The Palm Economy; They already share sun, long lunches and religion --now Italy and Spain are looking to do more business together, too.

Byline: Jacopo Barigazzi

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 Jose Luis Rodriguez 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, Telefonica, 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, ...