The Palm Economy

Ibiza is better known for dance music than diplomacy. But last February, the breezy and bohemian Mediterranean island was the site of an important meeting between Spanish Prime Minister José Luis Rodríguez Zapatero, and Italian Prime Minister Romano Prodi. Nobody knows exactly what they discussed that day under the palms. But since then, economic ties between the two countries have been getting plenty of ink. This past spring, the Italian power company Enel helped its counterpart in Spain, Endesa, defeat an unsolicited German buyout bid. Spain's largest telecom, Telefónica, has bought a 10 percent stake in Italy's Telecom Italia. A few weeks ago, Italy's biggest bank, UniCredit, bought into Spain's number-four player. A number of other such deals are being discussed among not only banks but big-infrastructure companies. It could, wrote the Italian brokerage firm Euromobiliare in a note dated Feb. 28, "be the beginning of a series of such negotiations between Spain and Italy."

Europe has its historic Franco-German political and economic alliance. Now it also has what might be called the Palm Economy. Spain and Italy, already social and political cousins with strong economic links and a similar business culture, are thinking bigger. At a time when Germany is surging ahead as Europe's growth engine, incoming French President Nicolas Sarkozy is raising hopes of a Gallic rebound, Paris and Berlin are working more closely to relaunch Europe's political integration and there is new talk of a cozier three-way friendship among France, Germany and Britain, it's clear why Italy and Spain don't want to be left in the dust.

There is certainly reason for concern. Spain's economy is relatively fast-growing, but it's small compared with Europe's Big Three; Italy, meanwhile, continues to be a laggard on both growth and reform. The biggest companies in either nation are dwarfed by regional competitors—Spain has only three of the world's largest 100 companies, and Italy four, while France has eight and Germany 10. If they don't reach critical mass quickly, Italian and Spanish companies know they'll be targets as European mergers and acquisitions continue to grow—hence, a series of new partnerships between them. "Italy and Spain are seeking to enhance their role alongside France and Germany," says Gualtiero Tamburini, chairman of Nomisma, a Bologna-based think tank founded by Prodi.

The economic ties are already tight—Spain is Italy's third largest commercial partner, and import-export trade soared from $25.7 billion in 2003 to $29.7 billion in 2005. A number of Italian media groups, like Silvio Berlusconi's Mediaset, and the publisher Rizzoli, have a strong presence in Spain, which owes its EU membership in large part to Italy's support of its bid back in 1986. Culturally, the pair are alike, sharing religion, similar languages and a laid-back attitude.

They also share certain bad habits—politics is fairly intrusive in both countries, and some onlookers wonder if the spate of recent deals is more reflective of political wagon-circling than a desire for greater competitiveness. Germany's Eon, one of the world leaders in power, had been trying for months to acquire Endesa, but the Spanish government had balked, saying that Eon's approach wasn't "friendly" enough. Madrid pushed instead for a deal with Enel (30 percent controlled by the Italian government), which, in the words of Spanish Industry Minister Joan Clos, "allows Endesa to keep its headquarters in Spain." Brussels is now suing Madrid over the conditions set on the Eon offer.

Likewise, Spain's Telefónica was able to buy a share of Telecom Italia with Italian partners after the U.S. giant AT&T made a bid for it with a Mexican partner, América Móvil. Daniel Gros, director of the Brussels-based Center for European Policy Studies, sums up much of the outsider view: "These are moves between institutions that want to defend themselves from raiders."

It's no surprise that both Zapatero and Prodi are playing down the existence of any official Palm Economics, though Prodi has admitted to discussing joint efforts in energy markets with his Spanish counterpart. When asked recently about his country's openness to all foreign investment, he responded defensively: "I wish that people would finally start to distinguish propaganda from facts. We are much more open than most other European countries, and I am proud of that."

While there's little doubt that Italy and Spain are creating a political axis based on reciprocity, the countries have some legitimate reasons to team up. A proposed $33 billion partnership between Autostrade, which controls Italy's highways, and Abertis, a Spanish infrastructure company, could create the world's largest investor-owned toll operator. The Telefónica-Telecom Italia merger leverages the two countries' historic strengths in South America—the Spanish firm leads in Brazil, and the Italian deal will give it extra clout in Argentina, Bolivia and Cuba. It will also block efforts by rival América Móvil to gain ground in the region.

Likewise, analysts look forward to more mergers in the banking sector, which is due for consolidation. Aside from UniCredit, which purchased a stake in Spain's Banco Sabadell, likely players include the Spanish giant Santander, which has its eye on Italy's Antonveneta. Of course, banks in both countries could and should also be acquired by other Continental or non-European firms (Santander itself merged with Britain's Abbey National a couple of years back). The Palm Economy may have its advantages—but in the end, it will always be trumped by the global economy.