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Wednesday, May 30, 2012

Spanish regional profligacy sits as a worrying lesson for the eurozone

In today's City AM, we argue:
Beyond the troubled banking sector, there is another potential problem on the Spanish horizon that could be instrumental in how the euro crisis develops: the central government’s relationship with the 17 Spanish regions, and particularly its ability to keep public spending at the regional level under control.

The 1978 post-Franco constitution designed Spain as a highly decentralised state. Regional statutes are treated as an integral part of Spanish law, and the regions legislate over a wide range of policy areas, from local infrastructure projects to culture and healthcare. As a result, they currently handle over 50 per cent of Spain’s total public spending.

Earlier this year, the new centre-right government, led by Mariano Rajoy, was quick to blame the regions for Spain’s failure to meet EU-mandated deficit targets. He had a point, but, ironically, some of the spendthrift regions – like Comunidad de Madrid and Comunidad Valenciana – have been led by the Prime Minister’s own party, Partido Popular, for years. More worryingly, earlier this month, excessive spending in these regions again forced Rajoy to revise upwards the country’s deficit.

This shows just how difficult it will be for Madrid to control the regions, and therefore Spain’s public spending. Spanish regions have committed to a total of over €18bn (£13.6bn) of savings by the end of 2012 – almost half of Spain’s planned deficit reduction for this year. Given their past record, the regions are unlikely to deliver, meaning that the central government would have to pick up the slack. This would put further strains on Spain’s public finances, which will need much of the ammunition at their disposal to deal with potential future bank bail-outs.

What can Rajoy do? The Spanish parliament has recently passed new legislation giving the government the power to take over the accounts of regions that look set to miss their deficit targets, and the tiny principality of Asturias may become the guinea pig for the new system. But will regions such as Catalonia or the Basque Country – which take their regional identity and independence extremely seriously – accept Madrid coming anywhere near their partial budget autonomy? It looks doubtful. The Basque Country is going to take the government to the Constitutional Court over planned cuts to health and education, while the Catalan governor, Artur Mas, has threatened to break his regional alliance with Partido Popular, unless Catalonia is granted greater tax autonomy.

Spain could be heading for a major political showdown. In theory, Rajoy’s Partido Popular holds a sufficient majority to push through legislation without the support of regional parties. This is precisely what happened with this year’s budget, when the Prime Minister’s party rejected all of the over 3,000 amendments tabled by the opposition. However, the price of consistently taking such an inflexible stance may well be greater discontent in Barcelona and Bilbao.

In general, the feeling is that Rajoy may already have reached the political limit of how much he can encroach on regional autonomy, and any further steps in this direction would require important changes to the Spanish constitution – for which there would be very little support.

So what is the significance of all of this for the future of the Eurozone? First, those that put their hope in the Spanish government being able to deliver far-reaching deficit cuts, via equally far-reaching savings in the regions, are likely to be disappointed. Spain is not going to become France – a highly centralised country where the national capital rules supreme over public spending. Spanish regions will remain a liability, and pushing them too far may trigger a huge political backlash, which would hardly benefit the Eurozone either.

But second, there’s a bigger lesson. If Spain faces difficulties in achieving more fiscal centralisation in its own country, due to political constraints, how much more difficult will it be for the single currency to achieve similar centralisation at the level of all 17 Eurozone members – considering its own number of different parliamentary and economic models, government structures, and cultural preferences? Just a thought.

1 comment:

Rik said...

It is a misplaced sense of solidarity that is killing Europe.
The 'no one will be left behind' one, whatever they have done or will do.
This system is simply no longer working in Europe.

All over the place it is the productive people/countries/entities are made to pay for the dysfunctional ones and iso these using it to become functional again it is seen as an alternative source of income to pay for a lifestyle that isnot affordable on their own income.
The nett payers group has simply become too small compared to the nett receivers group.

In these kind of circumstances it only work when it is a hard (more US style) system. You have a limited time to solve things if you donot manage it within that timeframe you are on your own.

Like we see here. Does anybody think that the regions would overspend like they did and do now, if it would have been fully clear that they would be hung out to dry if they did.
Most likely not, they just gamble on 'inter-region or government welfare' and probably think it is a good bet.
In other words they likely see overspending and running the chance that they end up with no money to pay for even the most basic things a smaller evil than cut say 5% of their spending (probably there in the form of fat anyway).

Looking it from that angle they likely see government, EU, etc assistance as a 90% certainty even though they are not officially/legally entitled to it.

You simply donot get things in grip if this is the system you have to do it with. Yopu have a built in incentive to underperform.
People/countries have to be held accountable for their own actions and not simply rely on welfare etc when they donot and what is worse see it as a normal behaviour (like they see in Greece now).