The Spanish Council of Ministers on Jan. 27 approved a preliminary draft of the Stability and Sustainability Law, meant to reduce Spain's public deficit and debt. Spanish Prime Minister Mariano Rajoy's Popular Party (PP) holds enough of a majority in parliament to ensure the law's adoption, without much modification, in early February. Under the new law, Spain's public debt may not exceed 60 percent of gross domestic product (GDP) and the central and regional administrations must reduce their structural deficit to zero by 2020. This law replicates at Spain's internal level the kind of fiscal oversight the European Union intends to apply to member countries.
This law is a follow-up to the constitutional reform that the PP and the party that preceded it in power, the Spanish Socialist Workers' Party (PSOE), agreed to in August 2011. However, one provision has created particularly strong controversy — the provision that the central government could oversee the budgets of the 17 autonomous regions and establish penalties for those administrators who do not meet the balanced budget targets. Given the stringent nature of these targets, the PSOE has complained that the law is tougher than the reforms agreed to last year.
Madrid's argument for the increase in control is clear. The regions are too indebted and their deficits are too high, while the central government is in need of more resources. In the third quarter of 2011, the autonomous communities' debt reached 135 billion euros (almost $177 billion), equal to 12.6 percent of Spain's GDP. Furthermore, in 2011 none of the regions met the deficit target set by the central government; some even showed a deficit five times higher than the central government's proposal. In early January, Rajoy's government had to rescue Valencia and pay the region's debt to Deutsche Bank, which matured in December 2011.
Meanwhile, Madrid is struggling to reduce Spain's budget deficit. Since coming into power in December 2011 criticizing the Socialists' management of Spain's economic crisis, Rajoy's conservative government has been focused on reducing Spain's budget deficit. However, the task is more complicated than it first seemed. Official data from the International Monetary Fund and European Union revealed that Spain's debt is higher than expected, and Madrid will not meet the deficit goal of 4.4 percent of GDP that was promised for 2012.
Although Madrid has a clear case for wanting to control the regions' spending, the new law would create considerable political tension, as it would alter the delicate balance of power between Madrid and the regions.
The Madrid-Regions Divide
Madrid's attempts to control all of Spain date back 500 years to Spanish unification. Before the 16th century, Spain was a collection of small kingdoms with no central power and half the country under Muslim rule. Unification occurred when the kingdoms of Castile and Aragon merged and expelled the Muslims from the Iberian Peninsula. However, this administrative union failed to suppress national identities, due to the region's mountainous geography isolating various groups of people from the country's political center. The Basque Country and Catalonia are two good examples of Spanish regions with national identities. Both are surrounded by mountain ranges (the Pyrenees and Cantabrian mountains for the Basque Country, and the Pyrenees and the Iberian System for Catalonia) and have developed separately from Spain's administrative center.
This lack of cultural homogenization meant that the five centuries after unification were marked by a struggle between the central government's aim for control and the regions' desire for autonomy. In the 20th century, the Franco regime tried to make Spanish the only official language in the country and persecuted all remaining historical languages and cultural identities. This persecution led several nationalist groups to resort to violence, especially in the Basque Country and Catalonia. During the transition to democracy, Spanish legislators tried to create a delicate balance between national unity and regional autonomy. This attempt is reflected in the Spanish Constitution of 1978, which recognizes and guarantees the right to autonomy for the regions and nationalities that make up the Spanish state. However, nationalist claims are still a very sensitive issue in Spain, and every attempt to change the balance between the regions and Madrid creates tension.
Madrid's attempt to monitor regional budgets, therefore, immediately generated controversy. Some of the regions that have strongly defended their autonomy, like the Basque Country and Catalonia, have criticized the proposal harshly. These regions consider any control emanating from Madrid as a threat to their autonomy and a violation of the balance of power enshrined in the constitution.
However, the regions are in a delicate economic situation and do not have many options. Catalonia, the richest and most productive region in Spain, is also the most indebted — Catalonia's debt is one-third of the autonomous regions' total debt. Thus, while many autonomous regions are protesting the possible loss of budgetary autonomy, they need credit from Madrid. The regions' main source of income, in fact, is transfers from the central government. In a statement showing the autonomous communities' ambiguity on the issue, the Basque National Party said it supports the Stability and Sustainability Law "with great reluctance."
Possible Backlash Against the New Law
The possibility of exerting more control over the autonomous communities' budgets divided the Spanish government. Economy Minister Luis de Guindos said the central government should review the budgets before they are voted on at the regional level, but Finance Minister Cristobal Montoro said Madrid should only apply penalties after a region has failed to meet its budgetary targets. In the preliminary draft law approved by the Spanish Council of Ministers, de Guindos and his camp appear to have won. Each community must present its budget to the central government before approving it locally. Madrid also will have the power to design specific spending limits for each region.
While the regions have no choice but to accept the new fiscal discipline, tension between Madrid and the regions is expected to grow in the near future as the central government begins to implement the law. If the central government decides to implement strict controls, regions may respond by rejecting such control and demanding more autonomy based on the constitutional guarantee.
Madrid's increasing intrusion into the regions' budgets could lead to the social rejection of Rajoy's government and the growth of regional political parties. In addition, the new law is likely to generate friction with the regions and municipalities controlled by the opposition Socialists. This tension with regional political powers could weaken the central government's position and undermine Madrid's management of the already fragile Spanish economy.