There seems to be no end to gloomy headlines about the European Union's economic outlook. The bloc’s two largest economies, France and Germany, are in a dreadful state and politically adrift. Growth forecasts are shaky. The European Central Bank is sending out debt crisis vibes like it’s 2010 again.
Meanwhile, the United States is surging ahead and threatens to drag the EU into a trade war when Donald Trump returns to the White House in January. Cheaper and more attractive electric vehicles from China are putting additional pressure on the bloc's legacy auto industry — a major driver of the single market.
The EU looks like it’s getting squeezed from every side, with no clear formula to push back.
Then there is Spain. The eurozone’s fourth-largest economy is currently among the few rays of sunshine, on track to beat every other major economy this year on growth. At 2.9%, according to the International Monetary Fund, it edges out even the US at 2.8%. The forecast for 2025 is also strong — clocking in at 2.1% to America’s 2.2%, and way ahead of Germany’s paltry 0.8%. Spain’s predicted performance is about double the eurozone’s average.
Spain is the only big EU member where the far right is largely in check and the centre-left party in power is governing from a more traditional centre-left position. That means, in part, using public spending to boost the economy at a time other EU members are looking at cuts.
It marks a dramatic turnaround for a country that has struggled for much of this century. That, in turn, is a consequence of a major shift in how the EU has responded to economic crises.
Following the financial crisis in the early 2010s, heavily indebted countries like Spain were forced into painful austerity. When the COVID-19 pandemic hit a decade later, the EU showed a more generous side, pooling funds and doling them out to members in need.
“When it comes to EU funds, it is not a given that a country will use them well,” Alexander Kritikos, the head of the entrepreneurship research group at the German Institute for Economic Research (DIW), in Berlin, told The Parliament. “Spain has actually used them to invest in infrastructure.”
That, he said, is starting to pay off.
Spanish growth — with caveats
The money comes out of the EU's €800-billion post-pandemic recovery program, known as NextGenerationEU. It marks the first time the bloc raised debt collectively to address a common problem — a tool long rejected by richer and more fiscally conservative countries, such as Germany.
Spain is set to receive about €163 billion, according to its most recent recovery plan.
While acute crises have passed, the EU finds itself in a weakened state to face mounting challenges. Defence, global competition, and the twin transitions of energy and digital are big-ticket items that require substantial financial support to succeed. That has many policymakers and economists eyeing the pandemic recovery response as a template for funding other common goals.
The viability of more public spending, especially built on joint debt, as a policy solution is likely to be the subject of fierce debate during the next mandate. Fiscally conservative members, such as Germany with its “fetish” for balanced budgets, Kritikos said, would prefer it to remain the exception rather than the rule. “There is already a panic that what I would call ‘southern European conditions’ could take hold,” he said. “So, we have a classic north-south conflict.”
Spain's public spending and growing immigrant population, which are helping drive its macroeconomic comeback, buck efforts elsewhere in the bloc to curtail both. They don't come without their critics, of course, who have said the former is unsustainable — given Spain's relatively high public debt — and the latter often fills jobs in less productive sectors.
Another economic driver, tourism, can fluctuate and brings a host of societal and ecological consequences.
EU growth amid Franco-German slump
Yet the counterpoint to Spain's formula is hardly problem-free. Germany's strict spending rules have curtailed investment in areas such as infrastructure and education — and hastened the breakup of the three-party coalition. In France, looming budget reforms threaten to do the same to President Emmanuel Macron's already fragile minority government.
The sputtering of the EU's traditional twin motor leaves the bloc at a crossroads, as it heads into its next five-year mandate that is shaping up to be a turbulent one. An unpredictable transatlantic relationship, a bleak outlook for Ukraine and an emboldened far right that challenges pro-EU assumptions add to the economic concerns.
"You can't compensate for the political deficit in France and Germany with either central and eastern Europe or in Brussels. And that's a major problem,” Mujtaba Rahman, the managing director of the Europe portfolio at the consultancy, Eurasia Group, told The Parliament. “Part of the reason it's hard for Europe to organise a response to these challenges is because these are precisely the areas that define what it means to be a nation state.”
Draghi to the rescue?
That is a paradox with which the EU has long wrestled. Its latest effort to overcome it is Mario Draghi’s competitiveness report, published in September, which calls for more investment, a stronger single market and streamlining regulation.
Yet the EU’s fiscal noose around the necks of most member states, Rahman said, means Draghi’s policy prescriptions will require “creating more resources at the European level."
The EU’s next long-term budget, he added, is the most likely place to come up with the kind of fiscal flexibility required to make the Draghi report more than words on a page.
The current fiscal framework aims to keep member state budget deficits below 3% and public debt below 60% of GDP. Countries like Germany would like that to be stricter, while those like Spain might prefer more wiggle room. Either way, most EU members are well above those ranges.
Given the opposing viewpoints, the “European Commission is almost like in the middle,” Lucio Pench, a non-resident fellow at Bruegel, a Brussels-based economics think tank, told The Parliament.
"I take the German point that the moment you begin with exceptions, politics being what they are, you risk ending up with the exception becoming the rule,” Pench, who helped make those fiscal rules for the Commission, said. “What I would say: Think better about your rule.”
Areas of investment with clearer profit potential, such as tech, could get by mostly on private sources of capital — Pench pointed to the gargantuan sums that US companies have plowed into AI.
Other endeavours, such as defence and infrastructure, may need the more visible helping hand of the state.
The result may be what the EU is known for — striking a compromise among 27 prescriptions for the same diagnosis. To reach it, Pench said the Commission may lean on the Draghi report as a kind of "bible.”
Like a religious text, it could serve as a source of clarity and assurance, but it also means, he added, that “you can always find something that confirms your interpretation.”