Europe’s economies will diverge in new ways

For the past decade or so, economic fortune favoured Europe’s north. The Scandinavian countries, plus Germany, Poland and even Britain, all boasted decent growth and employment. The south, by contrast, was hit first by the euro crisis in 2010-12 and the subsequent painful adjustment, and then by the pandemic, which hurt its tourism-heavy economies more than most. As Europe faces new challenges such as climate change and geopolitical upheaval, its countries’ economic fortunes are diverging in new ways that will start to become visible in 2024.

Start with climate change. Europe aims to become the first carbon-neutral continent. For that to happen, it needs to make its electricity supplies carbon-free, then revamp industry, heating and transport to run on green energy. It is a tall order. For some, this green transformation may boost growth, as investment increases demand and geography creates opportunities. Places with lots of renewable-energy potential, like those along the windy coast of the North Sea or in practically all of sunny Spain, may see a green boost to growth.

But legacy industries will struggle. Processes such as cement- or steelmaking use fossil energy that is hard to replace cheaply with green energy. On the global market where such products are traded, other producers will have much lower energy costs than European ones, because they either have natural gas today or will enjoy abundant green electricity and hydrogen tomorrow. In heavy industry, Germany is Europe’s largest energy user, consuming around twice as much as the next largest, Italy and France.

The car industry, too, faces new competition as combustion-engine cars are phased out and electric vehicles (evs) take over the market. The EU’s recently announced probe into China’s subsidies to its EV industry shows how nervous Europe is about this new competitor. Countries with big car industries—the Czech Republic, France, Germany, Slovakia and Spain—stand to suffer as a result.

Next up is demography. Already, companies across Europe are struggling to find enough workers. The vacancy rate, the ratio of how many vacancies there are to the total number of jobs in the economy, exceeded 4% in Austria, Germany and the Netherlands in the second quarter of 2023 (the euro-zone average was just above 1% a decade ago). And each year, large cohorts from the baby-boom generation enter retirement. The euro zone has 23m people aged 60-64, but only 18m aged 15-19. Among the big countries, the gap is largest in Germany, Italy and Poland. There is hardly any gap in France or Scandinavia, and just a small one in Belgium and the Netherlands.

Not all European countries can compensate for the shortfall with increased migration. The war in Ukraine forced many people to flee westward, giving the Czech, German and Polish economies a new source of workers. In 2024, immigration will dominate the political debate again, as labour shortage intensifies, more Ukrainians decide to return home and migrants from outside Europe continue to arrive on its shores.

Finally, the growing geopolitical rivalry between America and China—and, by extension, democracies and autocracies—will have economic repercussions across Europe. Countries with strong trade links to autocracies may see their supply chains disrupted, or find themselves subjected to economic retaliation. Germany and Italy have already been through one such shock, namely Russia’s attempted blackmail with gas supplies. They, along with a few eastern European economies such as Poland, trade intensively with autocracies, unlike, say, France or Sweden. The EU, which aims to make economies converge, has seen divergence before. But the new kinds that will hit the continent in 2024 will be much harder to manage. ■

Christian OdendahL, European economics editor, The Economist