How Greece became a leader of growth in Europe

2 May, 2024

New York Times: How Greece went from being the “black sheep” to becoming a growth leader in the Eurozone

“Something extraordinary is happening in the European economy: the southern states that nearly… derailed the EU economy, the bloc that sided against the euro during the financial crisis in 2012, are now growing faster than Germany and other major countries that have long served as the region’s growth engines.”

This is the statement in the introduction to a major New York Times survey, which among other things describes Greece as a “growth leader” in the eurozone.

The US network’s feature on the EU economy says, among other things, that “Greece’s economy has grown thanks to increased investment by multinational companies such as Microsoft, record tourism and investment in renewable energy”.

In particular, as noted in the paper signed by Liz Alderman and Melissa Eddy, Greece, Spain and Portugal grew at more than twice the eurozone average in 2023. Italy was not far behind.

Just over a decade ago, Southern Europe was at the center of a eurozone debt crisis that threatened to break up the bloc of countries using the euro. It took years to recover from deep national recessions and multi-billion dollar international bailouts with harsh austerity programs. Since then, those same countries have worked to repair their finances, attracting investors, reviving growth and exports, and reversing unemployment to record levels.

Now Germany, Europe’s largest economy, is taking the region’s fortunes in its stride. It is struggling to emerge from the recession caused by soaring energy prices after Russia’s invasion of Ukraine.

That became clear on Tuesday when new data showed that the euro bloc’s economic output rose 0.3 percent in the first quarter of this year compared with the previous quarter, according to Eurostat. The eurozone economy contracted by 0.1% in both the third and fourth quarters of last year, a technical recession.

Germany, which accounts for a quarter of the bloc’s economy, barely avoided a recession in the first quarter of 2024, growing 0.2%. Spain and Portugal grew more than three times as fast, indicating that the European economy continues to grow at two speeds.

How Greece, Spain and Portugal pulled in the reins

After years of international bailouts and harsh austerity programs, Southern European countries have made critical changes that have attracted investors, revived growth and exports, and turned unemployment around to record levels.

Governments cut red tape and corporate taxes to stimulate business and promoted changes in their once rigid labour markets, including making it easier for employers to hire and fire workers and reducing the widespread use of fixed-term contracts. They proceeded to reduce debts and deficits, attracting international pension and investment funds to start buying their public debt again.

“These countries have largely cleaned up after the European crisis and are structurally healthier and more dynamic than they were before,” said Holger Schmieding, chief economist at Berenberg Bank in London.

Southern countries have also doubled their service economies – particularly tourism, which has generated record revenues since the end of the coronet restrictions. And they benefited from part of an 800 billion euro stimulus package deployed by the European Union to help economies recover from the pandemic.

What does a “two-speed” economy look like?

Greece’s economy grew about twice as fast as the eurozone average last year, thanks to increased investment from multinationals like Microsoft and Pfizer, record tourism and investment in renewable energy.

In Portugal, where growth was driven by construction and hospitality, the economy expanded by 1.4% in the first quarter compared to the same quarter last year. The pace for Spain’s economy over the same period was even stronger at 2.4%.

In Italy, the conservative government has reined in spending and the country is exporting more technology and automotive products and attracting new foreign investment in the industrial sector. The economy there has almost matched the overall eurozone growth rate, a remarkable improvement for a country long considered an economic drag.

“They are correcting their excesses and tightening their belts,” Mr. Schmieding said of southern European economies. “They have been shaped after living beyond their means before the crisis, and as a result they are leaner, fitter and more fit.”

What happened in Germany?

For decades, Germany was growing steadily, but instead of investing in education, digitisation and public infrastructure during those boom years, Germans became complacent and dangerously dependent on Russian energy and exports to China.

The result was two years of near-zero growth, putting the country in last place among its peers in the Group of 7 and eurozone countries. Measured on an annual basis, the country’s economy contracted by 0.2% in the first quarter of 2024.

Germany accounts for a quarter of Europe’s total economy and the German government last week predicted the economy would expand by just 0.3% for the year.

Economists point to structural problems, such as an ageing workforce, high energy prices and taxes, and excessive amounts of red tape, which need to be addressed before there is significant change.

“Basically, Germany didn’t do its homework when it was doing well,” said Jasmin Gröschl, a senior economist at Allianz, which is based in Munich. “And now we are feeling the pain.”

Germany also built its economy on an export model based on international trade and global supply chains, which have been disrupted by geopolitical conflicts and growing tensions between China and the United States – its two leading trading partners.

What about Europe’s other major economies?

In France, the eurozone’s second largest economy, the economy expanded by 1.1% in the first quarter compared to the same period last year.

France’s finances are getting worse: The deficit is at a record level, 5.5% of gross domestic product, and debt has reached 110% of the economy. The government recently announced that it will have to find some €20 billion in savings this year and next.

The Netherlands has only recently emerged from a mild recession that hit last year, when the economy contracted by 1.1%. The Dutch property market was hit particularly hard by the tighter monetary policy in Europe.

Together, the economies of Germany, France and the Netherlands account for around 45% of the eurozone’s gross domestic product. As long as they are dragging their feet, overall growth will be sluggish.

Can southern Europe hold?

Yes – at least for now. High interest rates are starting to cool their growth, but the European Central Bank, which sets interest rates for all 20 countries that use the euro, has said it could cut rates at its next policy meeting in early June.

Inflation in the euro zone held steady at 2.4 percent in the year ended April, Eurostat said Tuesday, after an aggressive campaign by the bank to cool runaway prices over the past year.

That should help tourism, a major driver of growth in Spain, Greece and Portugal. These countries will also increasingly benefit from efforts to diversify their economies into new destinations for international investment in manufacturing and technology.

Greece, Italy, Spain and Portugal – which together make up around a quarter of the eurozone economy – have also been supported by EU recovery funds, with billions of euros in subsidies and low-cost loans invested in economic digitalisation and renewable energy.

But to ensure these gains are not fleeting, economists say, countries need to build on the momentum and further increase competitiveness and productivity. Unemployment, although down sharply from the crisis, is still high, and wage increases for many jobs have failed to keep pace with inflation.

Southern countries also continue to have large debts that raise questions about the sustainability of their improved finances. Germany, by contrast, has a self-imposed limit on how much it can finance its economy through borrowing.

These investments “will help make their economies more resilient in the future,” said Bert Colijn chief eurozone economist at ING Bank. “Will they challenge Germany and France as the engines of Europe? That’s a step too far.”


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