In a remarkable turn of events, Southern European economies, once dismissed by their wealthier northern counterparts, are now emerging as growth engines within the struggling euro area.
Recent business surveys conducted by S&P Global have unveiled a positive trend, with Spain and Italy outperforming economists’ expectations, showcasing accelerated expansion in March. Greece’s manufacturing gauge echoed a similar pattern, contributing to the currency bloc’s emergence from contraction for the first time in ten months.
According to Hamburg Commercial Bank, Spain and Italy played pivotal roles in propelling growth, marking their strongest growth rates in nearly a year. This served as a counterbalance to ongoing output contractions in Germany and France, which commenced in mid-2023.
Factors such as a post-pandemic surge in tourism, robust exports, and favorable energy prices stemming from renewables and reduced reliance on Russian gas have propelled Mediterranean countries to the forefront of the euro area.
Bank of Greece Governor Yannis Stournaras highlighted the resurgence of tourism in the European south, attributing the region’s robust growth to the correction of longstanding imbalances, leading to healthier economic development.
A decade ago, these same countries grappled with a debt crisis that posed significant challenges to the euro’s stability. Today, Spain, Portugal, and Greece are poised to be among the top-performing economies in the 20-nation bloc, as projected by the European Commission.
In contrast, France recently revised down its 2024 growth forecast, reporting a budget deficit surpassing estimates for 2023, prompting calls for substantial spending cuts. Meanwhile, Germany faces the tail end of a mild recession amid cautious consumer sentiment, weak external demand, and elevated borrowing costs.
Investors, including Vanguard Asset Management, JPMorgan Asset Management, and Neuberger Berman, have been capitalizing on the rally in Southern European government bonds, narrowing the premium over German and French bonds.
Spain stands out particularly, experiencing a surge in exports across various sectors, from financial services to manufacturing, post-Covid crisis.
Natixis economist Jesus Castillo emphasizes Spain’s enduring appeal to investors, highlighting factors such as lower labor costs, a skilled workforce, and a resilient healthcare system. Spain’s attractiveness is further underscored by a reduction in debt levels among consumers and corporations, alongside a low unemployment rate.
In neighboring Portugal, record tourism revenue and a steady uptick in exports, particularly in textiles and automobile parts, signal a thriving economy. Portugal’s shift towards renewable energy sources, coupled with a burgeoning property market, further reinforces its economic resilience.
Greece’s resurgence in tourism, accounting for a significant share of its economy, coupled with a construction boom and successful IPOs, reflect the country’s remarkable recovery from past debt challenges.
As Southern European economies continue to outpace expectations, their transformation from economic laggards to growth leaders underscores a significant shift in the euro area landscape.