Lessons And Comparative Visual Analysis Of The Eurozone – Eurasia Review

How have the Eurozone’s four largest member states’ main economic variables fared in the last five years?

By Judith Arnal

Important conclusions can be drawn from analysing the performance of the main macroeconomic variables of the Eurozone’s four largest member states.

First of all, although in the second quarter of 2024 the GDPs of Italy and Spain were 4.7% above their pre-pandemic levels, their compositions differ, with Spain relying on population growth, public consumption and the export of services, whereas Italy focuses on investment and the export of goods. Meanwhile, the marked differences in population growth, with Spain’s population rising by 3.6% between the beginning of 2019 and 2024 and Italy’s falling 1.4%, also explains why Italy’s per capita GDP at the end of 2023 stood at 4.7% above its pre-pandemic level, while in Spain it was only 0.1% higher. In other words, Spain’s economic growth is more extensive, whereas Italy’s is more intensive.

Secondly, public consumption has increased significantly in all the Eurozone’s major economies since the pandemic, with a particularly notable rise in Spain (almost 12%), which suggests it will have to be monitored closely if it is not to turn into a structural increase in expenditure.

Thirdly, investment, or Gross Fixed Capital Formation, has taken a worrying turn in Germany (-3.9%) and Spain (-2.2%), unlike Italy, where it has seen strong growth (in excess of 30%). This is possibly because Italy is being more assiduous in channelling the Recovery and Resilience Facility (RRF) funds and highlights the importance of harnessing this type of resource as a way of stimulating investment.

Fourth, although exports have been restored to pre-pandemic levels in the main Eurozone countries, the weak recovery of German exports is a concern, something that requires special attention in the current geo-economic situation. This could be related to the dependence of Germany’s export sector on China. It is a situation that highlights the risks stemming from the European economy relying excessively on external demand.

Fifth, by the end of 2023, France, Spain and Germany had not regained their pre-pandemic levels of real per capita productivity. Although this could be due to the cyclical behaviour of productivity in the Eurozone and other structural factors such as the reduction in the working day for efficiency improvements, it is still worth implementing measures such as the streamlined integration of new technology into productive processes and the appropriate training of workers in a context of growing digitalisation.

Lastly, fiscal discipline matters. Whereas an increase in the ratios of public debt to GDP was recorded in the Eurozone’s four largest economies between 2019 and 2023, Portugal and Greece, which were having to deal with bailouts a decade ago, have managed to significantly reduce their levels of public debt, which has resulted in lower 10-year bond yields compared with Spain and France, in the case of the former, and compared with Italy in the case of the latter.

Analysis

The pandemic represented an unprecedented economic shock for the entire global economy. In the Eurozone, countries more specialised in face-to-face services, such as tourism, came off worst. The pandemic was followed by the greatest inflationary crisis of recent decades, with a severe impact on a host of economic indicators. These situations prompted the instigation of fiscal policy measures that were without precedent in recent decades both at the European and at the national levels, as well as a resounding response by central banks. Now that the situation is returning to normal, it is worth conducting an analysis of where the main economic indicators of the Eurozone’s largest economies are located, and thereby extract some recommendations for economic policy.

1. The aggregated movements of GDP and its main components

Starting with GDP,[1] despite the fact that the Spanish and Italian economies endured the greatest fall as a consequence of the pandemic, by the second quarter of 2024 they were 4.7% above the fourth quarter of 2019. As shown on Figure 1, French GDP managed to climb to 3.8% above its pre-pandemic level, while in the case of Germany, the Eurozone’s largest economy, GDP in the second quarter of 2024 was only 0.3% above the level of the fourth quarter of 2019.

Although the global GDP growth of the Spanish and Italian economies in the second quarter of 2024 was in both cases 4.7% above their pre-pandemic levels, their composition is not the same. To begin with, as Figure 2[2] shows, real per capita GDP in Italy ended 2023 4.7% above that of 2019, compared with a modest 0.1% rise in Spain. Meanwhile, the real per capita GDP in Germany in 2023 was still 0.9% below that of 2019.

This pronounced difference in the performance between total GDP and per capita GDP is clearly explained by the denominator, in other words the differences in population growth. In fact, as Figure 3 shows, between early 2019 and early 2024, Spain was the Eurozone country that underwent the greatest population growth (3.6%, taking it from 46.9 to 48.6 million inhabitants). Italy occupies the opposite extreme, with a fall in population of 1.4%, taking it from 59.8 to 58.9 million inhabitants. This suggests that GDP growth is more intensive in Italy and more extensive in Spain, in other words, more based on population growth in the case of Spain.

Turning next to an analysis of the various components of GDP and starting with household consumption, it is evident from Figure 4 that this variable had not regained its pre-pandemic level by the first quarter of 2024 either in Germany (2.1% below the level for the fourth quarter of 2019) or in Italy (0.1% below). It was, however, above the pre-pandemic level in Spain, albeit very slightly (+0.5%) and particularly in France (+2.5%). Especially striking is the case of Italy, where the rebound in total and per capita GDP has not translated into a recovery in the level of household consumption. This dynamic in household consumption may be attributable to a combination of factors, namely: (1) precautionary saving, with families displaying more conservative behaviour in terms of spending; (2) an uneven perception among the population of the economic recovery, with the benefits of the recovery concentrated in specific sectors or regions; (3) an erosion of purchasing power due to the inflationary shock; and (4) a long-term fall-out from the pandemic, which may have led to structural changes in the economy and in consumers’ behaviour.

Turning next to public consumption, Figure 5 shows a marked increase above the pre-pandemic levels in all four cases, but particularly in Spain, where public consumption in the first quarter of 2024 was 11.8% above the last quarter of 2019, followed by Germany, with a 7.9% increase. At the opposite end of the spectrum is Italy, with growth in public expenditure between the two periods of 5.1%. Public consumption has risen substantially in this period first as a response to the pandemic and then to the cost-of-living crisis, but once the tensions seem to have abated, this variable will need to be monitored to forestall structural increases in public consumption.

Gross Fixed Capital Formation (GFCF), in other words investment, displays a very uneven pattern among the Eurozone’s main economies, as is shown in Figure 6. In Italy, GFCF in the first quarter of 2024 was 30.7% above the last quarter of 2019. The other country with GFCF levels higher than at the start of the pandemic is France, but lagging well behind Italy, with an increase of 1.7%. And Spain and Germany recorded GFCF levels in the first quarter of 2024 of 2.2% and 3.9% respectively below the last quarter of 2019. These are striking figures, especially in the context of the funds released through the Recovery and Resilience Facility (RRF), and they highlight the acceleration of the channelling of these public resources to the economy as a whole. This could suggest that Italy is being more assiduous in channelling the RRF funds and emphasises the importance of harnessing these resources as a means of stimulating investment.

Turning next to the export sector and in particular the export of goods, Figure 7 shows all the Eurozone’s economies are above pre-pandemic levels, with Italy (+8.9%) standing out. Germany lags behind in the restoration of goods exports (+2%), which is the cause for some concern, given the important role its export sector has traditionally played in its economy. The modest growth of German exports compared with other Eurozone countries could be linked to its dependence on the Chinese market, which has undergone an economic deceleration and an increase in self-sufficiency in key sectors. These factors have reduced the demand for German industrial goods, such as machinery and cars, sectors where Germany has a leading position, negatively impacting its export recovery.

As far as the exports of services are concerned, the case of the Spanish economy is especially notable (+36.7%), followed by Italy (+24.5%). Germany lies at the opposite extreme, with a modest increase between the fourth quarter of 2019 and the first quarter of 2024 of 1.6%. This highly positive change to Spain’s exports of services, not only tourism but also high added-value services, is explained by the structural change that Spain’s export sector is undergoing. Indeed, according to the latest data from the Bank of Spain, the financing capacity of the Spanish economy stood at €6.2 billion in June 2024, compared with €4.1 billion in June 2023. In accumulated terms over the course of 12 months, this enabled the Spanish economy to have a financing capacity of €58.8 billion, greater than the €42.6 billion of the previous year. Moreover, Spain has secured a notable improvement in its Net International Investment Position, equivalent to an economy’s difference between financial assets and liabilities at any given moment of time, which in the first quarter of 2024 stood at -51.6% of GDP, the lowest level since 2004.

In short, the way the economy has developed between the last quarter of 2019 and the first quarter of 2024 has seen a drop in household consumption as a percentage of GDP in all the Eurozone economies, particularly in Italy (-2.7 pp) and an increase in public consumption, albeit especially modest in Italy (+0.1 pp). The preponderance of GFCF has fallen in all countries, with the striking exception of Italy, where it has risen 4.52 pp. And in terms of the exports sector, Italy has witnessed a significant increase in the export of goods (+2.28 pp) and Spain in services (+3.97 pp).

Figure 9. Preponderance of the main components of GDP in 1Q/24 and percentage point change between 1Q/24 and 4Q/19

2. The evolution of employment

Analysing employment from the perspective of the number of hours worked, it is clear from Figure 10[3] that the pre-pandemic levels have still not been restored in Germany (-0.8%), compared with Italy and France, where the levels were 6.5% and 5.1% higher, respectively. In Spain, in the first quarter of 2024 the number of hours worked was 1.6% above the pre-pandemic level.

In terms of the real per capita productivity, Figure 11 shows that by the end of 2023 the pre-pandemic levels had been restored only in Italy (+1.1%), compared with France (-3.5%), Spain (-1.3%) and Germany (-0.8%). The change in productivity may be attributable to a range of factors, as Arce & Sonderman point out. To begin with, productivity behaves cyclically in the Eurozone, with many companies acquiring an accumulation of personnel at times of recession or lower economic growth, prioritising the protection of employment over flexibility. This became clear during the pandemic, with the implementation of, for instance, the ERTE (temporary regulation of employment) scheme in Spain. The accumulation of workers by companies and even the hiring of new workers has been possible especially in the last three quarters thanks to: (1) the increase in corporate profit margins; and (2) the drop in real salaries. Moreover, in recent years there has been a tendency towards a reduction in the hours worked per employee, which is partly attributable to improvements in efficiency, but also to a simple reduction in working days, leading companies to enlarge their workforces.

In any event, it is essential to support the productivity of work and to this end it is worth adopting measures that foster productivity. By way of example, in a context of growing digitalisation, this could involve efficiently integrating new technologies into productive processes and training in accordance with workers’ needs.

3. The evolution of public finances and financial markets

Public finances too have been affected by the pandemic and the cost-of-living crisis. In the Eurozone’s four largest economies, public deficit as a proportion of GDP at the close of 2023 exceeded the 2019 level, as shown in Figure 12.

Something similar can be said about the ratio of public debt to GDP, with increases at the end of 2023 compared with 2019. However, as shown in Figure 13, Greece and Portugal, two countries that a decade ago were immersed in bailout programmes, display exactly the opposite tendency, with major reductions in their ratios of public debt to GDP (-18.7 pp and -17.5 pp, respectively).

Figure 13. Ratio of public debt to GDP in 2023 and the difference between 2023 and 2019 for the Eurozone’s four largest economies, Portugal and Greece

Precisely this very different evolution of the ratios of public debt to GDP may explain the fact that the yields on the Portuguese 10-year bond have now fallen below their Spanish (21.4 bp at the beginning of August) and French equivalents (12.4 bp at the beginning of August), and the fact that yields on the Greek 10-year bond are below its Italian counterpart (34.3 bp at the beginning of August). This is a clear demonstration that fiscal discipline matters and that the bond markets take fiscal variables into account when they come to determining prices. This message is especially important in the context of reactivating European fiscal rules.

In line with the widespread rise in interest rates, there has been an increase in the yields of 10-year public bonds, as shown in Figure 15. As far as the risk premium relative to Germany is concerned, there is heterogeneity as can be seen in Figure 16: Greece is at one extreme, with a fall in the risk premium of 54.2 bp between October 2019 and August 2024 and France at the other, with a rise of 41.4 bp in the same period.

Figure 16. Changes to the risk premium relative to German 10-year bonds between October 2019 and August 2024

Lastly, stock markets have risen well above their pre-pandemic levels, as is apparent from Figure 17. Bearing in mind the main stock market indices of each country, the 48.1% rise in the Italian FTSE MIB stands out. At the other extreme is Spain’s Ibex-35, with an increase of 21.9% between October 2019 and August 2024.

Conclusions and recommendations

It is possible to draw interesting conclusions from the analysis that has been conducted. First, the composition of growth matters: although between the last quarter of 2019 and the second quarter of 2024 Italian and Spanish GDP both rose equally (+4.7%), the elements on which they rely are very different. In particular, economic growth in Spain rests mainly on its growth in population, on public consumption and on the export of services, whereas in Italy it is GFCF and the export of goods that stand out. Meanwhile, the pronounced differences in population growth, with Spain growing by 3.6% between the start of 2019 and 2024 and Italy shrinking by 1.4%, also account for the fact that while Italy’s per capita GDP at the end of 2023 stood at 4.7% above its pre-pandemic level, in Spain it was only 0,1% higher. In other words, Spain’s economic growth is more extensive compared with Italy’s more intensive growth.

Secondly, all the Eurozone’s major economies have seen a significant increase in public consumption compared with pre-pandemic levels, Spain’s case being particularly striking, with an increase of almost 12% between the last quarter of 2019 and the first quarter of 2024. Although these increases are related to the public support measures put in place to offset the effects of the pandemic and the cost-of-living crisis, as these effects are waning, it is worth monitoring the situation to ensure that this does not translate into structural increases in public consumption.

Thirdly, the performance of GFCF, in other words investment, is a cause for concern in Germany and Spain, where in the first quarter of 2024 it still stood at 3.9% and 2.2%, respectively, below the last quarter of 2019. This is in contrast to the performance of GFCF in Italy, where it has climbed more than 30% compared with the pre-pandemic level. This may indicate that Italy is being more assiduous in channelling funds from the Recovery and Resilience Facility (RRF) and highlights the importance of harnessing these resources as a means of stimulating investment. Given that GFCF to a large extent determines the potential future growth of an economy, it is a component of GDP that should be stimulated as much as possible. This entails an appeal for an acceleration and a full and effective use of the Recovery and Resilience Facility funds, especially in Spain, as one of the main beneficiaries of this facility.

Fourth, although all the large Eurozone economies have recovered their pre-pandemic levels of exports of goods and services, the weak recovery of German exports is particularly striking and concerning. Given the importance of this economy to the Eurozone and the key role that the export sector plays in Germany, the situation requires careful monitoring, even more so against the current backdrop of powerful geo-economic tensions, with the forthcoming presidential election in the US on 5 November and growing tensions with China, upon which the German economy is strongly dependent. This situation highlights the risks stemming from the excessive dependence of the European economy on external demand.

Fifth, the evolution of real per capita productivity is a cause for concern, with France (-3.5%), Spain (-1.3%) and Germany (-0.8%) still below their pre-pandemic levels. Although this could be due to the cyclical behaviour of productivity in the Eurozone and to other structural factors such as the reduction of the working day for efficiency improvements, it is worth implementing measures such as the integration of new technologies into productive processes and the appropriate training of workers in a context of growing digitalisation.

Lastly, fiscal discipline is important. Whereas in the Eurozone’s four largest economies there has been an increase in the ratios of public debt to GDP between 2019 and 2023, Greece and Portugal, two countries that were mired in financial bailout programmes a decade ago, display precisely the opposite tendency, with major reductions in the ratios of public debt to GDP (-18.7 pp and -17.5 pp, respectively). And this has translated into yields on the Portuguese 10-year bond being lower than its Spanish (21.4 bp at the beginning of August) and French equivalents (12.4 bp at the beginning of August), and the yields of the Greek 10-year bond being below those of the Italian bond (34.3 bp at the beginning of August).

• About the author: Judith Arnal is a Senior Analyst at the Elcano Royal Institute and a member of its Scientific Committee. She is also an independent Board member of the Bank of Spain, as well as a member of its Audit Committee. In addition, she is an Associate senior research fellow in financial regulation at the Center for European Policy Studies (CEPS) and the European Credit Research Institute (ECRI) and teaches international finance at Instituto de Empresa. She conducts extensive research on financial affairs, with several papers published in top peer-reviewed journals, such as The European Journal of Finance, and a regular contributor to the financial media.
• Source: This article was published by Elcano Royal Institute

[1] For the purposes of analysing the aggregated variables in this section, the data series for the linked volumes of 2015 were used, adjusted for seasonal and calendar effects. The figures recorded in the last quarter of 2019 were taken as the basis for performing the calculations.

[2] For the purposes of analysing this variable, the 2010 data series of linked volumes is used. The figures recorded in 2019 are taken as the basis for performing the calculations.

[3] Data series adjusted for seasonal and calendar effects. The figures recorded in the last quarter of 2019 are taken as the basis for performing the calculations.