Spain Urgently Needs Consolidation

This is the second part of a two part essay on the history of Spain’s regional autonomy system and its modern fiscal impacts on the nation. Return to part I.

Over the past 20 years, central government has been gradually surrendering more and more policy arenas to the communities — some of them as major as education in 1992 and health in 2002.

The Comunidades became responsible not only for their services, but also of their own regulation. Thus, Spain soon saw a sharp increase in both the number of civil servants and new regulations and laws.

Eventually, this autonomy movement, going ever more overboard, began to create internal borders. It hampered economic activities and the movement of workers across the country.

This phenomenon, by which the autonomous communities demand more powers and the central state grants them readily, results from Spanish electoral system dynamics. The electoral system greatly favors the representation of the nationalist parties in the parliament, who support autonomy or independence for their regions.

This makes pro-autonomy parties almost essential for any major votes. Offers of further devolution and new funds to finance such autonomous governance have thus been used as currency to buy votes whenever the nationalist support was needed to form a government – or even to pass a bill.

Out-of-control autonomy

By the time the economic crisis erupted in September 2008, Spain was split in seventeen political entities and two autonomous cities that all wanted to behave like sovereign states.

They each had their own parliament, government, ombudsman, police, milk quality control agencies and even regional embassies in the major capitals of the world.

Any industrial policy and infrastructure plans were no longer based on the real economic stimulus needs of a particular region or geographic area. Rather they were motivated by the electoral interest of local politicians.

Infrastructure projects were substantially financed by local savings banks whose governing boards were chosen by the political parties in the region. Unable to recover the investments made in these projects fueled by politics — and not the prospect of financial returns — the local banks began to collapse.

This pushed them into merger or acquisition by larger banks, a situation that eventually led to the European bailout of Spanish banks in 2012.

The pervasive fiscal irresponsibility of these seventeen “communities” was encouraged also by a financing system in which two major revenue sources converge: regional taxes — never sufficient — and central government transfers – an increasingly substantial part of their budget — to which some regions contribute more than the rest.

This transfer of central tax revenue from wealthier to poorer regions imposed an unwelcome and forced solidarity on some communities. They found themselves compelled to cut their services while helping finance those of other regions through the central government.

Rising separatist sentiments

That is one of the reasons behind the recent increase of support for secession in Catalonia. There, in 2012, nationalist parties unsuccessfully but loudly demanded a fiscal pact to overturn this situation. They had no intention of helping the rest of Spain. Solidarity? That’s for other countries.

The more autonomy is granted, the louder the calls for outright independence grow in the more historically anti-centralization regions, because for the other, less self-sufficient regions, autonomy only works with central support.

Nowadays Spain, like the divided domains of Ferdinand and Isabella, is a country with a byzantine collage of administrations and redundant agencies at regional and central levels. The agencies no longer provide the services for which they were created.

Worse, they are all directed by leaders who have neither the funds to keep the redundancies nor the political will to dismantle them. That is the true structural crisis of Spain.

Now is the moment to act

The reform of the country’s territorial organization is a task for which Prime Minister Mariano Rajoy is both constitutionally authorized and unprecedentedly empowered to execute.

Now would be the best possible moment to act, not only because of his wide majority in Parliament, but also because his People’s Party currently controls almost all regional governments, too.

One thing is for sure: such an opportune moment to rectify the country’s ill-balanced territorial structures is unlikely to return anytime soon — if ever.

However, it seems unlikely that Rajoy will undertake the necessary reforms – as a recent and unambitious law on municipal government shows.

This is because he both lacks political courage and fears taking on the conservative nationalists upon whom a second term may depend. It is also because the powerful “regional barons” of his party would not welcome the loss of power and influence in their fiefdoms.

Although unlikely, a reform should not be dismissed entirely. Polls show growing discontent among Spaniards, an increasing dissatisfaction with a no longer viable model.

That is one of the reasons behind the dramatic growth of a new party in the Spanish political landscape: Union, Progress and Democracy that has made re-centralizing control over health and education and electoral reform the core of its platform.

They will likely be a key partner for any multi-party government at the central level – and even regional governments in many cases — that will probably have to be formed in 2015.

Spain can’t afford to wait

The IMF has recently made clear that, despite the recent economic growth, Prime Minister Rajoy is very unlikely to be able to reverse the crippling unemployment rate before the elections. Without his party winning a new majority, a coalition government is a good possibility.

The territorial integrity problem is as old as Spain itself and, far from being over, the current financial crisis opened the wound wide again.

But now, more than ever, the race against the national budget deficit makes it imperative to reformulate the territorial organization model.

Spain needs a new governance model based on efficiency, sustainability and respect for regional sensitivities. But this time, the model must cut out from the get-go the ambiguity on which the architects of the 1970s transition relied and which later politicians exploited.