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159 9 Spanish Federalism in Crisis Spain has been hit very hard by the current fiscal crisis. Although Spanish federalism has faced a number of challenges before—for example, in accommodating territorial and ethnic differences and promoting economic efficiency—today it is having to deal with a combination of fiscal and political problems that were previously unknown: economic stagnation and fiscal crisis, increasing economic divergence among regions, and the strengthening of traditional centrifugal forces in some autonomous communities (ACs). Discussion of the demise or radical reform of the system has now entered the public sphere and the government agenda. While some of the literature on Spain has pointed out several centralizing trends within the territorial model, not much of it has been able to convincingly show any formal shift of authority toward the center over the last decades. In the wake of the first stage of the crisis, little formal change or shift of authority was observed, since the central government had plenty of financial and regulatory powers to deal with the crisis.1 During the second phase, however, the government’s austerity policies exposed the system to centralizing pressures that resulted in some formal changes that are already having an impact on the autonomy of the ACs; those changes have in turn exacerbated some centrifugal tensions, such as secessionism in Catalonia.2 In this chapter we seek to contribute to the growing discussion on the effects of the current crisis on the stability and fiscal sustainability of federal systems.3 In particular, we look at whether, after a period of sweeping decentralization in most of them, these systems are experiencing strong pressures to centralize and if so, how. We examine how the Spanish system is evolving and how it has reacted to the imperatives of the economic and fiscal crisis, whether through césar colino and eloísa del pino The authors acknowledge support from the Project CRISAUT, CSO2012-33075, funded by the Spanish Ministry of Economy and Competitiveness. 09-0487-4 chap9.indd 159 10/7/13 8:35 PM 160 César Colino and Eloísa del Pino formal reform, cooperation among government tiers, the central government’s use of previously unused formal powers, or centralization of powers.We explore the scope and severity of the crisis in central and regional government finance and some of the main structural and contextual factors that have generated or aggravated it, looking, for example, at the role of social security and welfare benefits and public employees’ salaries. In addition, we also seek to establish whether the fiscal crisis has implied or will imply any major shift of authority toward the central government.4 We also discuss whether the Spanish system confirms a growing literature5 that suggests that the fiscal governance regime in the Spanish variant of federalism —based mostly on revenue and tax sharing, transfers by the central government , and little taxing autonomy of subnational units—leads to both recurring fiscal indiscipline and an increase in regional spending and debt in times of crisis . This literature also would expect to find centralizing tendencies in response to the crisis, which could occur within a stimulus phase as well as an austerity and adjustment phase.6 We argue that, partly confirming the literature and the previous experience of similar federal systems, the crisis has produced fiscal problems and centralizing pressures that have reinforced the primacy of the central government in economic and fiscal policymaking. Even if sometimes warranted for the management and coordination of policies to combat the crisis, this centralization has met resistance, of different degrees, from the constituent units, producing increased political and jurisdictional tensions and conflicts that seek to restore the former balance of power or give additional leeway to regions. As the historical data show, the potential problems of the Spanish system of fiscal federalism, well known to experts and covered by the literature, did not manifest themselves seriously before 2008. They seem to have been latent or disguised by the preceding long period of economic expansion and rising public revenues. After the onset of the crisis, however, all the wrong incentives built into the system finally produced a “perfect storm.” One could argue, therefore, that rather than resulting from excessive or irresponsible spending or borrowing in the past, the current problems with deficits and debts are largely a product of the sharp reduction in regional revenues produced by the bursting of the real estate bubble and the resulting collapse of tax yields combined with the sovereign debt...

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