The extra interest Italy and Spain must pay to borrow, relative to Germany, has fallen to its lowest level in about 16 years — a shift that is eroding the long-standing divide between the eurozone’s “core” and its once-risky “periphery.”
What has changed
The gap between 10-year Italian government bond yields and German Bunds — a closely watched gauge of perceived lending risk — narrowed to around 0.7 percentage points, the lowest since late 2009. Spain’s 10-year spread over Germany fell below 0.5 percentage points, its tightest since before the eurozone crisis. Investors, in effect, are rewarding Rome and Madrid for fiscal discipline while growing more wary of rising debt elsewhere in the bloc.
A reversal of the old hierarchy
Fund managers have increasingly argued that it no longer makes sense to label Italy and Spain as the eurozone’s periphery. At the same time, a large budget deficit and political turmoil in France — traditionally viewed as one of the bloc’s safer economies — have pushed its borrowing costs above Spain’s, and even Germany has faced some reassessment amid plans for heavy spending. As one Vanguard strategist put it, markets have long memories but are willing to “turn the page” when given the right incentive. Rating agencies including S&P estimate French debt could approach 120% of GDP in the coming years.
Spain’s growth, Italy’s discipline
Spain has been among the fastest-growing major advanced economies, with the IMF projecting GDP growth of about 2.9% for 2025, helped by immigration, tourism, lower energy costs and EU funds. Rising revenues are expected to narrow its deficit from 3.2% of GDP in 2024 toward 2.5%, according to Bank of Spain forecasts. Italy’s economy is far more sluggish, with growth projected below 1% until at least 2027, but investors have responded well to the government’s commitment to deficit control: Italy expects its deficit to fall from 7.2% in 2023 toward around 3% in 2025, potentially exiting the EU’s excessive-deficit procedure sooner than expected.
A different regime
In absolute terms, borrowing is not cheap: Italian and Spanish yields have risen to roughly 3.5% and 3.3% respectively, well above the ultra-low-rate era around the pandemic. But trading close to peers long considered safe marks what one analyst at BNP Paribas Asset Management described as “a very different regime” — potentially opening these markets to a wider pool of global buyers, including cautious central-bank reserve managers.
Limitations and what to watch
Bond spreads move constantly, so the figures here are a snapshot rather than a fixed state, and the trend could reverse if inflation, growth or politics shift — in Italy, France or Germany. The narrative of “periphery” convergence rests partly on France’s difficulties as much as on southern-European strength, so it reflects relative rather than absolute improvement. Forecasts for growth, deficits and debt ratios come from bodies such as the IMF, the Bank of Spain and rating agencies and are subject to revision. This article is informational and not investment advice; anyone acting on bond-market moves should consult current market data and a qualified professional.
