The regions’ role in the seemingly unstoppable slide towards Spain’s bailout

Spain’s economy minister, Luis de Guindos, has insisted again that Spain will not require a full sovereign bailout. But does anyone believe him? Almost certainly not. During its seven months in power, the government of Mariano Rajoy has been repeatedly forced to backtrack on pledges and resolutions. The promise not to raise taxes has been followed by increases in income tax and VAT. The assertion that social spending would be ring-fenced has been followed by cuts to health and education. And the claim that Spain would not require a bailout for its banks…well, you guessed it.

So when Guindos says there won’t be a full-blown bailout, because the Spanish economy is strong enough to withstand the ongoing market turbulence, his insistence should be taken with a pinch of salt.

But the beleaguered minister’s attempts to deny the inevitable don’t seem to be a cynical exercise in misleading voters, investors and fellow European governments. Instead, they are perhaps the only strategy available to him, after the government’s unsuccessful efforts to calm the markets and bring Spain out of the eye of the storm.

Those efforts have been as numerous as the government’s now infamous u-turns, including an austerity program announced on taking power; further cuts in the 2012 budget; a controversial labour reform; further austerity in the shape of a recently announced €65-billion package; and the request to Europe for up to €100 billion to help struggling banks.

And nothing has worked. “The drumbeat of the market for a full bailout is getting louder,” one Société Générale analyst told the Financial Times.

Of course, none of these drastic measures was able to control Spain’s Achilles heel: the debts and deficits of the 17 autonomous regions. The frailty of the finances of many of those regions – particularly the likes of Valencia, Catalonia, Murcia and Castilla-La Mancha – now looks like being the final paving stone leading to Spain’s sovereign bailout. Valencia’s request for help from the state liquidity fund on Friday alone sparked renewed market chaos and more regions are expected to follow.

In recent weeks some measures have been examined and introduced to curb regional spending. But Guindos, and his predecessors in the economy minister’s seat, can all argue that effective controls of the regions’ finances have been beyond the reach of the central government. While a major overhaul of regional financing has long been necessary, it has also been virtually taboo. Spain has seen its autonomous regional structure as a major element of the modernity it has embraced in the democratic era. Meddling with that structure (unless it was to give regions more autonomy, rather than less) has been viewed as political dynamite – even when a region such as Castilla-La Mancha manages to clock up a deficit worth 7.5 percent of its GDP.

Ironically, such a view now looks decidedly antiquated in the current climate of deficit controls and austerity. And while the overspending regions are far from being the sole reason for the country’s current predicament, these standard bearers of decentralised democracy could end up being the final nail in the coffin of Spain’s economic independence.