Not long ago, Spain and Italy were the EU’s cautionary tales — debt-laden economies trapped by austerity, unemployment and political dysfunction. Today the picture looks strikingly different. Both countries have outpaced the EU average in economic growth for three consecutive years, bond spreads have narrowed, and investors who once fled southern Europe are quietly returning. The turnaround is real. So what actually changed?
The numbers first
Spain’s GDP grew by 3.1% in 2025, the fastest in the G7 and well above the eurozone average of 1.4%. Italy posted 1.9% — its strongest sustained run since the early 2000s. Spanish unemployment has fallen below 10% for the first time since 2008. Italian youth unemployment, once a structural wound above 30%, has dropped to 18.4%: still high, but moving meaningfully in the right direction.
Three factors driving the recovery
Dr. Isabella Genovesi, senior economist at the Rome-based think tank Istituto Bruno Leoni, identifies converging drivers. “First, the Next Generation EU funds arrived at exactly the right moment — both economies had the project pipelines and institutional capacity to deploy capital quickly,” she explains. “Second, post-pandemic tourism has been transformational in ways that go well beyond hospitality revenue. Third, labour market reforms that faced fierce resistance when introduced are now visibly paying off.”
In Spain, the 2022 labour reform that dramatically reduced temporary contracts in favour of permanent employment initially met fierce business opposition. Employers warned it would destroy flexibility. Instead, the proportion of workers on permanent contracts rose from 57% to 74% within three years, providing income stability that supported consumer spending and reduced social transfer costs simultaneously.
Italy’s story is more structural. The Draghi-era reforms implemented in exchange for EU recovery fund access modernised the judicial system and streamlined public administration — reducing the bureaucratic friction that had for decades deterred foreign direct investment. “Italy’s problem was never a lack of talent or ideas,” says Marco Caruso, head of fixed income at Mediobanca in Milan. “It was the cost and unpredictability of doing business. That is measurably better now.”
The tourism engine and its limits
Southern Europe has also benefited from the reconfiguration of global travel flows. Instability in parts of the Middle East and North Africa has redirected visitors toward Mediterranean alternatives. Spain welcomed a record 94 million tourists in 2025. Italy’s cultural and heritage tourism has seen similar tailwinds, with visitors from India and South Korea arriving in unprecedented numbers as their middle classes expand their travel horizons.
Risks worth watching
Neither economy is without vulnerability. Spain’s housing affordability crisis — a theme running across European capitals from Berlin to Lisbon, as we examined in depth this week — risks stoking political instability and suppressing the domestic consumption that has driven recent growth. Italy’s public debt at around 137% of GDP remains the eurozone’s highest after Greece, leaving limited fiscal headroom if growth moderates.
Coalition politics in both countries also warrants attention. As Germany’s ongoing coalition tensions demonstrate, even economically significant EU members can find their European influence curtailed by domestic political fragility. For now, though, southern Europe’s comeback is real, data-backed, and reshaping who holds weight within the EU. Berlin and Paris are noticing.
