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.

Published in Global Economic Outlook – July 2024 (pdf, 2 MB)

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The German economy has been stagnant over the past two years or so, while other large euro area economies have managed to improve their economic performance at least moderately. Looking at its average GDP growth rate since mid-2022,^[1] we see net zero. The second-largest economy in the euro area, France, grew at an average rate of 0.2% over the same period. Although this is hardly a dazzling performance by its standards, it is at least positive growth. Italy also maintained the same growth rate in the period under review. This was, however, a much better result, as this growth rate roughly corresponds to its potential. Fourth-placed Spain has recently been the clear leader of the Big Four. Its economic output is increasing at a steady half a percent per quarter. We thus observe a clear dichotomy in real economic developments in the Germanic^[2] and Romance parts of the euro area (Charts 1 and 2).

Chart 1 – GDP growth in the large euro area economies
(y-o-y growth in %)

Source: Eurostat

Chart 2 – GDP growth in the large euro area economies
(index 2021 Q1 = 100)

Source: Eurostat

Specific features of the German economic strategy

What distinguishes the German economy from the Romance ones is above all the growth model chosen. Unlike those of the other states mentioned above, the German economy has long been oriented towards strong industrial production combined with a clear emphasis on exports. It built its competitive advantage on the use of cheap Russian gas and the legendary high quality of “Made in Germany” workmanship. In Germany, gross value added generated in industry and construction represents about 27% of GDP, while in France it is a full ten percentage points less.^[3] Italy and Spain are only slightly more industry-intensive than France, with shares just above 20%. The pro-export nature of the German economy is evidenced by the share of net exports in GDP, which is on average twice as high as that for the second-placed Spain, in turn followed at a slight distance by Italy. France is traditionally a net importer.^[4] While the share of net exports in Germany and France has recently returned to roughly the baseline level after the fluctuations during the COVID and energy crises, and even significantly exceeded it in Spain, in Italy it has not yet reached its pre-COVID level (Chart 3).

Chart 3 – Share of net exports in GDP
(in %)

Source: Eurostat
Note: The latest available data are for 2024 Q1, and for 2023 Q4 for Italy.

The pandemic, which temporarily paralysed world trade, dealt a heavy blow to Germany’s growth model. The supply-chain problems that restricted the supply side of the economy and the turbulent structural shifts in demand for goods and services brought about by the COVID pandemic resulted in a sharp drop in international trade (Chart 4). While the COVID-related drop in trade volumes in the last three years has been more than compensated worldwide, the euro area has lagged significantly behind in this respect. It started catching up a year later, but its trade volume had barely returned to its 2019 baseline in 2021, and it was only in 2022 that volumes increased significantly. Moreover, the effect faded very quickly^[5] As a result, the pro-export Germany suffered much greater damage to its economy compared to France, which is a predominantly importing state. Given that the problems in international trade lasted for a relatively long time, and were accompanied by structural shifts in the global economy that were difficult to predict both in production (whether for operational or protectionist reasons) and in consumption, and the uncertainty of future developments was enormous during the COVID years, it could have been impossible for many industrial plants to adapt to the changes quickly enough or to just wait for such a long time for the turbulence to pass and the view to clear.

Chart 4 – Developments in the volume of world trade
(index 2019 = 100)

Source: World Trade Monitor
Note: The latest available data are for January 2024.

German energy-intensive industry

The subsequent energy crisis attacked the weak spots of German industry. The price of natural gas for supplies to industrial companies increased more than sevenfold between March 2021 and September 2022, while the price of electricity more than tripled in the same period and the price of heating oils doubled, according to the German Federal Statistical Office (Destatis, 2024). Of course, the situation in Germany was far from unique. Energy commodity prices rose much higher in some other European states. In the second half of 2022, final consumers in industry and other sectors of the economy, excluding households, paid about 30% more (after deducting taxes and other fees) for natural gas in Italy than their German counterparts, while in Spain prices were just under 20% higher (Chart 5).

Chart 5 – The price of natural gas for non-households
(EUR/MWh)

Source: Eurostat
Note: Half-yearly data for final consumption outside households (i.e. industry, services, authorities, agriculture, etc.) in consumption band I5 (1–4 PJ). Prices exclude taxes and fees.

However, there has always been energy price heterogeneity in the euro area. The price of natural gas in individual states is strongly affected by their distance from important commodity fields and commodity suppliers. Depending on the available, and possibly preferred, supply alternatives, each economy has its own transport infrastructure for gas imports. As a result, demand for this commodity shows very low short-term price elasticity in most economies. If we focus on natural gas, the difference between its price for companies in Spain and Germany oscillated around 4 EUR/MWh between 2012 and 2020 (Chart 5). Germany has long benefited from lower natural gas prices thanks its imports of cheaper gas from Russia, while it heavily invested in the construction and further expansion of transmission infrastructure for this source (e.g. the Nord Stream gas pipeline system, which is no longer active). In addition, it is also conveniently located to receive supplies of gas extracted by other European states in the North Sea. By contrast, due to its geographical location, Spain covers a major part of the natural gas it consumes through LNG brought in by sea, the price of which has long been higher than that of Russian gas.

The long-term lower energy prices led Germany to develop many energy-intensive industries in previous decades. It was thus taking advantage of a clear competitive advantage in terms of lower production costs to satisfy demand for the final products of these industries from foreign destinations that were not afforded such an advantage. By contrast, Spain and Italy never had an incentive for economic specialisation in this direction. As a result, energy-intensive industries hold a prominent position in the German economy. Industry was still the country’s most important final energy consumer in 2021, accounting for 30% of total energy consumption, i.e. more than households or transport (AG Energiebilanzen e.V., 2023). The chemical industry clearly consumed the most, followed by the production and processing of metals (324 TWh and 254 TWh consumed in 2021, respectively (Destatis, 2024)). The Federal Statistical Office also ranks coking plants and mineral oil processing, and glass and paper production (annual consumption between 70 TWh and 100 TWh) among energy-intensive industries. These five industries have particularly high energy consumption compared to other industrial sectors in relation to their gross value added using the production method.^[6] Natural gas is by far the most important energy source in German industry, accounting for almost a third of industrial energy consumption in 2021 (followed by electricity at 21% and coal at 16%). The chemical industry is primarily dependent on natural gas, using it not only as a source of energy but also as a raw material, e.g. for the production of fertilisers.

Production in German energy-intensive industries started to fall very steeply in 2022, following the sharp increases in energy prices. With the start of sanctions against Russia in March 2022, the rise in natural gas, electricity and oil prices significantly intensified. The pace of the decline in production in energy-intensive industries^[7] was particularly high during the first year of the war, but production volumes fell almost continuously until the end of last year (Chart 6). Thus, production in energy-intensive industries dropped by almost one fifth (18.8%) between February 2022 and December 2023. The most significant slump was in the chemical industry (Chart 7), where a significant part of production suddenly ceased to be price-competitive. Energy-intensive industrial companies were logically hit harder by the sharp rise in energy prices than those in other industries, so the trend in their production was clearly decoupled from that of total industrial production, which fell by only 7% in the same period. Without the significantly negative impact of the energy crisis on a selected part of German industry, total industrial production would have contributed much more significantly to the creation of gross value added in the German economy.

Chart 6 – Industrial production in Germany
(index 2015 = 100, seasonally adjusted, constant prices)

Source: Destatis

Chart 7 – Production in energy-intensive industries
(index 2015 = 100, seasonally adjusted, constant prices)

Source: Destatis
Note: Data for Germany. The petrochemical industry means coking plants and mineral oil processing.

However, the latest data have brought some (almost unexpected) encouragement. Energy prices in Germany have performed an about-face and entered a sharp decline since the hot phase of the energy crisis in Europe subsided at the end of 2022. They reached less than half their maximum levels last spring. For a long time, however, it seemed that this had little effect on the development of production in Germany’s energy-intensive industry. There was concern that the sector might not recover from the shock. The loss of global market shares is not easily repaired. And, for example, the resumption of production at a steelworks or glass furnace after it has been shut down requires considerable fixed costs. However, the continuing, albeit more gradual, fall in energy prices together with the time lag needed for production in heavy industry to adapt to new conditions eventually bore fruit. Energy-intensive industry production started to rise in January this year (Chart 6). It has so far only reached its level of production at the beginning of 2023. This applies to the petrochemical, metal and paper industries (Chart 7). The glass industry is currently lagging behind, while the chemical industry is doing a little better. However, only time will tell how much of the original energy-intensive production in Germany will be restored. Some operations have already ceased to exist in the meantime, and their reopening does not make much economic sense. The future of the German economy already lies elsewhere than in heavy industry.

Other factors favouring the growth of the Romance economies

The German economy differs from the large Romance economies of the euro area in other respects than just its orientation towards industry and exports. Its potentially available sources of economic growth are much more limited than those of France, Italy and Spain. For example, human capital (especially skilled labour) has long been a highly scarce commodity in Germany. This is a basic ingredient in theoretical models of economic growth. How economic development is financed offers another perspective. The southern euro area states are growing much more using debt than Germany, and only time will tell whether this is a wise strategy. If they can invest the borrowed funds appropriately in productivity growth, there is hope that borrowing now will actually pay off in the future. However, if they fail to ensure the efficient use of the funds, the final report card might be disappointing. The solidarity-based redistribution of funds within the European Union, from which, generally speaking, the Romance economies benefit more than the richer Germany, is another chapter.

One of the barriers to German economic growth continues to be the lack of labour. The causes of the record-low unemployment in the euro area, both cyclical and structural, including the heterogeneity of many labour market characteristics in selected euro bloc economies, were discussed in detail in an article in the December issue of Global Economic Outlook (Růžičková, 2023). The situation on the labour markets in the euro area has not changed much since it was prepared. Overall unemployment remains at its historical low (6.4%).^[8] It has been growing slightly in some of its economies in recent months, while in others it is still falling (Chart 8). In Germany, it has increased only marginally so far, from 2.9% in May 2023 to 3.2% in March this year, the latest date for which data are available. The share of unemployed persons in France has risen slightly less since last autumn (currently 7.3%). In Italy, by contrast, unemployment is now at its lowest level since 2008 (6.3%) and is not yet set to reverse the downward trend. Spain is very similar in this regard (11.7%). With the highest share of unsatisfied job seekers, it still has the most room for a further fall of the four economies reviewed.

Chart 8 – Unemployment rate
(in %, seasonally adjusted)

Source: Eurostat.

Another factor significantly supporting economic growth in the southern euro area states is their fiscal policy. The economies of France, Italy and Spain are growing much more using debt than Germany. Their budgetary performance has been much worse over the long term. Their budget deficits as a percentage of GDP have more than double that of Germany over the last few years (Chart 9). However, all four economies have clearly been trying to put their budgets into better order since COVID. Yet while Germany had already complied with the Maastricht 3% standard in 2022, the other three states have not yet done so. Spain is the best performer in terms of these consolidation efforts. In Italy, by contrast, deficits are declining only very unwillingly. In France, the deficit even worsened last year.^[9]  

Chart 9 – State budget deficit/surplus
 (% of GDP)

Source: Eurostat

These consolidation efforts, together with real economic developments, were among the factors leading to the recent fall in long-term interest rates. For example, the surprisingly more positive development of the Italian economy than the German one was reflected in a reduction in the spread between Italian and German government bond yields. For the ten-year maturity, the spread fell to its lowest level since November 2021 (Chart 10). The financial markets were positive not only about the performance of the Italian economy last year and the improvement in the country’s credit rating, but also about the favourable prospects for its growth this year, in particular due to the expected drawdown of EU funds. The structure of the Italian debt was also supported by the issuance of BTP Valore bonds aimed at Italian small savers. In the optimistic scenario, a more sustained reduction in the range could translate into 0.1–0.2 percentage point higher Italian economic growth.^[10]

Chart 10 – 10-year government bond yields
(%, percentage points)

Source: Eurostat
Note: The right-hand scale shows the yield spread between the Italian and German 10-year bonds.

The large euro area economies also differ in how actively they have invested over the past few years. The share of investment to German GDP has been broadly constant since 2018, fluctuating around 21% (Chart 11). Spain is in a similar situation, as this indicator remained close to 20% but fell to around 19% at the end of 2022.^[11] By contrast, the share of investment in French GDP has long been higher than in the first two economies and had been steadily rising until 2022, when it reached more than 25%.^[12] The case of Italy is even more remarkable. Its share of investment in GDP was less than 17% ten years ago, but has been steadily increasing, and its growth rate rose sharply during the coronavirus pandemic. It is thus now roughly at Germany’s level. The absolute value of investment provides a different perspective. While investment grew at a roughly similar rate before COVID in these economies, with Spain clearly standing out in this comparison, since 2020, investment has been broadly flat at constant prices in Germany, France and Spain, but has risen sharply in Italy (Chart 12).

Chart 11 – The share of investment in GDP
(% of GDP)

Source: Eurostat

Chart 12 – Investment developments
(index 2015 = 100, seasonally adjusted, constant prices)

Source: Eurostat

Investment activity has significantly boosted economic growth over the past three years, especially in Italy. The contribution of investment to quarter-on-quarter GDP growth in Italy has been clearly positive throughout this period. It was particularly high in 2021, when it averaged 0.7 percentage point (Chart 13). Investment contributed less significantly to economic performance in Spain and France. And in Germany, the contribution was actually negative approximately every second quarter. Looking at a more detailed breakdown of Italian investment, it is particularly evident that there is an above-proportional contribution of investment in the construction sector (Chart 14). This is related to a specific measure taken by the Italian government (the Superbonus, see Box), which was supposed to help the economy get out of the COVID-induced crisis by supporting the modernisation of buildings.

Chart 13 – Investment contributions to GDP growth
(percentage points; contributions to quarter-on-quarter GDP growth)

Source: Eurostat

Chart 14 – Contributions of Italian investment to GDP growth – breakdown
(percentage points; contributions to quarter-on-quarter GDP growth)

Source: Eurostat.

The convergence of the weaker EU economies to the stronger ones has traditionally been facilitated by the solidarity aspect of the European Union budget. All Member States contribute to it, and the funds collected are then reallocated during the individual multi-annual programming periods with the aim of encouraging the development of territories and reducing inequalities across areas. In terms of accounting, the individual EU economies can be divided into net contributors to the EU budget and net recipients of funds. Germany is by far the largest ‘payer’ into the EU budget. France and Italy, as very advanced economies, are also net payers. Spain, on the other hand, is still a net beneficiary, which is another of the impulses helping it to increase economic growth.

The importance of EU funding has recently grown significantly. In addition to the traditional redistribution of funds collected into the common treasury, the economic development of selected EU Member States is now strongly supported by the post-pandemic recovery plan known as Next Generation EU (NGEU). This aims to help with economic recovery after the COVID-19 pandemic raged in the EU Member States. This is also why it is mainly directed towards states hit particularly hard by the pandemic. Out of the total of EUR 750 billion, around EUR 200 billion is allocated to Italy only (equivalent to around 11% of its GDP). Spain accounts for around EUR 160 billion (14% of GDP). On the other hand, France is only entitled to around EUR 40 billion (2% of GDP) and Germany to less than EUR 30 billion (1% of GDP). The RRF^[13] does not operate on the principle of redistributing its own collected funds, being rather based on funding that the European Commission raises on behalf of the Member States by issuing debt on international capital markets. Part of the RRF funds will be provided to EU Member States in the form of grants and part in the form of loans,^[14] on the basis of submitted National Recovery Plans. Guaranteed loans in particular significantly increase the allocations for the states hit hardest by the pandemic.

However, the individual economies vary considerably in the speed of implementation of projects that qualify for funds from the NGEU recovery plan. France and Italy have already received around 60% of the grant funds to which they are entitled (Graph 15). Spain has already drawn almost half of its funds. However, Germany has so far drawn less than a quarter. Italy also excels in the drawing of guaranteed loans, of which it has already taken about half. Spain, on the other hand, has not even started drawing them. (Germany and France are not eligible for NGEU loans.) Given their huge volume, the funds from the post-pandemic recovery plan are having a significant impact on the economic growth of the supported states. This is already clearly visible in the case of the faster-drawing states, while for the others they represent a medium-term opportunity.

Chart 15 – Allocations and drawdowns from the NGEU recovery plan
(EUR billions)

Source: European Commission
Note: Recovery and Resilience Scoreboard (European Commission, 2024).

The differing economic growth dynamics may also reflect differing consumer behaviour. The individual economies are characterised by differing household preferences. In southern European states, for example, households prefer consumption over savings more than is usual in Central and Western Europe (Chart 16). Regardless of the possible  reasons for this behaviour (such as higher interest rates, lower GDP per capita, younger populations or different socio-cultural roots (“Catholics vs. Protestants”)), this has implications for economic development. While in Germany the saving rate averaged 18% between 2015 and 2019 (while the trend was increasing slightly), in Italy it was only 10% and in Spain even lower. The COVID pandemic led to a sharp rise in the savings rate across states, which was more pronounced in economies with lower previous saving rates. It thus briefly climbed to 30% in Germany and exceeded 20% in Italy. It then decreased gradually again. With the exception of Italy, however, it remains higher than before COVID (the difference is 2 percentage points in Germany and slightly higher in France). This is another of the pro-growth impulses in favour of the Italian and Spanish economies compared to Germany.

Chart 16 – Household savings rate
(in %, seasonally adjusted)

Source: Eurostat

The pandemic also changed household consumption preferences by forcibly shifting part of the demand from services to goods. The gradual increase in the share of services in household final consumption, typical for societies with increasing wealth, which had been evident until then, was interrupted in 2020 by the arrival of the pandemic (Chart 17). Tough anti-COVID measures closed or significantly reduced many service areas, and the sector’s share of household consumption fell sharply. Only France had returned to its pre-COVID level by 2022^[15], although Spain was also very close. In Italy, the share of services in final household consumption exceeded the 2019 level last year. This general catch-up in demand for services brings positive points to economic growth for economies specialising in the export of services. As the pandemic particularly negatively affected specific parts of the services sector, such as hospitality and transport, the return to the status quo has recently mainly benefited the economies exporting these types of services, i.e. Spain and Italy among the large euro area economies. However, it seems that this source of growth could already be exhausted, as visitor numbers have already returned to pre-COVID levels. In addition, last year’s extremely warm summer perhaps made the experience for tourists in southern Europe more negative than positive. After last year’s experience, some of them may head further north this year, something made more likely by the warning reports that the coming La Niña may bring both warmer weather to southern Europe than usual in these places, and in addition it could be very unstable.^[16] Or they will change the timing of their holiday. Tourist numbers in Spain were unprecedented in last year’s fourth quarter and this year’s first (Banco de España, 2024).

Chart 17 – Share of services in final household consumption
(in %)

Source: Eurostat
Note: Classification of household consumption expenditure according to the COICOP. Services are represented by the CP06–CP12 groups.

Conclusion

Over the past two years or so, a split has been observed, perhaps surprising at first glance, between the growth dynamics of the large southern and western economies of the euro area and those of Germany. In a word, the Spanish economy has done well, with its GDP growing steadily at a quarter-on-quarter rate of 0.5%, which is even slightly above estimates of the equilibrium growth rate for this state. Italy has not been doing badly recently either, with its economy developing roughly in line with its long-term usual potential. On the other hand, France clearly lagged well behind its potential in the post-COVID period. The largest economy in the euro area, Germany, is a chapter unto its own. With its persistent economic stagnation, it has clearly stepped out of line and dragged down the results of the entire euro bloc.

The dichotomy of the economic growth rates observed in the aftermath of the pandemic in the euro area reflects a combination of factors, often very specific ones. A large number of these stem directly from, or are a cascading consequence of, the enormous recent shocks of non-economic origin (the COVID-19 pandemic and the war in Ukraine), while others reflect longer-term structural problems. To understand recent developments in the euro area and to forecast developments in the immediate future, it is crucial to correctly identify these specificities, as they are inherently different in terms of their lifespans. Some of the influences are currently fading away and do not need to be taken into account in the future to the same extent as they have been so far (e.g. high energy prices, catching up with previous service consumption levels, or the Italian Superbonus), while others will still gain strength (e.g. the effect of NGEU investments) and all of them will certainly have their other side effects relating to the behaviour of economic agents and their representation in representative democracy.

The dichotomy of euro area growth seems to have decreased in the first half of this year.^[17] The reduction in differences is mostly due to the German economy, which recorded distinctly positive economic growth in Q1 (0.2% quarter on quarter). It probably continued at a similar pace in Q2. In addition to the acceleration of growth in real household income and external demand, which benefit all euro area economies, the release from the acute impacts of the energy crisis is also a significant source of recovery in Germany. By contrast, the other large euro area economies continue to evolve roughly within the story of the past two years described above. In the first half of this year, France apparently retained roughly the same quarter-on-quarter growth rates as in the previous two years (around 0.2%). It still lacks a significant pro-growth stimulus (such as the recovery of energy-intensive industry for Germany, the Superbonus for Italy, or EU funds). The Italian economy accelerated slightly at the beginning of the year (0.3%), but in general it is experiencing the contradictory impacts of many temporary effects. Last year’s benefits from the post-COVID tourism boom probably no longer offer much possibility for expansion, and limiting the level of generosity from the Superbonus is dampening GDP growth, but the economy will continue to benefit from the inflow of investment under the EU’s post-pandemic recovery plan. At the beginning of the year, the Spanish economy repeated the same strong growth as at the end of last year, with strong exports of services being the main source. Forecasts assume that the 0.7% growth rate is no longer sustainable and that the economy is therefore likely to slow slightly in the course of the year, although it will continue to be greatly helped by the drawdown of EU funds. As a result, the dichotomy between the Germanic and Romance parts of the euro area has significantly eased this year and is no longer a thorny issue.

Future developments will depend to a large extent on what the individual economies learn from the COVID and energy-crisis lessons. These shocks have brought to light a number of deeper structural problems that these economies, either all of them without significant differences or only some of them, are facing. Paradoxically, one of the “simpler” ones is the poor condition of the state budgets. This mainly concerns Italy, and to a lesser extent France, yet Spain is guilty to some extent as well. In addition to the acute phase of taming their excessive deficits, the debate is reopening over whether it is necessary to at last achieve balanced finances (or let alone create a reserve for future black swans) or, on the contrary, whether it is necessary to invest using debt for a better future. Population ageing, which receded into the background for a while with the pandemic but has not disappeared, is a heavier-calibre problem. Coping with intensifying climate change, not to mention efforts to slow it down or even avert it, will be an even more difficult obstacle. In addition, the future growth trajectories of the euro area economies will depend on how quickly and efficiently individual states can jump on the wave of technological progress brought about by the current rapid development of artificial intelligence. Given that in Germany there has been a growing general dissatisfaction of economic actors with the proliferating bureaucracy, while other European states are certainly not doing any better, the question is which of the available opportunities the economies can actually use for their development. The growth models that have been touted so far, especially in some large euro area economies, will have to be redefined in the face of (old) new challenges and opportunities. Innovation is key to the future, but these countries do not yet excel in a global comparison.

Written by Pavla Růžičková. The views expressed in this article are those of the author and do not necessarily reflect the official position of the Czech National Bank. The estimate of the impact of the reduction in the spread between Italian and German government bond yields on Italian GDP growth was prepared by Soňa Benecká. Valuable comments on natural gas prices were provided by Jan Hošek and the graphical representation of the data on the recovery plan was prepared by Petr Polák. I thank them all for their sterling work.

Sources

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Banco de España (2024). “Macroeconomic projections and quarterly report on the Spanish economy. June 2024”. 11 June 2024.https://www.bde.es/f/webbe/SES/Secciones/Publicaciones/InformesBoletinesRevistas/BoletinEconomico/24/T2/Files/be2402-ite.pdf

Camera dei deputati (2024): “La dimensione economica del superbonus”. [Online, 11 June 2024]. https://temi.camera.it/leg19/post/la-dimensione-economica-del-superbonus.html

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Vogel, L., Neumann, M., Linz, S. (2023). “Berechnung und Entwicklung des neuen Produktionsindex für energieintensive Industriezweige”. WISTA Wirtschaft und Statistik. Issue 2/2023, p. 39–48. https://www.destatis.de/DE/Methoden/WISTA-Wirtschaft-und-Statistik/2023/02/produktionsindex-energieintensive-industriezweige-022023.pdf?__blob=publicationFile

Keywords

Economic growth, euro area, energy-intensive industry, fiscal policy, investment, NGEU

JEL Classification

O52, Q43, E22

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^[1] At the time this article was being prepared, the latest available data were for 2024 Q1. The average is thus for the last seven available quarters.

^[2] Similarly to Germany, Austria has recently been stagnating. A sharp drop in 2023 Q2 meant that its average growth in the last seven quarters has actually been negative (-0.2%).

^[3] The average for 2019–2024 (the latest available data are for 2024 Q1, and for 2023 Q4 for Italy) is 27.1% for Germany, 22.6% for Italy, 20.3% for Spain and 17.3% for France.

^[4] The average for 2019–2024 (the latest available data are for 2024 Q1, and for 2023 Q4 for Italy) is 4.7% for Germany, 2.3% for Spain, 1.8% for Italy and -2.1% for France.

^[5] The escalating energy crisis in Europe caused by the war in Ukraine played a significant role in this.

^[6] This was 17% in 2021. However, these sectors accounted for 77% of all energy consumption in German industry before the energy crisis (Destatis, 2024).

^[7] The production index for energy-intensive industries is calculated as the weighted average of the industrial production indices for the relevant economic sectors. The weights correspond to the relative gross value added to the cost of the factors of production in the base year of 2015. For more information, see Vogel et al. (2023).

^[8] Data for March 2024. However, as a result of frequent revisions and refinements of the time series, the actual value of the reported historical minimum may vary slightly at any given moment, but usually only by a tenth of a percentage point.

^[9] The evaluation remains qualitatively the same even in the case of deficits in absolute terms.

^[10] We tried to estimate the impact of the current range reduction on Italian GDP growth using the Oxford Economics (OE) model. If the range were to remain at the currently lower values of around 120 basis points until the end of the year, the model indicates it would have an impact of 0.1 percentage point. The expected impact is lower than the Bloomberg analysts’ estimate, according to whose model a range reduction of 40 basis points could add up to 0.2 percentage point to growth in 2024. Due to the different methodologies, the main text provides an estimate of the impact in the form of an interval.

^[11] At that time, the European Central Bank started tightening monetary policy in the most intensive way. The key interest rate increased by 4.5 percentage points between July 2022 and September 2023. The end of the cheap money period led to a deterioration in the return on investment made using debt, and thus to a reduction in investment activity in the euro area.

^[12] It has fallen to around 24% since then.

^[13] Recovery and Resilience Facility.

^[14] Out of a total of EUR 750 billion, EUR 390 billion is for grants and EUR 360 billion for loans.

^[15] The last year for which data for all four countries are available.

^[16] https://www.i-meteo.cz/predpoved-pocasi-pro-leto-2024-ocekavame-vliv-el-nina-na-evropu

^[17] At the time of writing, the latest available GDP data were for the first quarter of 2024.