ECB faces
tough task after flip in fortunes for eurozone economies
Economists
say EU countries hardest hit by 2010s debt crisis now in stronger position than
France and Germany
Richard
Partington Economics correspondent
Fri 27 Dec
2024 12.00 CET
The European
Central Bank is facing a tough balancing act in 2025 as it tries to navigate a
reversal of fortunes in eurozone economies, as the hardest-hit nations of the
2010s debt crisis outperform the traditional core.
Highlighting
a potential shift in power dynamics within the single currency bloc, economists
said countries in the EU periphery ravaged by last decade’s sovereign debt
crisis were in a stronger position than northern Europe’s most powerful
nations, including France and Germany.
In a marked
turnaround from a decade ago, Portugal, Ireland, Greece and Spain are among
eurozone nations expected to grow by at least 2% in 2025 – more than double the
rates forecast for France and Germany by the Organisation for Economic
Co-operation and Development (OECD).
Carsten
Brzeski, the global head of macro research at the Dutch bank ING, said: “They
have flipped. There are two sides to that story. One is the positive side: that
the south has been doing much better in recent years. And then there is the
weakness of the north.
“In the euro
crisis 10 years ago, we had all the moral attitudes of my fellow citizens from
Germany – on how the Greeks should become more German. Now it’s a blessing not
to be German, at least when it comes to the structure of your economy.”
Germany’s
economy skirted close to recession in the second half of 2024 amid mounting
political turmoil and a collapse in industrial output as the country struggled
to adapt to weakness in demand for its exports from China, as well as growing
domestic competition from Chinese carmakers targeting the EU market. It has
also faced soaring inflation and the loss of cheap Russian gas, which the
country’s dominant industrial base had grown to rely on before Vladimir Putin’s
invasion of Ukraine.
The German
chancellor, Olaf Scholz, lost a confidence vote earlier this month, paving the
way for early national elections expected in February, as the EU’s two largest
economies face rolling political crises. The OECD is forecasting that the
German economy stagnated in 2024 and will grow by 0.7% in 2025.
In France,
Emmanuel Macron is attempting to push through a budget to avoid a financial
crisis, having appointed François Bayrou as his fourth prime minister this
year, after Bayrou’s predecessor, Michel Barnier, was brought down by a vote of
no confidence.
The OECD
expects French GDP growth to slow from 1.1% in 2024 to 0.9% in 2025 as
government efforts to bring down high levels of national debt through tax
increases and spending cuts weigh on businesses and households.
The
Paris-based organisation said the fact that Greece, Portugal and Spain were
among the few countries with positive growth outlooks suggested the reforms
they made under severe stress in the 2010s had put them in a stronger position.
“The
countries that have done their homework are reaping the benefit of it,” said
Fabio Balboni, a senior economist at HSBC. “It came at a significant cost in
terms of GDP. Of course they’re now looking strong but there’s still a long way
to come – particularly when you think about Greece. There is a perception these
economies are now growing in a more blanched way.”
The ECB
president, Christine Lagarde, has signalled that interest rates will be cut
further in 2025 after saying the “darkest days” of high inflation appeared to
be behind the eurozone. The central bank has cut borrowing costs in 2024 to 3%,
amid mounting pressure to provide more support for the struggling economies of
northern Europe.
Balboni
said: “I’m not overly surprised to see France’s central bank governor has
become one of the most dovish members of the ECB governing council. There’s no
question from a European perspective you need a strong France, so it does pose
some existential questions.”
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