Euro Zone Financial Crisis Waxes and Wanes

Countries that sat up and took the bitter medicine of economic reform are emerging leaner and stronger, but others are still struggling. Even mighty Germany could feel the sting of competition from its neighbors soon.
Off to the shops in Madrid. Spain is expecting 2.8 percent growth this year.

Some euro-zone nation are shedding the label of "crisis countries." Portugal is growing once again. Ireland is blossoming. A renewed self-confidence fills the air in Spain. Things are even looking up for Italy.

For a long time, Spain was on the same path as Greece. Many people expected radical leftists to win parliamentary elections. There was no growth and no end to mass unemployment in sight, years after the start of the financial crisis.

Now, the European Commission has raised growth forecasts for the Spaniards. Instead of economic growth of 1.7 percent, the commission now predicts 2.8 percent. The popularity of the leftist Podemos Party is waning somewhat. “Spain is today no longer a problem country,” said Jörg Krämer, head economist of Commerzbank.

Ireland had almost 5 percent growth last year and is looking at about 4 percent this year. Portugal is moving in the right direction. Both countries, which had to request extensive rescue packages from other euro-zone states during the crisis years, have reduced their national deficits to close to the 3-percent level.

Even though much remains to do, the countries of Spain, Ireland and Portugal have worked their way out of the hole in the shadow of the never-ending Greek crisis.

“Growth has become sustainable,” said Christian Schulz of Berenberg Bank. He added solid growth in exports has helped.

Angela Merkel has wasted Gerhard Schröder's achievements with regards to competitiveness. Patrick Artus,, Economist, Natixis Investment Bank

Meanwhile, shadows are falling on other once-solid economies.

In Austria and Finland, the mood in households and companies is low. For the fourth year in a row, Austria’s economy will grow only slightly.

The Finnish economy contracted in the last three years. It is suffering from its proximity to economically-sanctioned Russia and the downfall of Nokia, and is not expected to achieve even half a percent of growth.

And then there is France, whose growth continues to lag behind the euro-zone average. Mr. Schultz of Berenberg Bank said countries such as Austria and France that resist economic reform fall behind, while other nations that have completed the process enjoy advantages. In most cases, domestic economies suffer initially, but exports are strengthened because the countries become more competitive in terms of prices. That is exactly what Spain and Portugal have experienced.

Italy, on the other hand, still has a long way to go. It is, however, after eight years of crisis, experiencing some growth and the economic mood in the country has improved, according to E.U. surveys.

That is partly thanks to the reform policies of Prime Minister Matteo Renzi and his focus on the labor market. Experts such as Stefania Tomasini of the economic institute Prometeia expect unemployment to decline. During the crisis years companies had so many redundancies that even tentative signs of an upsurge are enough to motivate managers to hire new personnel.

Euro-partner countries climbing out of the crisis are having a knock-on effect on Germany by curbing its competitive lead. But its labor market is doing well and vigorous consumption is driving up growth — to about 2 percent this year and next, the European Commission estimates.

Underperformers in the Euro Zone-01


However, a few experts are starting to worry about productivity stagnating while wages are rising — and because of the scant enthusiasm of the German government for reform.

“Angela Merkel has wasted [former chancellor] Gerhard Schröder's achievements with regards to competitiveness,” said Patrick Artus, head economist of the investment bank Natixis. “The euro partners are catching up in the meantime.”

The Irish economy meanwhile has reached the level of prosperity of the pre-crisis year 2007. In 2014, the economy grew by 4.8 percent — more than any other euro-zone country. A big rise is also expected this year.

During the boom years of the 1990s, the Irish set up the National Pension Reserve Fund, which was supposed to boost pensions someday. But when the crisis hit Ireland, that fund’s billions were used to rescue ailing banks. The National Pensions Reserve Fund is now the Ireland Strategic Investment Fund, and has around €7 billion, or $7.8 billion in its coffers to be used for investment in the Irish economy.

In Portugal, the economy is moving in the right direction, and even the upcoming parliamentary elections do not pose any threat of reform destabilization as the country has no radical parties.

At first glance, the balance sheet of what is still the poorest country in western Europe is exemplary. The International Monetary Fund (IMF), European Central Bank and European Union lent Portugal a total of €78 billion. The accompanying austerity program came to an end in 2014. Portugal even intends to pay back the IMF loan early.

In 2014, the Portuguese economy grew slightly. For this year, the European Commission expects a plus of 1.6 percent. Unemployment is declining. But the country is deriving much profit from the weak euro and low oil prices.

Outperformers in the Euro Zone-01

And the long-term outlook? “We have an extremely old population,” said Joao Leao of the ISCTE business school in Lisbon. “That poses a considerable danger for the social welfare system.” A need exists for further reform. The IMF is also issuing similar warnings.

In Spain, a new day is dawning. “There is no doubt that Spain's economy is on the path of sustainable recovery,” said Javier Diaz Giménez of the IESE business school in Madrid. After seven years of recession, Spain's economy grew last year. But much catching-up remains to do. The level of prosperity at the end of this year will still be less than in 2007.

What triggered the crisis back then was the bursting of a real-estate bubble. A readjustment seems to have been completed in that sector. Prices for houses are rising once again, Spaniards are beginning to spend more on private consumption, and companies are increasing their investments. Georg Abeg from law firm Rödl & Partners in Madrid said: “The joy is back.”


Hans C. Müller-Dröge covers economic and monetary policy from Düsseldorf. Katharina Kort is the Handelsblatt correspondent in Milan. Katharina Slodczyk and Sandra Louven also contributed to this story. To contact the authors: [email protected], [email protected].