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Greece, Spain, Italy are chasing Germany. “Revenge” of the Southern countries

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  • Weekly Friday series “Interia Closer to the World” are the most interesting texts from the most important foreign newspapers
  • The Spanish daily “El Pais” draws attention to two-speed Europe in a surprising way
  • Not so long ago, the Mediterranean countries were at the economic tail end of Europe, but they have gained momentum and are recording better economic indicators than Germany.

We are witnessing extraordinary anomalies in Europe. The North is getting poorer and the South is getting richer. Two-speed Europe in a surprising version. The end of 2023 confirmed this phenomenon that began a few quarters ago.

And if the rich countries of old Europe survived the global financial crisis of 2008, we are now facing the opposite. Their GDP is shrinking. Germany are on the verge of recession, consumption and domestic demand are falling and exports are falling. They are also at the center of an unfavorable trend Austria i Netherlandsbut the problems reach other rich EU countries: Belgium, Luxembourg and some Nordic countries.

Greece, Spain, Portugal, Italy are chasing Germany

In the case of the countries of the South and Ireland, i.e. the so-called PIIGS countries – Greece, Spain, Portugal, Italy – it's exactly the opposite. First, they were hit hard by the debt crisis in the euro zone. They avoided insolvency thanks to massive rescue packages and were forced to implement drastic budget cuts.

  • The acronym PIGS originally stood for “Portugal, Italy, Greece, Spain”. However, due to the economic situation, from 2010 another I was added, meaning “Ireland”, hence the extended name: PIIGS.

The socio-economic effects of the COVID-19 pandemic have also proven to be very severe for the Mediterranean countries, whose economies are largely based on tourism and services. It turns out, however, that thanks to the economic recovery in the three-year cycle 2021-2023 after the pandemic, the inflation crisis and the war in Ukraine, the Southern countries and Ireland are doing much better than expected.

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The reason for making up for losses seems obvious. This is a paralysis of the German economy that began even before the pandemic. The engine of Europe's once major economic powerhouse stalled in 2020, a state of affairs that continues today.

German industry suffered from the breakdown of supply chains and lost the competitive advantage of buying cheap raw materials from Russia. Since 2017, GDP growth in the Southern countries as a whole has outpaced Germany's GDP growth by more than five percentage points on average.

Germany's economic problems

Germany has a lot of problems: infrastructure renewal progresses slowly. The reason is the influence of the ultra-liberal fiscal straightjacket. Cheap raw materials have run outa serious challenge is to transfer production and export to those that have their own economic problems Chin.

At the opposite extreme are the former brakemen. A few years ago, the Mediterranean countries were considered the economic bomb of Europe, however now they have gained wind in their sails and entered the path of growth. What is the source of success? Fiscal and monetary expansion, i.e. skillful stimulation of economic growth by increasing public spending and reducing taxes, as well as increasing the money supply and reducing the cost of credit.

In absolute numbers Greece, Spain and Portugal recorded average economic growth of over 2% in 2023, while the economies of Germany and Austria contracted by 0.3% respectively. and 0.75 percent The Dutch economy grew by a modest 0.09 percent. The euro zone economy by 0.4 percent

As a result, without growth in Spain and Italy, the economy of the Old Continent would shrink. Latest forecasts published by European Commission predict the south-north growth gap will continue in 2024 and possibly 2025.

Economic recovery in southern Europe. What are the reasons?

The reasons for the economic recovery in southern Europe include, among others: with geography and… distance from Russia. Less dependence on Kremlin-controlled raw materials has allowed Mediterranean countries to better cope with energy market disruptions than Northern countries.

Another reason for the recovery is related to the rapid recovery in the tourism and services sector after the pandemic and the reduced dependence on production-related sectors, which have been struggling in many European countries since the outbreak of war.

The proximity of Ireland to Ireland is also important Great Britain. The green island emerged as a beneficiary of “trade and investment diversion” as a result Brexit: the British economy fell into a rut after leaving the EU, culminating in a recession in the second half of 2023 (-0.2% of GDP in average annual terms; data from the British equivalent of the Central Statistical Office).

In addition, country-specific reasons come into play. Ireland continues to fully exploit the competitive advantage resulting from low taxation of global companies. It maintains a system of tax breaks for corporations, especially large American technology companies, that use the green island to optimize costs. This artificially increases the country's economic indicators.

In Greece, the process of rebuilding a country that lacked even a land register is coming to an end. Portugal enjoys enviable political stability and benefits from the economic policies of the former Prime Minister's Socialist government over the last few years. Antonio Costy. Even his political opponents considered his policy “responsible”.

Spain, in turn, enjoyed an economic “miracle”, strengthened by the service sector and the focus on renewable energy sources and increasingly better employment statistics, which currently amount to nearly 21 million. This is almost twice as much as in the 1980s. One of the keys to success on the labor market is immigration: the Spanish economy “absorbed” over 800,000. foreigners in just three years.

How Southern countries emerged from the crisis

Recent years in Mediterranean countries are associated with numerous sacrifices, budget cuts and subsequent rescue programs, the implementation of which was controlled by the so-called Troika (European Commission, European Central Bank and the International Monetary Fund – ed.).

Rescue operations in southern European countries were not uniform. For example, the first two rescue packages for Greece were much tougher for the government in Athens than the third package from 2015. They led to a series of successful structural and administrative reforms as well as greater fiscal responsibility, both during the last term of office of the left-wing government. Syrizyas well as the conservatives in power since 2019. Kiriakosa Mitsotakisa.

In Spain, the economy was saved by interventions in specific sectors, as in the case of banks. This cost a lot of money – EUR 60 billion. It deserves special attention Portugal. After the government in Lisbon was saved by the Troika in 2011, in the following years Portugal became one of the most dynamic countries in Europe.

After draconian cuts, the main fiscal imbalance was reduced – the lack of coverage of public finance sector expenses in revenues. Since then, it has managed to attract foreign investment and make the tourism sector a powerhouse again.

In recent years in southern Europe, austerity policies – which led to social cuts and increased inequality – gave way to stabilization (albeit unevenly). This allowed us to take advantage of opportunities that have appeared since the outbreak of the pandemic, such as relatively lower production costs. They have become an effective export lever. Evidence? Spain closed 2023 with the second best export result in its history.

The problem of debt in relation to GDP

The decisive factor in the south was a pan-European shift away from restrictive policies fiscal to expansionary: increasing spending and reducing taxes to stimulate economic growth. This phenomenon occurred after the outbreak of the pandemic.

The temporary (and extended several times) release from the yoke of the Stability and Growth Pact, agreed by EU countries after the outbreak of the pandemic, abolished restrictions imposed in the context of monitoring the public deficit and debt.

As a result, in Spain, Portugal, Greece and Ireland debt in relation to GDP has increased significantly. The government in Madrid has brought the debt to over 110 percent. GDP, which means an increase of just over 15-20 percentage points. within one year. The increase in liabilities was similar in all Mediterranean countries.

Additional funds made it possible to partially overcome the pandemic paralysis of economies. They contributed to strengthening private consumption and public investment, as well as the foreign sector, including due to the revival of tourism.

The number of foreign tourists in Spain reached a record level in 2023 and amounted to almost 86 million visitors. And foreign sales of Spain and Italy, the countries with the worst economic results and the greatest political instability, account for almost 40 percent. their GDP. This translates into a noticeable -10 percentage point. – growth over the decade. At the same time, Austria, the Netherlands and Germany reported shrinking foreign trade, paying for their dependence on trade with Russia and China.

European impulse. The effects of EU solidarity

Economic recovery in the Mediterranean countries is also associated with transfers of funds from the EU. Mediterranean governments benefit from the EU's high credit rating (AAA – ed.), thanks to which funds, e.g. under Next Generation EU, i.e. the EU Reconstruction Fund, are available to them costless in the case of grants or minimal in the case of loans. These are the advantages of EU solidarity.

Debt mutualization is a turning point for the EU. The most significant example is the Reconstruction Fund, which can cover a total of up to EUR 800 billion. Instrument SURE (loans to member states) – PLN 100 billion; Eurofunds from the European Central Bank's extraordinary purchase program during the pandemic (PEPP) – a total of up to EUR 750 billion.

If we add traditional reserves to this European Investment Bank (EIB) (with an annual investment capacity of EUR 60 billion) and a rescue fund known as the European Stability Mechanism (ESM, up to EUR 422 billion, so far only partially used), the entire amount is being raised unprecedented.

Spain and Italy. The main beneficiaries of the Reconstruction Fund

As he enumerates Kalin Anev Janse from the ESM, the sum of all these instruments already exceeds one trillion euros of assets available on the financial market. Apart from the countries that joined after 2004, the countries from the south of the Old Continent, i.e. the less wealthy ones, will be able to benefit the most.

As a result the main recipients of funds from the Reconstruction Fund are Italy and Spain; the SURE instrument (effectively mitigating the effects of the pandemic and supporting economic recovery) has brought enormous benefits to Spain, especially in the context of job protection, and purchases of domestic bonds by the European Central Bank benefited Greece. The first recipient of EIB loans is Spain.

Regions PIIGS owe their economic recovery largely to the support of European funds, and not just to their own efforts, although assessing what corresponds to each factor would be quite a challenge. However, EU support will not last forever, and the announced return to tighter fiscal rules (although slightly modified) will require greater fiscal orthodoxy, i.e. reducing the national debt.

The disbursement of funds from the Housing Funds is scheduled to end in 2026, and the ECB has already announced a return to its former restrictive policy. Either the southern countries will take advantage of the favorable economic situation, or they will return to their old habits.


Translation by Mateusz Kucharczyk

The title, subheadings and abbreviations come from the editors

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