Flying PIIGS nations stir rethink in Europe’s core
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Francesco Guerrera
LONDON, Aug 12 (Reuters Breakingviews) -The last shall be first. Once chastised as fiscally lax and slow-growing, Portugal, Italy, Ireland, Greece and Spain are expanding faster than hitherto powerhouses France and Germany. Investors are benefitting from this changing of the guard. To regain lost ground, Berlin will have to act against type and promote looser monetary policies.
The nations unflatteringly nicknamed “PIIGS” during the European sovereign crisis in the 2010s are keeping the euro zone economy afloat. Spain grew at heady annual clip of 2.9% in the second quarter, much faster than the 0.6% rate for the euro zone as a whole. Italy and Portugal also outpaced the rest, while Ireland posted the bloc’s fastest quarterly growth rate. By contrast, Germany — the euro zone’s biggest economy — contracted by 0.1%.
The revenge of the “periphery” over “core” economies is not a one-off either. Since 2019, the German economy has been outpaced by Spain, Greece, Portugal and Ireland, with the latter growing over 20% more quickly. Even Italy, with its aging population, sclerotic corporate sector and mind-numbing bureaucracy almost kept up with Germany and France.
PIIGS countries’ lower exposure to exports and manufacturing, which struggled due to the pandemic and the slowdown in key markets such as China, helped. Making products such as high-end cars and appliances accounts for nearly a fifth of German’s GDP while in Spain goods’ producers contribute just 11% to economic output, World Bank data show. The rebound in tourism after Covid-19 was also a boon since foreign visitors tend to favour the likes of Barcelona, Rome and Lisbon.
European Union post-pandemic funds are another boon. Two-thirds of the 400 billion euro pot is allocated to Italy and Spain while Greece is likely to receive EU grants and loans equivalent to nearly 12% of GDP by 2026, according to TS Lombard research.
Investors have noticed. Spreads between yields on 10-year government bonds for all the PIIGS and the corresponding German sovereign debt have fallen over the past two years. They could narrow further if strong growth and new EU fiscal rules encourage more budgetary discipline in Rome, Madrid and other capitals.
On the other hand, Germany’s ability to borrow and spend more on its ageing population, creaking infrastructure and defence is hampered by constitutional constraints. The country’s best hope is to boost exports, which make up around 47% of GDP. But that requires interest rates to fall, pushing the euro lower. Berlin and its representatives at the European Central Bank have long supported a tight monetary policy to avoid the risk of inflation. Now, they will be more likely to do whatever it takes to keep their economy from being shunted to the periphery.
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CONTEXT NEWS
The euro zone's economy grew slightly more than expected in the three months to June, data showed July 30.
Output in the 20 countries that share the euro increased by 0.3% in the second quarter of the year compared to the previous three months, according to official data, keeping up the pace from the previous quarter and just ahead of economists' expectations.
Among large economies, France and Spain did better than expected, Italy held its ground, while German output unexpectedly contracted.
Germany and its representatives at the European Central Bank have traditionally argued for a tight monetary policy to prevent the spread of inflation.
Bond spreads between PIIGS countries and Germany https://reut.rs/3SDOfk1
Some PIIGS countries have outpaced France and Germany https://reut.rs/3WzN1HQ
Editing by Neil Unmack and Streisand Neto
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