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kolumnit

06.07. 2012

Future of Southern Europe?

Southern Europe suffers from austerity fatigue. Northern Europe is haunted by bailout fatigue. What is the future of Southern Europe?
Teksti: Dan Stenbock, Research Director of International Business, India, China and America Institute (USA)

Let’s start from the 1980s, look into 2020 and focus on GDP per capita, which will give a 40-year perspective on prosperity in Southern Europe.

In the coming decade, French prosperity will remain close to its German counterpart and could exceed the latter, at over $50,000. Otherwise, there are great shifts.

In the 1980s, the prosperity levels were still relatively similar in France, Germany and Italy. The levels in Greece and Spain, which were almost identical, were significantly behind the three. And the Portuguese were far behind most of Southern Europe.

By 2020, the relatively wealthiest (France) and poorest Southern European country (Portugal) remain the same as in 1980. However, the difference between the two will no longer be 75 percent, but about 50 percent. That convergence is the good news.

The bad news is that, since the 1990s, Italian prosperity levels have steadily deteriorated. In the coming years, Italy will compete on prosperity with Spain, not with France and Germany.

At the turn of the 1990s, Spanish prosperity was still almost 35–40 percent behind that of its Italian counterpart. In 2008, the Spaniards were only 10 percent less prosperous than the Italians. By the 2020s, this gap could shrink to five percent. In turn, Greece has fallen dramatically behind Spain.

In the 1980s, the Portuguese were still 40 percent less prosperous than the Greeks. In the next three decades, the gap between two countries shrank to 20 percent. By 2020, it could further narrow to 15 percent.

In terms of their collective importance in the world economy, Southern Europe is declining. In 1980, these countries still accounted 13 percent of the world output. By 2020, this figure will be halved to six percent.

In these countries the general government debt relative to GDP is more than 160 percent in Greece, close to 125 percent in Italy and over 115 percent in Portugal. It is more than 90 percent even in France. In Spain, it was less than 40 percent before the global crisis, but has more than doubled and continues to soar to close to 100 percent by the late 2010s.

The current assumption underlying the prosperity projections in Southern Europe (and those presented here) is predicated on the idea that these countries can overcome their challenges by 2020 (and cope with their aging populations thereafter). But in reality, the change will be disruptive.

Due to their secular dilemmas, which range from huge debt loads and persistent current account deficits to structural unemployment, any effort to overcome these challenges is bound to cause further deterioration in prosperity levels for years to come.

With right policies, the weakest links of Southern Europe can overcome their challenges – but, and this is crucial, both inside and outside the Eurozone.