What do you think is the solution to this problem? | EFE EFE

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Francina Armengol’s vision of a federalist Spain, for which she has been banging the drum for some time, has never been a concrete one. It would require constitutional amendment, but as it is unclear what the amendment would entail, the proposal has never gone beyond a statement of intent (or wish), albeit a vague one.

To an extent, there is a further drip of devolution of powers, as evidenced by responsibilities for the coasts, something apparently catered for under revision of the statute of autonomy in 2016 and which has been pressed home not by Armengol or her government, but by a Més former environment minister now senator, Vicenç Vidal.

When the Spanish government needs all the friends it can find in order to guarantee budget safe passage, there can be some give. The Balearic coasts were a budgetary negotiable.

Other powers that have been craved for include those for points of entry and exit, namely the ports and airports, facilities that are - or would be - very much more difficult to negotiate away because they are strategic.

The Armengol vision, for now therefore, appears to be confined to money. Fiscal federalism is what she is advocating. Reform of the regional financing system, so the president argues, should equate to this federalism, a means of improving the Balearics financing lot, as the islands have consistently done less well out of the system than others. The Balearics continue to be a net contributor, one of only three.

This federalism would essentially boil down to retaining a greater percentage of revenue from national taxation, e.g. income tax and IVA (VAT). How much greater this might be is undefined. But then so much of this federalist talk is undefined, except in respect of debt. This does at least benefit from having a number attached to it. By the end of the third quarter of 2021 it was 4,356 million euros - the amount owed to the Spanish state by the Balearic government. Although there has been mention of “partial” write-off, the president would ideally see the whole lot being pardoned.

Fiscal federalism, says Armengol, would include debt write-off, a key justification being that the debt mountain has grown because of consistent shortfalls in regional financing. The Balearics have had to borrow, as not enough cash comes each year.

A point to be made with this is that borrowing is a fact of regional administration existence. It comes with the territory, so to speak. Create, by constitution and statute, administrative entities with devolved responsibilities, then the funding of these entities is a consequence. And this funding cannot solely rely on the state, especially not when institutional infrastructure has to be paid for.

I am no advocate of centralist government. I firmly support devolved powers. But this does involve cost, which is where borrowing has entered the equation and is why credit ratings are provided for regions like the Balearics - BBB+, according to S&P.

The Balearics have accrued a vast amount of debt over the years, but I can’t believe that this is solely due to having lost out under the regional financing system. One can always argue that this is at fault, but not when - for example - debt owed to the state went from zero in 2011 to 6,532 million euros in 2017 (the highest it has ever been).

If one goes way back to 1995, the overall debt was 351 million euros. At the end of quarter three in 2021 it was 9,378 million euros, 46% of which was owed to the state. In 1995, the debt was a combination of national and international bank loans and bonds, which is where the credit rating comes into play. While there has been some political convenience in blaming Jaume Matas and the Partido Popular between 2003 and 2007 for what was an ever-mounting debt, the figures don’t support this. The debt doubled under Matas - to 1,758 million - but it was what followed that was key. And that was financial crisis.

The PP government of José Ramón Bauzá first borrowed from the state in 2012. It had to. So did other regions. Borrowing from banks was, to all intents and purposes, blocked because of austerity measures, while revenue had meanwhile slumped. Therefore, the debt now owed to the Spanish government is essentially the legacy of bailouts.

The Balearic government can justifiably point to population growth - resident and floating - as a reason for obtaining a better financing deal. The population growth has undeniably been a reason for global debt having risen as much as it has over the past 25 years.
But it does also need to be remembered how debt to the state came about.

And so would fiscal federalism guarantee a similar shield were there to be another financial crisis? It may not have been the same, but the pandemic created the urgent necessity for state aid. Without it, to where would you turn? Europe can’t keep churning out Next Generation funds, so would it be to the banks or the bond markets?