Southern eurozone economies outpace stagnant north as Germany contracts

For more than a decade the label "PIGS", Portugal, Italy, Greece, Spain, was shorthand for the eurozone's fiscal fragility. That narrative has quietly inverted. While Germany, the bloc's industrial anchor, posted a 0.2% contraction for the full year 2024 and another 0.2% decline in the fourth quarter, the southern periphery is expanding at a pace that would have seemed implausible during the sovereign debt crisis. Spain's economy grew 3.2% in 2024, Portugal 1.9%, Greece 2.3%. The euro area as a whole flatlined in the final three months of last year, leaving the single currency's growth engine running on roughly half its cylinders.

Germany's structural break

The scale of Germany's downturn is not cyclical. Alexander Krüger, chief economist at Hauck Aufhäuser Lampe Privatbank, told Reuters that the country is "increasingly falling behind" both within the eurozone and globally. Hans-Werner Sinn, the former Ifo Institute president, goes further. He argues that Germany has suffered a self-inflicted energy shock compounded by the loss of cheap Russian gas, and that the EU's green transition has stripped the country of its competitive electricity costs. "Germany currently pays the highest electricity prices in the world," Sinn said, pointing to the chemical and automotive sectors as primary casualties. EU fleet consumption regulations, he added, have "robbed the auto industry of its competitiveness."

Robert Habeck, the German economy and climate minister, appeared to concede the point at the World Economic Forum in Davos in January. Germany, he said, has "somewhat overlooked the fact that this is not just a temporary crisis but a structural one." The admission is striking from a minister who has championed the green industrial overhaul. Habeck acknowledged that the crucial foreign trade sector is weakening, consumer confidence is deteriorating, and that "we need to reinvent our business model." The words are blunt; the policy response remains contested.

Why the south is growing

The southern revival rests on three pillars. First, structural reforms imposed during the 2010-2012 crisis, labour market liberalisation, pension adjustments, banking clean-ups, have lowered unit labour costs and improved external competitiveness. Gabriel Felbermayr, director of the Austrian Institute of Economic Research (WIFO), notes that inflation in the south has run below northern rates since 2010, a cumulative disinflation that acts as an internal devaluation. "The reform efforts following the eurozone debt crisis have paid off, for Greece, Spain, and Portugal in particular," he said.

Second, the sectoral composition matters. Tourism, agriculture and services dominate southern output. These sectors are less energy-intensive than the heavy industry clustered in Germany, northern Italy and the Benelux countries. When gas prices spiked after Russia's invasion of Ukraine, the south's exposure was limited. Spain, meanwhile, has turned its solar and wind resources into an export advantage, becoming a net electricity exporter to France and a buffer for the wider European grid.

Third, the NextGenerationEU recovery fund has disproportionately benefited the periphery. Spain and Italy are the largest recipients of grants and loans under the €800 billion facility, with disbursements tied to reform milestones that have, so far, largely been met. The fiscal impulse is real: Spanish public investment rose 18% year on year in the first three quarters of 2024, according to Eurostat data.

The arithmetic of size

Felbermayr's caution is arithmetic, not ideology. Germany and France together generate more than 50% of eurozone GDP. Add Austria, the Netherlands, Slovenia and Slovakia, the "strong, industrialised northern bloc" he identifies, and the share rises above 60%. Even if Spain, Portugal and Greece grow at 3% annually, their combined weight (roughly 18% of euro area output) cannot offset stagnation in the core. "They are simply too small economically," Felbermayr said. The same logic applies to the non-euro eastern members: the Czech Republic and Poland, deeply integrated into German supply chains, are "suffering from the weakness of the EU's industrial core."

Jörg Krämer, chief economist at Commerzbank, sees no quick fix. He expects a "sluggish rebound at best," citing the "deep structural crisis in industry" and the threat of US tariffs under a second Trump administration. Sebastian Dullien of the Hans-Böckler Foundation's IMK institute adds two further drags: China's aggressive industrial policy, which is eroding German export markets in machinery and autos, and the ECB's restrictive stance. Although the central bank cut its deposit rate from 3% to 2.75% in early February, Dullien argues that rates remain high enough to dampen investment across the bloc.

Monetary policy caught in the middle

The ECB's dilemma is familiar but sharper. Inflation has fallen to 2.4% in the euro area as of January 2025, within sight of the 2% target, yet growth is bifurcated. A rate path calibrated for a stagnant Germany risks overheating Spain; a path for Spain risks starving Germany of the cheap credit its capital-intensive industry needs. The Governing Council's February statement signalled further cuts "as appropriate," but officials have stopped short of committing to a pace. ECB president Christine Lagarde has repeatedly stressed data dependence, a formulation that buys time but resolves nothing.

The European Commission, for its part, projects 1.3% eurozone growth in 2025, a figure that assumes a gradual German recovery and continued southern momentum. That forecast looks optimistic if the US imposes 10-20% tariffs on European goods, as Trump has threatened. Germany's export exposure to the US stands at roughly €150 billion annually; the auto sector alone accounts for a third. The Commission's spring forecast, due in May, will be the first real test of whether Brussels still believes in a soft landing.

A familiar cycle, but with new constraints

Felbermayr frames the north-south swing as normal. "At times, the industrially strong north is ahead, and at other times, the service-oriented south takes the lead. It's no different in other large economies, such as the US," he said. The comparison is instructive: California and Texas have long outpaced the Rust Belt, but federal fiscal transfers and labour mobility smooth the gaps. The eurozone lacks both a central fiscal capacity of comparable scale and the linguistic and cultural mobility that allows a laid-off Ohio factory worker to relocate to Austin.

What the single market does provide is a mechanism for balancing regional differences, but only if the north pursues the competitiveness reforms Felbermayr urges and the south avoids backsliding. Spain's minority government has already watered down some labour reforms; Italy's growth remains anaemic at 0.5%; France's political paralysis has stalled its own adjustment. The periphery's current strength is real, but it is also fragile.