Record-high tourism activity has been a major driver of the Mediterranean recovery, while core European countries such as Germany have been more exposed to the downturn in manufacturing. Resilient labor markets saw increased employment and recovering productivity per hour worked, which contributed to the solid economic performance. In addition, our estimates suggest that NGEU funds have contributed 1.0 and 1.2pp to growth from 2021 to 2024 in Italy and Spain, respectively, and we expect a similar impact for Portugal and Greece, both of which have already received more than 50% of the funds. Interestingly, although Spain has seen a strong recovery, the positive spillovers from NGEU have not yet translated into a greater investment activity. Looking ahead, we expect the growth gap between Southern and core European economies to narrow further as the longer-term effects of the NGEU program take hold, while the initial boost from investment spending begins to fade towards the end of the program.
What to Watch
February 2025
Summary
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In summary:
Eurozone: What are the reasons behind Southern Europe's remontada
German elections: The budget math is not mathing
The Bayrou government managed to push through a watered down 2025 draft budget bill and escape a no-confidence motion. But the surviving budget leaves out several spending cuts and skews heavily towards tax hikes (EUR18bn) – including the surtax on domestic turnovers of companies (albeit only for 2025) and a minimum income tax rate of 20% for high-income households. The former should have a limited impact on traded French corporates (-2.1% median decline in income growth) as most large companies generate 70% of their turnover abroad. Volatility in French bond markets may rise in Q4 2025 as political deadlock may resurface during the preparation of the 2026 budget. New legislative elections are likely by then. To consolidate its finances while preserving medium-term growth, France should focus on targeted spending cuts and significantly lower taxation on labor, besides tackling excessive state pension spending.
US reciprocal tariffs: An eye for an eye?
The US “Reciprocal Trade and Tariffs” risk raising the US global effective tariff rate by another +13pps, of which +8pps are due to the differential in value-added tax rates, +3pps to make up for the imbalance in non-tariff measures and +2pps for the differential in tariff rates. This would mean further tariff hikes of +12pps on China and +13pps on the EU, bringing us closer to our “full-fledged trade war” scenario where GDP growth would be chopped by -0.7pp in China and -0.8pp in the EU by 2026. Specific products and sectors could be caught in the crossfire, such as autos, pharmaceuticals and chips. Argentina, India, Brazil, Chile and Kenya would be hit the hardest, with tariff hikes ranging from +23pps to +34pps. Taiwan, the UAE, Switzerland and Singapore would be the least affected (between c.+1pp and +5pps). While some trade partners may have until April to provide concessions and try to strike deals with President Trump, others may not be so lucky and will likely retaliate against the US.
Authors
Françoise Huang
Allianz Trade
Allianz Trade
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