Italy has taken the heat from Spain as the most troubled big economy at the heart of the eurozone crisis.
The premium Italy’s government is paying to borrow remains far higher than that Spain’s government is paying, and market chatter continues to focus on the Italians and not the Spanish.
Both countries stand to suffer in the ongoing crisis—and the furor around Spain could heat up again if we see a renewed bout of cynicism—but there are lots of good reasons to bet that Spain will be better off than Italy:
- Spain’s problems are much more like Ireland’s; both countries have been suffering from a banking crisis spurred by the bursting of a housing bubble. The sovereign debt problem in Ireland only set in after the government absorbed banks’ toxic loans, and Ireland has been the only country regularly lauded by EU officials for making progress towards solving its problems.
- Italy looks a lot like Greece. If you hadn’t noticed, Greece’s financial outlook isn’t looking pretty these days.
- Spain’s new Partido Popular-dominated government is (by all appearances) speedily stepping up to the plate to tackle Spain’s problems, enacting emergency measures to stay in line with deficit goals and allegedly even exploring more drastic measures to address the crisis. Not a cure-all, but it suggests real progress.
- After the ousting of Silvio Berlusconi, new Italian PM Mario Monti has struggled to get approval for the austerity measures that will bring down the country’s sky high levels of sovereign debt. Reuters also reports that 55% of Italians no longer have confidence in the euro.
The nature of these similarities implies a distinction between Italy and Spain’s response to the crisis, but fundamental differences in just why each country is here in the first place.
In particular, differences in political willingness to respond to crisis challenges suggest that problems are cultural, not just economic. Italians have accustomed themselves to spending that they cannot pay for—a structural flaw with their economy with grim economic prospects. In the decade leading up to the financial crisis, Italian GDP growth topped 2% per year just twice.
Spain’s economy, on the other hand, was regularly growing at a rate of over 3.5% for the same period. Spain may have its own problems—particularly with unemployment and immigration—but by all appearances its economy remains healthier than Italy’s.
Even so, the fickleness in investor sentiment and renewed or relieving pressures on the European banking system could reverse these speculative preferences.