Does federalism imperil recovery from the financial crisis?

Elena Salgado, finance minister of Spain (picture www.la-moncloa.es)

Never let it be said that this website does not acknowledge the difficulties and contradictions within the federalist case.  It spends enough time pointing out the difficulties and contradictions within the nationalist case, so it is only fair to accept the (many fewer) occasions when federalism has to confront numbers that do not add up.

Here is a recent example, arising from the Spanish system of regional government.  A report in the Financial Times last week noted last week noted that the development of a budgetary strategy to deal with the financial crisis in Spain was complicated by its multi-level of system of government.

This is because the ability of the Spanish government to deliver budgetary restraint is dependent, in part, on the performance of regional governments in Spain.  Can they cut spending and boost revenue along the same lines as the national government?

The national government is dependent for its financial viability on access to the financial markets: it has debts of €488 billion and needs to raise around €200 billion in new funds next year alone. While the regional governments also borrow money on their own behalf, it is generally believed that the national government would step in if an individual regional administration could not service or repay its debts.  Spanish regional and municipal government debts of €150 billion therefore also impinge on the credibility of the national government.

To compound this, the separate and distinctive electoral mandate that Spanish regional governments possess gives them grounds to resist national government budgetary policies, if they are at variance with the views of the regional electorate. The national level of government thus has responsibility without power.

One might have thought that a federal system, in which regional governments raise their own taxes to fund their own expenditure and thus borrow money secured against their future tax revenues, would spare the Spanish government this problem. But of course, in an imperfect world, perfect federalism cannot exist.

Budgetary problems in one Spanish region would quickly have knock-on consequences for the others. (Proof of this lies in the way that budgetary problems in one EU member stat have consequences for others, and Spanish regions have much more in common with each other than do different European countries.) That is why there is such a strong expectation that the national government will step in.  Indeed, those consequences are one of the main reasons for national governments to exist in the first place.

Any solution to the financial crisis will therefore depend on coordinated action between the different levels of government, with each assuming some kind of responsibility for the consequences of the financial decisions it takes. Given that the crisis arose in the first place because there a separation between decisions and consequences, reinstating a connection of this kind is, while difficult, surely welcome.

Any solution to the financial crisis will therefore depend on coordinated action between the different levels of government, with each assuming some kind of responsibility for the consequences of the financial decisions it takes.  Given that the crisis arose in the first place because there a separation between decisions and consequences, reinstating a connection of this kind is, while difficult, surely welcome.

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