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Southern Europe’s Growth Boost: Bridging Eurozone Divides

In recent years, southern Europe has experienced a notable growth spurt, sparking optimism for a swifter convergence between the traditionally lackluster Mediterranean economies and the industrial powerhouses in the north of the eurozone. Portugal, Italy, Greece, and Spain collectively surpassed Germany, the bloc’s largest economy, by approximately 5 percent in growth since 2017.

This surge has contributed over €200 billion to their gross domestic product when adjusted for price. Such progress is warmly welcomed by the eurozone, particularly following the sovereign debt and banking crises that plagued the southern economies after the 2008 financial crash, necessitating significant bailouts and subsequent fiscal tightening.

The recent growth not only compensates for lost ground but also bolsters the overall economic performance of the common currency area amidst competition from global giants like the US and China.

This resurgence in peripheral Europe is not solely attributed to economic growth but also stems from positive reforms enacted in these regions. Greece, for instance, saw its bonds regain “investment-grade” status last year after over a decade, reflecting improvements in fiscal management. Similarly, Spain’s labor market reforms have curbed precarious work contracts, while enhanced export performance and reduced unit labor costs further contribute to the region’s economic revival.

Southern Europe's Growth Boost: Bridging Eurozone Divides

Southern Europe’s Growth Boost: Bridging Eurozone Divides (Credits: Euro News)

However, concerns linger regarding the sustainability of this growth. Firstly, it has been buoyed by substantial capital injections from the EU’s €800 billion recovery fund, with grants and loans under the Recovery and Resilience Facility disproportionately allocated to southern economies, some receiving support exceeding 10 percent of their GDP until 2026.

Secondly, a portion of the recent strength in Mediterranean nations can be attributed to transient factors such as the resurgence in tourism post-pandemic restrictions. Additionally, Italy’s growth has been propped up by loose fiscal policies, notably costly tax incentives stimulating construction activities, resulting in a budget deficit of 7.2 percent of GDP last year.

Concurrently, northern economies have weakened, with Germany, the Netherlands, and Austria all anticipated to exhibit lower GDP growth rates compared to each of the four southern economies, according to European Commission forecasts.

Southern Europe's Growth Boost: Bridging Eurozone Divides

Southern Europe’s Growth Boost: Bridging Eurozone Divides (Credits: Financial Times)

While the persistent discrepancy in GDP per capita between northern and southern regions underscores the need for sustained growth in the Mediterranean alongside northern recovery, it also underscores the imperative for coordinated efforts across the eurozone.

Southern nations must intensify structural reforms to enhance public sector efficiency, foster private-sector competition, and drive innovation while ensuring effective utilization of remaining EU recovery funds.

However, national reforms alone may not suffice; a more coordinated common economic policy is essential. Initiatives like a banking and capital markets union can facilitate investment and savings flow across regions, while efforts to integrate energy networks, bolster supply chain resilience, and prioritize digital and green investments will enhance competitiveness.

Building upon southern Europe’s recent economic momentum is crucial not only for its own resurgence but also for the long-term prospects of the entire eurozone. Achieving this necessitates concerted efforts from both the north and south, underscoring the importance of collaborative endeavors to foster sustainable growth and bolster the eurozone’s resilience in the face of global economic challenges.

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