Southern Europe is the continent’s new economic growth engine

Southern Europe is the continent’s new economic growth engine

On Monday, Eurostat brought much-needed good news: the Eurozone returned to growth in the second quarter of 2023. Yet this modest success story has not applied to everyone.

Roaring tourism and demand for services, luxury goods, and other light manufactures are fueling the continent’s economic resilience.

• Countries more oriented towards these sectors, like France and Southern Europe’s major economies, have reaped the lion’s share of European economic growth.
• If we weight economic growth projections by each country’s share of European GDP, Spain, Italy, and France will likely be the largest contributors to the EU’s growth in 2023.
• This is despite the Italian economy’s surprise contraction in the last quarter, which partially reflects the one-off effects of curbing its ‘Superbonus’ tax exemption program.
• In its July World Economic Outlook update, the IMF upgraded Italy and Spain’s growth forecasts by 0.4 percentage points and 1 percentage points, respectively.

Germany’s economy, which is more dependent on heavy manufacturing exports than its peers, faces an uncertain global trade environment, worker shortages, and rising subsidies in the US and China.

• The IMF forecasts a 0.3% contraction this year.

Regional inversion

Ten years ago, the map would have nearly been reversed, with Germany leading European growth and Southern Europe in dire straits. The 2008 financial crisis hit Southern Europe hard; after the collapse of asset bubbles prompted governments to increase stimulus spending, the resulting debt loads triggered a balance-of-payments crisis. To resolve their debt crises, these countries took austerity measures like painful cutbacks on government spending, largely at the behest of their northern neighbors.

Moreover, the region’s industry mix was unfavorable for years after the financial crisis. Resilient demand, especially from Asia, for essential industrial goods pulled Germany out of recession quickly, while tourism and other services sectors were slower to rebound as households pulled back on spending. While France’s economic experience was not as extreme, its recovery was also hampered by an economy dependent on services, tourism, and luxury goods.

Meanwhile in the South, poor consumer confidence and austerity contributed to a vicious cycle of contraction, amounting to a “lost decade” for growth. For instance, Italy’s GDP growth underperformed the EU average every year between 2008 and 2020.

Back to the future

How did Southern Europe bounce back? Some factors, like the strength of the services sector and a rebound in tourism, are more recent. Although Russia’s invasion of Ukraine drove up energy prices in all European countries, France, Spain, Italy were among the least affected countries. In 2021, Russian imports accounted for 6%, 9% and 23% of French, Spanish, and Italian fuel consumption, respectively, compared to 31% of German consumption. Southern European countries also received an outsized proportion (47%) of EU recovery funds from the pandemic.

Structural factors have also helped, particularly in Southern Europe. Austerity programs have ended, and many of the region’s most indebted countries have improved public finances. Greek bonds, for example, are now one upgrade away from being ‘investment grade’–a far cry from the early 2010s, when Greece was placed in ‘selective default.’

These improvements offer optimism that Southern Europe may be turning a page on its “lost decade.” It may be hard to imagine now, but rapid regional economic growth was once the norm before economic crises (starting with Italy in the 1990s) set the region back. From 1971 to 1990, nominal economic growth averaged 3.3% per year in Spain and 3.1% in Italy, compared to 2.6% in Germany and Britain. That might not sound like much, but sustained growth meant that Southern Europe was quickly catching up to its northern peers. In 1980, GDP per capita in Italy and Spain were 72% and 53% of Europe’s three largest economies (an average of Germany, France, and the United Kingdom, weighted by population). By the end of the decade, those figures were 98% and 62% respectively. Indeed, Italians of a certain generation still remember ‘il sorpasso,’ the point in 1987 when Italy’s economy surpassed Britain’s in size (in spite of its smaller population).

It is too soon to say

SDGs, Targets, and Indicators

1. SDG 8: Decent Work and Economic Growth

   • Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 percent gross domestic product growth per annum in the least developed countries
   • Indicator 8.1.1: Annual growth rate of real GDP per capita

2. SDG 10: Reduced Inequalities

   • Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average
   • Indicator 10.1.1: Growth rates of household expenditure or income per capita among the bottom 40 percent of the population and the total population

3. SDG 11: Sustainable Cities and Communities

   • Target 11.4: Strengthen efforts to protect and safeguard the world’s cultural and natural heritage
   • Indicator 11.4.1: Total expenditure (public and private) per capita spent on the preservation, protection, and conservation of all cultural and natural heritage, by type of heritage (cultural, natural, mixed, and World Heritage Centre designation), level of government (national, regional, and local/municipal), type of expenditure (operating expenditure/investment) and type of private funding (donations in kind, private non-profit sector, sponsorship, and public-private partnerships)

Analysis

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The issues highlighted in the article are connected to SDG 8 (Decent Work and Economic Growth), SDG 10 (Reduced Inequalities), and SDG 11 (Sustainable Cities and Communities).

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the article’s content, the specific targets that can be identified are:

• Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 percent gross domestic product growth per annum in the least developed countries
• Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average
• Target 11.4: Strengthen efforts to protect and safeguard the world’s cultural and natural heritage

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, there are indicators mentioned or implied in the article that can be used to measure progress towards the identified targets:

• Indicator 8.1.1: Annual growth rate of real GDP per capita
• Indicator 10.1.1: Growth rates of household expenditure or income per capita among the bottom 40 percent of the population and the total population
• Indicator 11.4.1: Total expenditure (public and private) per capita spent on the preservation, protection, and conservation of all cultural and natural heritage, by type of heritage (cultural, natural, mixed, and World Heritage Centre designation), level of government (national, regional, and local/municipal), type of expenditure (operating expenditure/investment) and type of private funding (donations in kind, private non-profit sector, sponsorship, and public-private partnerships)

Table: SDGs, Targets, and Indicators

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Source: atlanticcouncil.org

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