By Hugo Dixon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Spain is replacing Italy as the euro zone’s bad boy. Since August, when markets started to seriously worry about Silvio Berlusconi’s inability to govern, Italy has been seen as the big troubled euro economy, with higher yields than Spain. At one point in December, Rome’s 10-year bond yielded 1.94 percentage points more than Madrid’s. But Italy’s borrowing costs are now a touch tighter than Spain’s. Economics and politics are responsible for the flip.

New prime ministers Mariano Rajoy and Mario Monti have both embraced reform to boost the competitiveness of their economies and rein in deficits. But Monti – who benefits from the added credibility of being a well-respected international technocrat – is seen to have done so more vigorously. Admittedly, Italy has yet to tackle labour reform, an area that Spain has addressed. But Madrid has made much less progress on shrinking its fiscal deficit, which was 8.5 percent last year, compared to Italy’s 3.9 percent, in particular grappling with its overspending regions.

Last week Rajoy said he would cut the deficit to 5.8 percent this year, missing a 4.4 percent target that the previous government had agreed with the euro zone. Madrid has also only started the process of cleaning up its banks.

Meanwhile, Spain’s fundamental economic problems remain worse. Its unemployment rate is 23.3 percent, versus Italy’s 9.2 percent. Italy may have suffered years of low growth but it has a stronger industrial base.

The one big economic blot on Italy’s record is government debt, which was 120 percent of GDP last year, while Spain’s was a modest 68 percent. But the Italian private sector is wealthier than its Spanish counterpart – and less indebted.

All these factors mean that Rome’s yield advantage over Madrid should continue to widen in the coming months. But in the longer term, the picture gets murkier. After all, Monti is only scheduled to stay in office for another year. As his departure date nears, investors may conclude that a Rajoy in the hand has some advantages over an unknown Italian leader in the bush – particularly if the Spanish leader takes steps to make sure he doesn’t fall too far behind.