bank’s (ECB’s) “still-high interest rates, which are dampening investment.”

Speaking on the WEF in Davos lately, German Economy Minister Robert Habeck appeared to lastly settle for a significant progress downside when he stated that Germany has “somewhat overlooked the fact that this is not just a temporary crisis but a structural one.”

The challenges are notably evident within the industrial sector, he added, which is grappling with excessive electrical energy prices. Germany’s essential international commerce sector is weakening, and shopper confidence is deteriorating, he stated, acknowledging that “we need to reinvent our business model.”

The method forward

Despite the present financial issues, the European Commission is assured that a slight financial restoration will emerge in 2025 and sees the eurozone financial system rising by 1.3%. And the ECB, which reduce rates of interest from 3% to 2.75% final week, is anticipated to proceed on its downward charge path all year long.

As far as the expansion imbalance between the eurozone’s North and South is worried, WIFO chief Gabriel Felbermayr thinks this isn’t uncommon. “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 at the moment necessary, he stated, is for northern international locations to “push forward with the necessary reforms to increase competitiveness, while the South must continue its efforts.”

In doing so, the only European market can be strengthened and function a “mechanism to balance regional differences within the EU,” he stated.

This article was initially written in German.