Germany's decline as the economic engine of the eurozone is staggering.
Economic dominance for most of the last 20 years was so stable that it began to be perceived as natural and obvious.
Berlin, largely under the leadership of Angela Merkel, ran a supposedly tight ship while happily dispensing advice to the perceived wasteful laggard states of southern Europe. Since the debts of countries like Greece triggered a crisis in the currency zone a decade ago, Merkel held all the power.
But the combination of the pandemic, a slowdown in China and the energy crisis has brought into sharp focus the flaws in Germany's economic model. Its dependence on dictatorships has proven untenable, and recent economic indicators point to a looming recession.
Behind the scenes, economic transformation of the same magnitude is quietly taking place in Portugal, Italy, Greece and Spain.
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Countries politely called the “eurozone periphery” and more crudely derided as “Pigs” have used the past decade wisely.
As Germany sinks into a seemingly inevitable quagmire of stagnation, the former troubled southern fringes of the eurozone have become bastions of strength.
Italy is catching up with Germany in terms of GDP growth this year and is expected to outpace it again in 2024, according to OECD forecasts.
Spain is expected to grow more than twice as fast as Germany next year , and Greece's GDP will grow more than three times faster than Germany.
It's a far cry from the sovereign debt crisis of a decade ago, when, at its worst, it looked like debt-ridden Mediterranean countries might lead the breakup of the eurozone.
Sandra Horsfield, an economist at Investec, says the energy crisis and China's weak recovery have been particularly painful for Germany.
“Countries like Germany suffer because of their particular industrial structure. If your economy is heavily production-oriented, this is a weakness in this particular case,” she says.
Holger Schmieding, chief economist at Hamburg-based Berenberg Bank, concedes in contrast: “The periphery has taken on a certain shape.” .
However, Schmieding is quick to point out what he sees as German fingerprints on economic success in Germany. Southern Europe
“The euro crisis really served its purpose. The countries below have reformed their supply system, they are now better places to do business and are reaping the benefits, and that is what the euro is all about.
“The euro is about instilling discipline: if you want to be in the euro, you have to be disciplined because you can't devalue a currency. Countries in the south have taken the medicine and are prospering as a result.”
Reforms include making hiring and firing easier. This is often unpopular at first, but usually results in increased employment and greater economic dynamism as companies feel safer taking risks with staff and people find it easier to change jobs.
Joshua Farber of BNP Paribas attributes much of the strength of countries like Spain to the enthusiasm of tourists who have flocked back to the Mediterranean after being cut off from sunny holidays during the pandemic.
“The periphery is services – heavy and easy to manufacture – they don't export much to China and have benefited greatly from so-called Covid revenge spending,” he says.
At the same time, households and businesses in the south have recovered their finances after being hit by the credit crisis, while those in the north have borrowed more money when interest rates were at record lows.
Since the start of 2013, ECB data shows that mortgage lending in Germany grew by almost 60%. In France, the figure rose by 56%.
In contrast, households in Italy were more restrained and increased their borrowing by just one-sixth. In Spain, which experienced a serious crisis in the real estate market, the volume of lending for the purchase of housing fell by more than one fifth.
As a share of household income, the debts of Greece, Spain and Portugal have fallen to the same levels, and in some cases even lower, than in Germany. Over the same period, French households took on a significantly larger debt burden.
A similar picture can be seen for business lending. While in Italy, Spain and Portugal lending to companies has grown by about a third over the past decade, in Germany lending has grown by more than 50% and in France it has more than doubled.
As a result, southern European states are now less affected by rising borrowing costs.
“The edge is the new core,” Farber says. “Peripheral banks have less commercial real estate exposure and make more money than cold-weather banks.”
“The asset base of banks in the northern center collapsed earlier than in Italy, Spain and places like Greece.
Any economy that relies on lending to drive growth is now in trouble: ECB research points to a collapse in borrowing as households and businesses are deterred by high interest rates.
On public finances Italy remains a large borrower but has at least improved its trajectory in recent years.
Financial markets appear calm, with Italy paying an interest rate of 3.2% on its 10-year loans. bonds, compared with just over 2% in Germany. This is a far cry from the peak of the sovereign debt crisis, when Roman debt yields were around 7% and German yields were below 3.5%.
Greece received cheap debt from Europe in exchange for its reforms, while Spain and Portugal are much safer than they were ten years ago.
The periphery's ability to sustain and grow its newfound economy Success will depend on whether the political will to continue reforms can be maintained in the face of higher interest rates that are hurting the population and prompting calls for more government support.
“Greece is on the same path as Britain after Thatcher,” says Schmieding, praising its economic reforms.
“In Portugal has a similar story, although not as pronounced.
“Spain is a similar story, although with its current left-wing government it is unclear whether the supply side will remain strong or whether they will turn back. labor market reforms are hampering Spain.
“But now the periphery is reaping the benefits.”
Schmieding adds: “Italy is in doubt in the long term, but at the moment it is implementing reforms under Meloni's leadership, Italy enjoys the presumption of innocence both from the ECB and from the markets.”
It's a different story in Germany, where a collapse in manufacturing activity is forcing a country long obsessed with zero borrowing to grapple with thorny debt issues.
The country's constitutional court recently rejected Chancellor Olaf Scholz's plan to declare a Covid emergency -19. funds and redirect them to “green” expenses. The plan was aimed at stimulating growth, but was seen as a violation of the country's strict debt rules.
It “eliminates a key factor supporting growth,” Schmieding says.
Tight limits on government debt mean that the government has little room to maneuver. With the private sector stalled and key industries such as autos facing a costly transition to net zero, Schmieding says Germany's outlook is grim.
“The direction is relatively clear: it will be negative for the economy. Germany's growth prospects once again.”
Ten years after the eurozone crisis, the balance of economic power in the bloc has changed.
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