Three calls for the eurozone: It’s still brighter in the south

Remember that horrible acronym PIGS, used to describe the southern Economic and Monetary Union (EMU) member states being targeted by financial markets during the euro crisis? How times have changed. Over the last four years, Portugal, Italy, Greece and Spain have outpaced the eurozone’s average growth. And this trend is expected to continue next year.

These countries have received a significantly larger portion of the NextGen funds compared to their northern counterparts and still have plenty of money to spend. Additionally, the service sector’s share of GDP in these southern nations is higher than the eurozone average, which is beneficial as European manufacturing faces challenges from high energy prices and upcoming US import tariffs. That said, Italy, with a bigger manufacturing base and a more challenging fiscal situation, might have trouble keeping up with the other three.

The eurozone labour market is tighter than the sluggish economic environment would suggest. With labour markets already under strain since the pandemic, businesses have hoarded labour while production remains weak, resulting in a decline in productivity.

During periods of high inflation, businesses could afford to retain excess staff because profits were bolstered by price-driven revenue growth. However, with inflation now reduced and wage growth remaining high, profit growth has rapidly diminished. As wage costs surpass revenue growth, the ability to keep underused employees on the payroll is no longer sustainable.

Businesses are indeed more downbeat on hiring. We expect unemployment to increase moderately throughout 2025 as hoarding labour is becoming a lot more expensive. It also adds to the recent trend of higher bankruptcies, but the positive is that it should also help with some cyclical recovery in productivity.

Fiscal tensions within the eurozone are quickly increasing. France and Germany have been following almost completely opposing fiscal policies in recent times.

With a government debt ratio of 115% of GDP and an average fiscal deficit of 6% of GDP over the past few years, France urgently needs austerity. With government debt slightly above 60% of GDP, a fiscal deficit of less than 2% of GDP and an investment gap of more than €600bn, Germany needs fiscal stimulus.

This fiscal policy approach of two extremes is not sustainable, and we expect to see a new type of fiscal convergence in 2025, with France becoming more German and Germany becoming more French. At the same time, talks about new common European financing instruments – as needed as they are – will be postponed as just paying the interest rates on newly issued European debt would require changes to an already tight EU budget.