Why Europe's southern periphery props up eurozone growth

Just a few years ago, Portugal, Italy, Spain and Greece were considered the problem children of the European Union (EU), especially within the group of 20 countries that form the so-called eurozone.

This has fundamentally changed, with Spanish Prime Minister Pedro Sanchez recently emphasizing at the World Economic Forum (WEF) 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.

Spain, for example, has become a veritable producer and exporter of renewable energy — especially solar power — helping itself and others amid the energy crisis triggered by Russia's war in Ukraine.

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. In the fourth quarter of 2024, growth in the euro area remained unchanged compared to the previous quarter. Overall, 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 Europe's largest economy, Germany, for the stagnation.

Germany's GDP contracted by 0.2% in both the fourth quarter and the full year of 2024. Alexander Krüger, chief economist at one of Germany's largest private banks, 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 the "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 traditionally dominant economies ocntinue to struggle?

Hans-Werner Sinn, one of Germany's most prominent economists and former head of the think tank Ifo Institute for Economic Research, 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 energy, 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 the German automotive industry. "EU fleet consumption regulations have robbed the auto industry of its competitiveness."

Felbermayr shares Sinn's view, saying the economic sectors most important for southern EU countries, for example, tourism and agriculture, have "significantly lower industrial input in overall economic value creation." This means that factors like high energy costs, trade wars, and decarbonization challenges affect the north more than the south of Europe.

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 Commerzbank, 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 Donald Trump has threatened Europe with higher tariffs, which would hit Germany's export-driven economy particularly hard.

Sebastian Dullien, research director at the Macroeconomics Policy Institute (IMK) of the Hans-Böckler Foundation in Germany, also sees no signs of recovery. He told news agencies that there were several factors contributing to Germany's prolonged economic slump. Most significantly among them were 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 at the WEF in Davos recently, German Economy and Climate Minister Robert Habeck appeared to finally accept his country's 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 current economic problems, the European Commission is confident that a slight economic recovery will emerge in 2025, and even sees the eurozone economy growing by 1.3%. The ECB, which cut interest rates from 3% to 2.75% last week, 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 the necessary reforms to increase competitiveness, 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.