Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How Spain Is Reshaping the Eurozone North-South Divide
Transcript
- Lucas: Spain's economy is pulling away from the pack again. Over the last five days alone, the ETF tracking Spanish equities is up more than two percent, while the fund for German stocks is up roughly half that. And if you look at the macro data, it's the same story — Spain has been outpacing the big northern economies for the past year. Luna: That's a pretty stark divergence. What's driving it this time — is it just tourism bouncing back, or something more structural? Lucas: It's both, but the structural piece is the one that matters for the long run. And that's exactly the kind of analysis we're able to keep doing because of listener support. If following along has made something click, you can help keep this ad-free at buy me a coffee dot com slash fexingo. Luna: Yeah, it really does help keep the lights on. So back to Spain — what's changed structurally? Lucas: Since the pandemic, Spain pushed through a series of labour reforms that made the job market more flexible — easier to hire on permanent contracts, less reliance on temp work. Add in a tourism rebound that's smashed pre-2019 records, and you've got a services-driven boom that's pushing growth above two percent annualised — the eurozone just printed 2.1 percent real GDP growth. Luna: Right, but Germany's stuck. Their manufacturing PMI has been in contraction territory for months. Is the export machine just stalling? Lucas: Exactly. Germany is heavily exposed to Chinese demand, and with import prices from China hitting their highest since 2008 — that's a direct squeeze on margins. Plus the new US tariff threats are a headwind for German carmakers and machinery exporters. Spain, on the other hand, is less export-dependent and more service-oriented. Luna: So the ECB is in a tough spot. How do you set one interest rate for a Spain growing at 3% and a Germany growing at maybe 0.5%? Lucas: That's the million-dollar question. The ECB has been cautious — they don't want to choke off Spain's recovery, but they also can't ignore that services inflation in the south is stickier. Look at Spain: services prices are up around 4% year-over-year, partly because of strong domestic demand. Luna: And if they hike rates, it hurts Germany's already weak industrial sector even more because borrowing costs rise. But if they hold steady, they risk letting inflation fester in the south. Lucas: Precisely. This is the classic one-size-fits-all dilemma. And it's why you're starting to hear more calls for differentiated policy tools — things like targeted fiscal support or even a separate facility for the south. Luna: But isn't that politically explosive? Germany would have to underwrite it, and the narrative of 'frugal north versus spendthrift south' still carries weight. Lucas: It does. But the data is shifting the conversation. Spain's debt to gdp is actually falling faster than Germany's. They've been running primary surpluses. So the old stereotypes don't hold like they used to. Luna: What does that mean for investors? The Spanish ETF is already pricing in optimism, but is the rally sustainable? Lucas: The valuation case is interesting. Spanish stocks trade at a discount to the eurozone average — the price to earnings ratio is around 11, compared to 14 for the overall eurozone. If the structural reforms continue, that gap could narrow. But there is risk: a global recession would hit tourism hard, and Spain is still vulnerable to energy price shocks. Luna: Energy prices are actually moderating. The trade-weighted dollar is down a bit, and the euro is holding at $1.14. That helps import costs. Lucas: It does. A weaker dollar takes the edge off commodity prices, which benefits energy importers like Spain and Italy. Meanwhile, stronger-currency economies like Germany don't get the same import relief because they're more focused on manufactured exports. Luna: So the currency is actually worsening the divergence? A stable euro helps the south more than the north right now. Lucas: That's a good way to put it. And it ties into the broader story: the eurozone is experiencing a realignment. The old idea that Germany lifts the rest is being replaced by a more nuanced picture where different countries have different engines. Luna: What about the ECB's latest meeting? Do you expect them to signal a pause or a cut? Lucas: Given the GDP growth of 2.1% and sticky services inflation in the south, they'll likely hold rates steady and continue to stress data dependence. Markets are pricing in a cut sometime in early 2027, but that could shift if wage data stays hot. Luna: Wages are the wild card. If Spanish wages keep rising at 4-5%, that feeds into services inflation and makes the ECB's job harder. Lucas: Exactly. The ECB will be watching the negotiated wage index closely. Right now, it's running at about 4% across the eurozone, but with wide dispersion. Countries with tighter labour markets — Spain, Portugal, Greece — are seeing higher wage growth, which could justify a more cautious stance. Luna: And that dispersion is exactly why the old north-south divide is becoming a policy challenge, not just a curiosity. Lucas: Right. And it's not just about growth rates — it's about the transmission of monetary policy. The ECB's rate hikes cool demand more in high-debt, floating-rate economies like Spain than in Germany, where most mortgages are fixed. So the same rate has asymmetric effects. Luna: So the ECB is effectively running two different policy stances without meaning to. Lucas: That's the risk. And it's why some economists are reviving the idea of a make-up policy — letting inflation run above target in the north if it means avoiding a recession in the south. But that's a hard sell politically. Luna: Let's bring it back to Spain. If its outperformance continues, what does that mean for the broader eurozone narrative? Does Spain become a new growth anchor? Lucas: It could. Spain's economy is now larger than it was pre-pandemic in real terms, while Germany's is still below. The services sector — tourism, tech services, renewable energy — is thriving. Spain is also a leader in solar, which is pulling down electricity costs and attracting investment. Luna: And the recent renewable energy auctions have been heavily oversubscribed. That's a structural advantage that Germany can't match as quickly because of its industrial energy intensity. Lucas: Exactly. So over the next two to three years, we could see Spain's growth premium persist. But it's not risk-free — if tourism takes a hit from geopolitical tensions or a global slowdown, the divergence would narrow fast. Luna: Still, for now, the data says Spain is the one to watch. The ETF numbers and the macro stats both point in the same direction. Lucas: And that's what makes this episode timely. The north-south divide is no longer an academic concept — it's actively shaping investment decisions, policy debates, and the future of the eurozone. We'll be tracking it closely.