Southern Europe: Economy

The most significant development in Southern Europe this month was a major diplomatic and economic dispute between the United States and Spain. Donald Trump threatened to cut off all trade between the two countries, a statement made in response to Spain's reported refusal to allow U.S. use of its military bases for operations against Iran. The Spanish government under Prime Minister Pedro Sanchez expressed surprise and rejection of the threat, framing the disagreement around Spain's stance within NATO and its position on Iran.

Economically, Cyprus reported robust growth of 3.8% in 2025, with public debt at its lowest level since 2008, and its technology sector attracted over €2.5 billion in foreign capital. However, the wider region faces economic headwinds. Italy's public debt increased, its bond yields rose, and a coalition of ten EU states led by Prime Minister Giorgia Meloni is pressing the European Commission to review the phase-out of free carbon permits under the Emissions Trading System to protect industrial competitiveness. Meloni also traveled to Algeria to strengthen cooperation on natural gas deliveries.

Regional economies are bracing for fallout from the Middle East conflict, with Greece and Cyprus identified as particularly vulnerable. Cyprus's chamber of commerce pledged coordinated support for affected businesses, and easyJet canceled flights to the island. Meanwhile, Italy's UniCredit made a takeover bid for Germany's Commerzbank, a move opposed by Germany's ruling SPD party.