The eurozone economy is stagnating, largely due to Germany's weakness. But the south has woken up. Good news is coming from Portugal, Spain and Greece. Why is that?
Just a few years ago, Portugal, Italy, Spain and above all Greece were often referred to by northern Europeans as the "problem children" of the European Union and the eurozone. However, Spanish Prime Minister Pedro Sanchez recently expressed his belief at the World Economic Forum in Davos that this is no longer the case: "We in the south can also contribute to solutions to common problems."
He spoke about the possibility of increasing the production and export of clean energy (in Spain, this is mainly solar energy) in the energy crisis following the Russian invasion of Ukraine. In this way, according to Sanchez, Spain should become "the best economy in the world."
Germany is falling further behind
From a pan-European perspective, however, the situation does not look rosy at all: the economy in the eurozone is stagnating. The combined gross domestic product in the last quarter of 2024 remained at the level of the previous, i.e. the autumn, the EU's statistical office, Eurostat, announced at the end of January. In the summer quarter, growth in the eurozone countries was 0,4 percent.
Many experts agree: the main reason for this has been the long-standing weakness of Germany, Europe's largest economy. In Germany, GDP fell by 2024 percent in the fourth quarter, and throughout 0,2. "Germany is falling further and further behind," says Alexander Kruger, chief economist at Hauk Aufhäuser Lampe Privatbank.
There is not enough money for a complete train.
The eurozone's largest economy is weakening, and the former "problem children" from southern Europe are now wondering whether they could take over the role of locomotive when it comes to economic growth in the future? Economist Gabriel Felbermayr doesn't see it that way. He is the director of the Austrian Institute for Economic Research (WIFO) and tells DW: "No, they can't do it, they are simply too small economically for that."
Germany and France, according to Felbermayr, "already account for more than 50 percent of the eurozone's GDP. Countries like Austria, Slovenia, Slovakia, and the Netherlands must be added to this industrially strong northern bloc." And they are not the only ones affected: "EU countries that are not in the eurozone, especially the Czech Republic and to some extent Poland, are also suffering from the weakness of the Union's industrial core."
High energy prices
What is it that makes the "southerners" so strong, while the otherwise strong rest of Europe is so worn out and old? For economist Hans-Werner Zinn, former head of the Munich Ifo Institute, the answers should be sought in foreign policy reasons, but also in domestic political positioning: "Germany has suffered greatly in recent years from the energy crisis, which was caused by a combination of the war (in Ukraine) and the energy shortage, which it itself caused."
He particularly regrets the intention to quickly switch from fossil fuels to green energy sources. Thus, "the EU and Germany have lost their sense of proportion. The result of these interventions is that our country now has the highest electricity prices in the world."
Zinn tells DW that "the chemical industry is suffering in particular." Germany's leading automotive industry is also under great pressure: "The rules on fuel consumption and CO2 emissions set by the EU have deprived the automotive industry of its competitiveness."
Advantages of locations in the south
Gabriel Felbermayr shares a similar opinion. In the countries of southern Europe, tourism and agriculture play a larger role, while "a significantly smaller share is related to industrial production. Higher energy prices across Europe, trade wars, the challenges of decarbonization - all of this simply affects the south less than the north."
In addition, they have an advantage "of their own making": since 2010, the countries of southern Europe have had lower inflation rates than the northern ones. "This has contributed to their competitiveness. Reform efforts after the debt crisis in the eurozone have borne fruit. This can be said for Greece, as well as for Spain and Portugal."
And then there's Trump.
There is no light at the end of the economic tunnel in sight. Komercbank's chief economist Jörg Kremer says: "The deep structural crisis in industry and Trump's threats of tariffs against Europe are dragging everything down. This is hitting export-oriented Germany particularly hard."
"There are no signs of recovery yet," confirms Sebastian Dallien, director of the Institute for Macroeconomics and Business Cycle Research (IMK). He cites various reasons for the decline in the German economy, including "China's aggressive industrial policy, which is putting pressure on exports, as well as the European Central Bank's interest rates, which are still relatively high given the current economic situation and are slowing down investment."
There is hope that seeing the real situation is the first step towards improvement. It seems that German Economy Minister Robert Habek (Greens) has come to this realization. He said at the recently concluded World Economic Forum in Davos: "We have in a sense overlooked that this is not a short-term crisis, but a structural one." That is why, as he puts it, "the common business model must be reinvented."
What is needed now
The European Commission still expects a mild economic recovery in the eurozone and growth of 2025 percent in 1,3. The European Central Bank, which experts believe is close to cutting interest rates, is likely to take further steps to lower rates during the year.
Gabriel Felbermayr does not think that the current balance of power between northern and southern countries is unusual: "Sometimes the industrially strong north takes the lead, and then again the southern countries with strong service sectors. It is no different in other large economies, such as the US."
It is crucial that "the North pushes forward the necessary reforms for greater competitiveness, but also that the South does not falter. It is also important that the internal market, which is also a means of balancing individual regions, is strengthened again," Felbermayr concludes.
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