Southern Europe's Economic Future

With Greece’s economic future hanging in the balance, there are fears that the debt crisis in Greece could once again spread to the other countries of southern Europe.  While countries such as Spain and Portugal (and to a lesser degree, Italy) have taken significant steps to shield themselves from the risk of being harmed by the crisis in Greece, numerous underlying weaknesses are keeping their economies at risk of a new recession.  In fact, without major policy changes and a dramatic improvement in the region’s economic competitiveness, the long-term economic future for southern Europe is one of stagnation and decline that could see the region’s economies fall from the ranks of the world’s developed nations.

Over the past year, a clear divide has emerged in southern Europe between those countries that have enacted serious economic reforms (Spain and Portugal), and those that have not (Greece, Italy and even France).  In Spain and Portugal, the governments there enacted reforms aimed at improving their country’s economic competitiveness and this has allowed both of these countries to record higher rates of economic growth in recent months.  However, these reforms have proven to be highly unpopular and both countries’ governments face the prospect of defeat in national elections later this year.  In contrast, Greece’s depression and Italy’s long-term decline have been exacerbated by the lack of economic reforms in both counties that have resulted in a severe loss of economic competitiveness.  This too has been the case in France, where a lack of serious economic reforms has hurt that country’s ability to compete economically with Germany and other developed economies, resulting in a prolonged slump in the Eurozone’s second-largest economy.

Now, with the Greek debt crisis reaching a critical juncture, there are growing concerns that the recoveries in Spain and Portugal, and the ability of Italy and France to pull out of their recent recessions, will have been for naught.  For example, bond yields for southern European countries have risen in recent months as the Greek debt crisis worsened, although, so far, they have not returned to the levels seen in 2011.  Moreover, business and investor confidence levels have been negatively impacted by the uncertainty surrounding the situation in Greece and its potential impact on the rest of Europe.  For Spain and Portugal, this crisis comes as their economies have recorded their highest growth rates since the outbreak of the global financial crisis in 2008 and could boost support for more radical political parties, particularly in Spain, where the far-left Podemos party is in a position to emerge as that country’s largest political party in this year’s national elections.  For Italy, the long-term decline of that country’s economy came to an end earlier this year, but already, there are concerns that the Greek debt crisis could push Italy’s fragile economy back into a recession.  

While the short-term outlook for southern Europe is clouded with uncertainty, the region is certain to face a number of major difficulties over the longer-term.  First, the demographic situation in southern Europe is among the worst in the world, as birth rates are among the world’s lowest, leading to a rapidly shrinking working-age population in each of the countries in this region.  Second, with the exception of a few sectors, the economies of southern Europe continue to become less competitive than their rivals in other areas of the world, and this is preventing the region from attracting more investment.  Finally, each country in the region remains over-dependent upon their own declining domestic markets, while they export goods and services primarily to other European markets, where long-term growth prospects are poor.  Altogether, these factors suggest that southern Europe will be able to record only low rates of economic growth in the years and decades ahead, and could even face a situation such as that in Italy, where today’s economic output is less than it was in 1999.  This, in turn, will lead to declining living standards and will result in the countries of southern Europe falling further behind other developed economies in terms of per capita income levels.  In fact, many current emerging markets are on pace to surpass southern Europe in terms of per capita income levels in the coming years and decades, highlighting the fact that being a developed economy today does not mean that a country will remain a developed economy in the future.