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What is behind the robust growth projections for Southern Eurozone economies?

Southern Euro Area economies to outperform core economies in 2023

Over the last decade, the largest southern economies in the Eurozone—Portugal, Italy, Greece and Spain, commonly known as the “PIGS”—have been in the spotlight for a myriad of issues, such as the debt crisis, structural imbalances and lackluster economic growth. However, this year they are set to grow above the average rate of the Eurozone—faster than the likes of Germany, France and the Netherlands.

Tourism—a blessing and a curse 

The PIGS are heavily reliant on tourism; consequently, they posted the sharpest contractions among Euro Area countries in 2020, when Covid-19 lockdowns devastated the sector. In recent years, tourism activity has been recovering, and 2023 is set to be the year when the sector rebounds fully. Data for January–May reveals that tourist arrivals exceeded 2019 levels in Italy and Greece and were only marginally below their pre-pandemic level in Spain. Meanwhile, Portugal has posted record-high tourist arrivals in recent months. In contrast, the core economies of the Eurozone tend to rely more on the industrial sector than peripheral countries. As a result, elevated energy costs at the outset of this year had a stronger impact on them than on their southern counterparts.

EU funds to the rescue

The disbursement of Next Generation EU funds—aimed at propelling member countries out of the Covid-19 slump—is also a key driver of growth in the south. The PIGS are set to receive much larger inflows than core economies relative to their economic weight in 2023. In particular, projections from 2020 pencil in average inflows of 1.8% relative to their respective gross national income for the PIGS, more than six times the average of Germany, France and the Netherlands—0.3%. Although the disbursement of funds within the PIGS has not been optimal, such inflows are providing a significant tailwind to growth.

Sunny outlook but risks skewed to the downside

Despite optimistic projections, there are several downside risks. Extreme temperatures and wildfires during the summer have the potential to impede tourism activity, while the slower-than-expected absorption of EU funds could dent growth prospects further. Additionally, higher interest rates may hamper economic activity and could even spur financial turmoil within the heavily indebted PIGS, especially if tighter financing conditions translate into a significant increase in NPLs, impacting the banking system.

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Insights From Our Analyst Network

Wouter Thierie, economist at ING, commented on the effect of tourism on Spain’s economic outlook:

“Spain is poised to become the best-performing economy among the larger Eurozone countries this year.[…] Continued growth in the tourism sector will be the main driver of Spain’s higher growth rates. Although the number of international tourists entering Spain in 2022 was still 14% below pre-pandemic levels, the gap may be closing this year.” 

Meanwhile, EIU analysts commented on the absorption of EU funds in Italy:

“We expect the implementation of structural reforms and investment plans agreed with the EU to remain patchy but sufficient to continue receiving recovery fund disbursements, as EU conditionality is relatively soft by design.”

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