A few years ago, Cyprus, Portugal, Italy, Spain, and especially Greece were considered the "problematic children" of the EU and the Eurozone. However, much has changed since then. Speaking at the World Economic Forum in Davos, Spanish Prime Minister Pedro Sánchez emphasized this shift, stating: "We in the South can also contribute to solving common problems."

Sánchez highlighted the energy crisis triggered by Russia’s invasion of Ukraine and Spain’s potential to expand clean energy production and exports, positioning itself as a global economic leader.

Despite Southern Europe’s relative economic resilience, the overall situation in the Eurozone remains stagnant. According to Eurostat, the Eurozone’s GDP remained unchanged in the last quarter of 2024, following a modest 0.4% increase in the summer quarter.

Many economists attribute this stagnation to the long-standing weaknesses of Germany, the continent’s largest economy. In 2024, Germany’s GDP shrank by 0.2%, marking a concerning trend for the broader European economy.

With Germany’s economic engine slowing down, could the once struggling Southern European nations take the lead in the Eurozone?

According to Gabriel Felbermayr, director of the Austrian Institute of Economic Research (WIFO), this scenario is unlikely. He argues that these countries are too small to assume leadership, noting that Germany and France alone account for over 50% of the Eurozone’s GDP.

Additionally, industrial powerhouses such as Austria, Slovenia, Slovakia, and the Netherlands—along with non-Euro EU members like the Czech Republic—remain heavily dependent on Germany’s industrial core and are also affected by its slowdown.

So why is Southern Europe growing faster than its Northern counterparts?

According to Hans-Werner Sinn, former head of Germany’s Ifo Institute, this shift is due to both external factors and key policy decisions. He argues that Germany has been significantly affected by the energy crisis caused by the war in Ukraine and dwindling energy reserves.

Sinn criticizes the EU and Germany’s aggressive transition away from fossil fuels, claiming it has led to the world’s highest electricity prices, which have severely impacted key sectors such as chemicals and automotive manufacturing.

Similarly, Felbermayr notes that Southern Europe’s economy is less reliant on energy-intensive industries, focusing more on tourism and agriculture. As a result, high energy prices, trade wars, and the transition away from fossil fuels have had a smaller impact on Southern economies compared to Northern ones.

Southern Europe also benefits from lower inflation rates since 2010, which has boosted competitiveness. The structural reforms implemented during the Euro crisis have paid off for Cyprus, Greece, Spain, and Portugal, allowing them to recover more robustly than expected.

However, new challenges are emerging. U.S. President Donald Trump has threatened to impose high tariffs, which could further damage Germany’s already export-dependent economy if he is re-elected.

Sebastian Dullien, director of the IMK Institute for Macroeconomic and Business Cycle Research, told Reuters that there are no clear signs of a German economic recovery. He points to China’s increasingly aggressive industrial policies and high European Central Bank interest rates, which have slowed investment.

German Economy Minister Robert Habeck, speaking at Davos, admitted that the country is facing a structural crisis rather than a short-term slowdown, emphasizing the need to redefine its economic model.

The European Commission expects modest economic growth of 1.3% in the Eurozone in 2025, with the ECB likely to implement gradual interest rate cuts.

Felbermayr argues that the North-South economic balance is cyclical—sometimes led by the industrial North, and at other times by the service-driven South, similar to regional economic shifts in the U.S.

The key to stability, he suggests, lies in boosting competitiveness in the North without allowing the South to fall behind. Additionally, strengthening the internal market will be crucial to balancing regional economic disparities within the EU.