The dichotomy of real economic developments in the euro area

Since around mid-2022, a clear difference in economic growth rates has been observed between the large economies of the southern and western euro area and Germany. The Italian economy is doing well, the Spanish economy is even excelling, while the French economy is slightly lagging behind its potential yet is still far from the situation of its German neighbour, which has now been stagnating for some time. This article identifies the main causes of this dichotomy, seeing the primary ones as the exceptional vulnerability of the German growth model and the combination of specific shocks that have hit the European economy in particular in recent years. By contrast, the southern euro area states' labour markets are not as tight and these countries support their economies through significantly looser fiscal policies. Some have invested massively and, in addition, have benefited significantly from the EU's ambitious post-pandemic recovery plan. Recent changes in consumer preferences, triggered by external intervention in the form of the pandemic, have also played into their hands. This year, however, the difference in growth rates between the German economy and the southern euro area economies has narrowed considerably. Further developments will nevertheless mainly depend on overcoming structural challenges.