Posted by: Ben Vickers on November 14, 2011
Angela Merkel’s call for a “breakthrough to a new Europe” will find sympathizers well beyond the CDU party members she was addressing in Leipzig today. Many in the euro-zone’s most indebted countries will applaud the concept, even without knowing the details, largely in the hope that a “new Europe” of any sort might help solve their debt problems.
Still, Spain, Portugal, Italy and Greece need more immediate solutions. For them it’s tougher governance at home that will make the most difference—rather than the amendments to the EU treaties that Merkel has in mind, not least because any euro-zone makeover may be long in coming: the last amendments to the EU’s treaties, signed in Lisbon, took eight years to negotiate.
Greece and Italy have both set about getting new governments, which will allow them to rethink spending and reschedule their debts. Meanwhile, Spain will elect a new government next Sunday and can then be expected to take a fresh look at its accounts, too. However, the new Spanish prime minister, which polls suggest will be Mariano Rajoy of the right-wing Partido Popular, will have a more complex task than his Greek and Italian counterparts. Spain has a political system that replicates many of the euro-zone’s weaknesses, all within one country.
Spain is divided into 17 autonomous regions, each of which has some regional responsibilities, ranging from health, education and tourism to planning and tax collection. There are differences in economic growth and economic models: regions such as the Basque country and Catalonia are more industrial and richer, while Andalucia and Extremadura are more agricultural and poorer.
Each regional government has its own budget and the ability to raise money in the capital markets. And they have been raising money. Lately, quite a lot of it. The regional authorities were responsible for 133 billion euros of debt at the end of June, or 19 percent of the national total, according to the bank of Spain.
The new prime minister will have to contend with fiercely autonomous regions that over the past four years have moved increasingly to fund themselves from debt: 14 of the 17 regions have more than doubled their borrowings since 2007, according to central bank data. The position of whoever governs from Madrid will not be easy.
Madrid may try to lower national debt by cutting funding to the regions, many of which are governed by rival political parties. But it’s unlikely the regions will quietly cut services—and take the blame for cuts when the regional elections come round. They will probably choose to increase their borrowing to keep services going, so boosting national debt. It will take a fine statesman to solve that political equation without fueling regional independence movements which, to complete the parallel with the euro zone, will reiterate calls for breaking up the country.