Southern European economies have diverged – POLITICO

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Carla Subirana Artús is an economist who has worked as policy analyst for the Bank of England and Europe research analyst for Economist Intelligence.

If the euro zone were a school, Portugal, Italy, Greece and Spain would be the lazy ones. The four countries, branded with the ugly acronym PIGS, are talking loud, enjoying a slow life under the sun, over-indebted and in need of reform – or so the cliché goes.

Yet take a closer look and you’ll see that some of these previously unruly students have since become unlikely star students.

Although Italy and Greece remain economic laggards, Spain and Portugal’s growth trajectory has become more robust and compelling since the sovereign debt crises of 2012 – a change that has become visible with the end of the an era of ultra-loose monetary policy. And much of the credit for this split between the Iberian Peninsula and Italy and Greece goes to the structural reforms that Spain and Portugal have introduced over the past decade. But still, the euro zone is not crisis-proof.

A recent example of the divergence between southern European economies and their respective approach to reform was seen when the European Central Bank (ECB) promised to end its bond-buying program in June. While Italy and Greece’s 10-year sovereign bond yields soared, Portugal and Spain’s borrowing costs remained closer to those of the Netherlands, seen as a student. model by the leaders of the European Union.

Over the past decade, Italy’s labor reforms have been tentative and the country has only partially resolved its banks’ bad debts, while Spain has addressed these issues much more decisively. As a result, Spain’s GDP per capita in terms of purchasing power, supported by an increase in total factor productivity – or the efficiency with which an economy uses its productive inputs – exceeded that of Italy. in 2017.

The country has since become one of Europe’s largest automakers and its exports have diversified beyond tourism into chemicals, pharmaceuticals, machinery and professional services.

Investors are now looking at the country in a different light, leading to lower borrowing costs for households and businesses. While spreads on the country’s credit default swaps – which are insurance-like derivatives that pay in the event of default – were identical to those in Italy until 2014, they have since moved closer to those of Italy. France.

Portugal, meanwhile, also had a promising decade. Since 2014, its economy has grown on average three times faster than that of Greece, where output remains almost a quarter below its 2007 level. And boosting growth, while implementing costly reforms and by meeting strict budget targets demanded by EU officials, António Costa, Portugal’s socialist prime minister since 2015, has become Brussels’ favorite student.

In contrast, Syriza, the left-wing Greek party that ruled the country from 2015 to 2019, was the class rebel. The government backed down on reforms as the national debt remained the largest in the eurozone, bad bank loans piled up and tax revenues continued to rest on too narrow a base, demanding high rates that deterred hiring.

Despite its progress, however, any chanting about the success of the Iberian Peninsula still needs to be tempered.

For example, Portugal’s fiscal prudence came at a cost. Public investment was the lowest in the EU in 2020 and 2021, and the country’s public debt – the highest in the eurozone after Greece and Italy – puts the wider economy at risk of be affected by higher public borrowing costs. In addition, wages are low by Western European standards, which sends many Portuguese abroad for work.

Across the border, the Spanish government, made up of socialists and far-left group Unidas Podemos (United We Can), has offered no creative solutions to fix the country’s unsustainable pension system and the rate neither has skyrocketing youth unemployment since 2019. And with an ugly election in which no party is likely to win a majority, moderates are now eyeing Vox warily – a relatively new hard-right outfit, drawing worrying support in the polls.

Meanwhile, Greece has been busy doing its homework to join the club of successful “turnaround” stories in the Eurozone periphery. The government of Kyriakos Mitsotakis, Greece’s centre-right prime minister since 2019, has managed to polish its image among tourists and investors, attracting record foreign investment last year.

Italian growth, however, will most likely continue to disappoint, as the rare stability brought to its policy by Prime Minister Mario Draghi has now come to an end.

Political stability is important – and not just for Italian families. ECB officials fear that if the infamous ‘catastrophic loop’, which ties the solvency of banks to that of their host countries, were to hit Italy and threaten to trigger a debt crisis, monetary union would begin to look flimsy.

And while most European banks have reduced their home country exposures since the 2012 sovereign debt crisis, Italian banks remain just as exposed to their government debt as they were a decade ago, the link between banks and sovereigns being particularly strong.

So, as political unrest in Italy escalates and investors begin to demand higher yields to hold Italian debt, the country’s banks will inevitably suffer. There are already signs that Italian banks are headed for trouble: Year-to-date yields from the country’s biggest lender – a measure of investment performance – have fallen 24% since February.

And now, plagued by sluggish investment, meager reforms and once again political instability, Italy is set to remain the euro zone’s struggling pupil for the foreseeable future.

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