Daily Israel Report

Regional Excess Spending Aggravates European Debt Crisis

The indebted regions have aggravated the financial plight of Spain and Italy and may lose some competencies.
By Amiel Ungar
First Publish: 7/23/2012, 5:54 AM

Monti and Spanish Finance Minister De Guindos
Monti and Spanish Finance Minister De Guindos
Reuters

The European Union expected that the agreement on the recapitalization of Spanish banks would "put out the fire" temporarily in Spain. Instead it witnessed Spanish ten-year debt hitting rates of 7.17%.

Investors were spooked by the announcement from Valencia that the regional government there will apply for a bailout, now that Spain has been given assistance. This meant that it was not sufficient to patch up the Spanish banking sector; the problem of Spain's regional governments would have to be addressed.

Move over to Italy, where Italian Premier Mario Monti admitted that the debt crisis had arrived. While Italy has not yet approached Spain's condition, ten-year bonds were yielding 6.13%. Here as well, a regional government-- in this case Sicily-- was in the eye of the financial hurricane.

The island was described as the "Greece of Italy". Sicily is almost bankrupt and is billions of euros in debt. Local government may soon run out of money to run ferry service from the island to the mainland. Sicily's plight could seriously compromise Italy's situation.

The difficulties of regional governments in Europe, including regions such as Sicily, that have received substantial assistance from the  European Union - as part of its policy of aiding distressed regions - may prompt a rethink in the policy of devolution and the empowerment of the regions.

This policy originally served those who wanted to weaken the nation state by having it shed prerogatives in one direction towards Brussels and, on the other hand,  devolve others towards the regions. The direct relationship, bypassing the nation state and establishing a direct link between the regions and the European Union, also served the purpose of weakening the nation state.

The European Union, at least for countries in the Eurozone, is increasing its supervision of the finances of the member states, including their budgets.

It makes absolutely no sense that after Brussels has labored to put together a deal to avoid a bailout of Spain, that it should be jeopardized by what is happening in Valencia or Sicily.

The centralization of power in Brussels may therefore also herald the ebb tide in the powers of the regions.