Another Crisis in Southern Europe

Over the past eight years, few economies in the world have performed as poorly as those of southern Europe.  Each of the region’s four main economies (Italy, Spain, Portugal and Greece) has suffered tremendous economic losses since the global financial crisis erupted in 2008.  While all of these countries had hoped that the economic and financial struggles of the past few years would be behind them by now, the fact is that this region remains one of the largest threats to the health of the global economy.  As has been the case in recent years, the most immediate threat comes from Greece, a country that has become a byword for economic failure and fiscal mismanagement.  However, a larger threat could be posed by Italy, where a fragile economic recovery could be derailed by economic troubles in Europe and further abroad.  Altogether, southern Europe faces a difficult future and is likely to prove to be a drag on the tentative recovery underway in Europe.

Greece is once again causing a great deal of concern for business and political leaders in Europe, despite the fact that Greece has already received three massive bailouts from international lenders in recent years.  The latest threat stems from concerns that Greece will not be able to meet the fiscal targets set by its international lenders when negotiations took place for the third of these bailouts that was granted to Greece last year.  While the left-wing government in Athens has managed to push through some painful reforms in recent months, these efforts have cost the government some of its support and its grip on power has been weakened in the process.  Should Greece fail to enact these reforms, international lenders may decide to yet again withhold the disbursement of this aid.  Meanwhile, after a slight, tourism-driven, recovery last year, the Greek economy is finding itself falling back into a recession this year, adding to the misery felt by the Greek people.  As the Greek economy struggles, political risk levels will rise accordingly and this will add to the downward pressure on economic growth in Greece.

With an economy nine times larger than that of Greece, Italy potentially poses a greater threat to the European economy than Greece.  While Italy has not suffered from a collapse in economic output such as that in Greece, it has instead suffered from a prolonged period of economic stagnation that has resulted in the country’s level of economic output being smaller today than it was 15 years ago.  In recent months, Italy’s economy has managed to stage a tentative recovery, thanks largely to the economic reforms that the government of Prime Minister Matteo Renzi has managed to enact over the past two years.  Nevertheless, Italy’s domestic market remains very weak and the country is increasingly dependent upon export revenues for its growth.  Moreover, Italy’s financial sector remains in poor health and another weakening of the Italian economy could prove to be too much to bear for many Italian banks.  Should Italy fall into another recession and its financial sector struggle with bad debts, the impact would be felt not just in Italy but also across Europe, potentially derailing the entire region’s economic recovery.

Overall, economic risk levels in southern Europe remain dangerously high and will remain so for the foreseeable future.  Spain has managed to record the region’s highest rates of economic growth over the past two years, but political gridlock and growing unrest among younger people in Spain could cause major problems for the Spanish economy.  Likewise, Italy and Portugal are expected to record positive, but low, rates of growth in the coming years and neither of these economies is prepared to deal with potential external shocks.  Finally, Greece’s economic woes are far from over and it remains difficult to see how Greece can remain in the Eurozone while boosting its economic competitiveness.  In fact, the euro has proven be a major obstacle to southern Europe’s economic recovery, and without a further depreciation of the euro, this fact will remain unchanged.  As all four countries are seeing their domestic markets shrink due to some of the world’s lowest birth rates, increasing exports will be the only way for the region to grow in the years ahead.  Without this export growth, southern Europe faces long-term stagnation and decline, a process that appears to have already begun for most countries in the region.