Stock Market Insights: Europe’s debt shift, why southern economies are rising as northern nations struggle

Dr. Richard Baker, AIF®, is the CEO and executive wealth advisor at Fervent Wealth Management.

It has been just over a year since I saw the role reversal with my dad. During his last few days on earth, I was the medical power of attorney to the man I had always sought advice from. The older I get, the more I see role reversals. Right now, I’m watching one take place in Europe’s economies.

There is wisdom in having international holdings in your portfolio. It gives you diversification because global stocks and other governments are not in lockstep with the U.S. That being said, we are seeing a significant shift in European countries, which is impacting our investment approach. The usually weaker southern countries are beginning to look better than the long-time outperforming northern countries.

Europe is starting to have another debt crisis. Back in the early 2010s, it was the southern European countries that were the problem children. The countries of Portugal, Italy, Greece and Spain had huge debts and couldn’t get their spending under control. In a strange role reversal, those countries are growing while Europe's popular northern countries are now the problem. Countries like France and the UK have rising budget deficits and debt, and even the frugal countries like Germany and the Netherlands are taking on debt.

The southern European countries, whose shaky economies nearly broke apart the EU, made a course correction. They got their budgets in check, and instead of running huge deficits like before, they are now paying down their debt levels. Furthermore, Spain was one of the fastest-growing economies in the developed world in 2024, growing at a rate of 3.5%, while Portugal and Greece are both growing at around 2%. This is because when the EU was bailing them out, countries like Greece, Spain and Portugal were forced to make some difficult budgetary decisions, such as raising retirement ages, slashing bureaucracy and overhauling labor laws.

However, Europe's northern countries didn’t take their own advice and are beginning to struggle because they can’t get their welfare spending under control, and their populations are aging. France is expected to have a budget deficit of over 5% of its GDP this year, compared to just 2% before the pandemic, while the UK, Austria and Belgium are projected to go above 4%. There are only two ways to fix this: reduce spending or raise taxes, and neither option is politically popular. France’s Macron tried to raise the pension age, and the UK’s Starmer tried to reduce some disability benefits, and both have seen a political blowback.

Germany, the European golden child that has been the EU’s financial engine, is starting to see its economy, which is fueled by manufacturing, big exports and free trade, falter. It has been hit hard by U.S. tariffs, as well as competition from China. Volkswagen and other German automakers are being hurt by cheap Chinese cars. They have also watched their energy prices skyrocket because of Russia's invasion of Ukraine, which greatly harms its industrial sectors. They don’t like to admit it, but one of the biggest reasons Europe's manufacturers were relatively competitive was because of cheap Russian energy, which is no longer available. It is too soon to know how these latest European struggles will affect the global developed market sector. The drop in the U.S. dollar pumped some life into this sector this year, but it might be disguising bigger troubles. The last time this region had a debt crisis, it led to global risk aversion and negative returns. This should be watched closely, which is why it pays to have active investment management.

Making difficult decisions for my dad changed me, but also gave me some peace. The last thing he said to me was “thank you” when I stopped the medical team from doing a painful but unnecessary thing to him. He couldn’t speak, but he mouthed it to me, and I now know that the last thing he thought about me was that I was taking care of him. Hopefully, European governments will look beyond the short-sightedness of public opinion and take the necessary steps to care for their countries for decades to come.

Have a blessed week!

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Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.