Olli Rehn, economic and monetary affairs commissioner, has told Spain to get "a very firm grip to curb the excessive spending of regional governments".
Spain is like Ireland. Both had low sovereign debt and balanced budgets before the crisis. Both used the cheap and easy credit that followed the introduction of the euro to go on real estate binges that compromised their banks. Ireland has heavily recapitalised its shrunken banking system and ring-fenced toxic property assets in a “bad” bank. Until now Spain had been slow to address the problem of its cajas, the regional savings banks most exposed by its real estate bust. The centre-right government of Mariano Rajoy has threatened to take control of regional budgets that exceed a deficit target for this year of 1.5 per cent of gross domestic product.
Focusing on the regions in this way could create a real political problem by unravelling the post-Franco settlement that created one of the most devolved states in Europe. This quasi-federal Spain, under the umbrella of the European Union, has been a conspicuous success over the past 25 years, seeing not only a big jump in national prosperity but wealth spread throughout the whole country for the first time in Spanish history.
Spain’s problems need proper diagnosis, and devolution at its best should be seen as part of the solution. To begin with, the regions have to spend a lot because the main powers devolved to them, health and education, cost a lot, and the money transferred from the centre to finance this does not keep up. Shutting down regional autonomy will not much change that.
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