Spain turned to markets and less government after the financial crisis, while Italy went in the other direction

See Why Italy Is Flirting with Euro Exit and Spain Isn’t: Spain suffered far more than Italy during the euro crisis, but the major Spanish parties are committed to staying in the common currency by Greg Ip of The WSJ. Excerpt:

"Both Spain and Italy had a history of high inflation and currency devaluation to keep their exports competitive, which forced them to pay more to borrow. Once they joined the euro, that penalty disappeared and both saw bond yields drop to German levels.

In Spain, like in Ireland, that sparked a massive housing bubble and a huge inflow of capital from Germans and other foreigners. Spain’s current-account deficit, which includes trade and investment income, soared. In Greece the inflow of German savings went to finance government, not private, debt. The consequences were largely the same, though: When the crisis began, the inflows suddenly stopped, bond yields shot up, and all three economies fell into deep recessions.

Under conservative Prime Minister Mariano Rajoy, Spain responded to the crisis by liberalizing its labor market, such as making it easier and cheaper to fire employees or change working conditions; forcing banks to recognize bad loans, consolidate and recapitalize, and slashing public spending to contain deficits. GDP, which fell 9%, began recovering in 2013.

There is considerable debate about whether Mr. Rajoy’s reforms fueled this growth or more conventional factors did, such as declining wages and prices that bolstered competitiveness. Unemployment remains stubbornly high. But the recovery is an important reason euroskepticism has never gained a foothold in Spanish politics. Mr. Rajoy, dogged by accusations of corruption, was ousted Friday in a no-confidence vote but his successor, socialist Pedro Sanchez, has promised to keep his budget.

Italy, like Spain, lost the ability to boost its competitiveness via devaluation when it joined the euro. Andrea Montanino, chief economist of Confindustria, Italy’s employer association, says Italy’s large, world-class exporters “restructured, reorganized, and penetrated foreign markets.” But small and medium sized enterprises, which dominate the Italian economy, didn’t, and couldn’t compete without devaluation.

Italy had no private borrowing binge like Spain or government borrowing binge like Greece, thus the inflow of foreign capital was much more moderate, and the growth crunch during the crisis less severe. Italy didn’t need a bailout for its banks or undergo savage austerity: It ran bigger budget deficits than the eurozone average, says Daniel Gros, director of the Centre for European Policy Studies.

But Italy entered the crisis saddled with structural problems that predate the euro: low productivity growth, a low birthrate, and rigid labor markets. Since Italy didn’t accept a bailout, it was slower to clean up its banks. Labor-market reforms were less ambitious than Spain’s. Its most important fiscal reform was to reduce the burden of public pensions via a less generous benefit formula and higher retirement age. But the changes are deeply unpopular and the new populist government has promised to repeal them.

Meanwhile, Mr. Gros says, on corruption, rule of law and government effectiveness Italy still ranks far behind the rest of the eurozone and has made little progress in recent years."