Eurozone crisis focuses on Andalucía, home to sun, sand and soaring deficits

http://www.guardian.co.uk/business/2012/apr/13/andalucia-eurozone-crisis-spanish-regions

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It sells itself to British tourists as a holiday heaven of golden beaches, flamenco dresses and well-stocked sherry bars, but southern Andalucía — home to the Costa del Sol — has now become the focus of worries about the euro.

As inspectors from Brussels this week demanded answers from the Spanish government about how it intended to bring profligate regional governments under control, senior officials admitted they were clueless as to the real size of the debt in the biggest region of all – party-loving Andalucía.

Antonio Beteta, the junior minister responsible for the regions, claimed that Andalucía was cooking its books and hiding unpaid bills in order to cover-up that debt.

"Andalucía is not being transparent," he said. "There is a problem of both transparency and credibility."

His words will not trouble British tourists practising their golf swing or soaking up the sun on Andalucia's Mediterranean beaches, but they must have produced shudders in Brussels — and on the international bond markets that now view Spain as the biggest threat to the survival of the euro.

Their worries are centred on the 17 big-spending regional governments which together spend almost four out of every ten euros of Spain's public money – as much as bailed-out Greece and Portugal spend together.

Last year, despite Spanish pledges of austerity, the regions failed to cut their joint deficit by a single euro – sending Spain's total deficit wildly off target and leaving its reputation for budget control in tatters.

That left the country having to borrow some €17bn (£14bn) more than expected, with wary markets demanding ever higher interest rates as what was once one of Europe's lowest sovereign debts grew and grew.

A new conservative government led by Mariano Rajoy, which has watched nervously as bond yields have soared over the past fortnight, has so far failed to persuade investors it can tame the regions.

On Friday 10-year bond yields – the interest rate investors demand to lend money to Spain — came under further pressure, peaking at more than 5.9%.

Andalucía was one of nine regions that last year ignored government demands to embrace intense austerity and which produced even higher deficits than in 2010.

Beteta has warned civil servants in the regions, where payrolls swelled by 42% between 2006 and 2010 as local politicians expanded their power bases, that they must change their culture of "coffee breaks and reading the newspaper".

Regional politicians are behind some of the biggest and most costly white elephants in Spain. From Valencia's huge, spaceship-like City of the Arts and Sciences to Santiago de Compostela's vast, half-empty City of Culture, loss-making monuments to their vanity abound.

An escalating competition to construct flashy public buildings designed by cutting-edge architects, combined with a taste for underused infrastructure projects, has helped push up both debt and deficit. So, too, have regional brodcasters whose vast workforces can dwarf their puny audience share.

On Friday the huge airport at Ciudad Real shut definitively after attempts to turn it into Madrid's second airport failed. Its runways are now even closed to the handful of private jets that had brought wealthy hunting parties, some including British royals, in to kill deer in the region's overstocked private hunting estates.

Ciudad Real is in the central Castilla La Mancha region, the worst regional offender last year with a deficit that grew to 7.3% of GDP. The local savings bank, partly controlled by politicians, had to be rescued by taxpayers after it loaned too much money to real estate developers and to bankrupt projects like the airport.

Inspectors from Brussels were in Madrid on Friday, seeking answers to how Spain thinks it can manage to meet its national deficit target of 5.3% of GDP this year. Many economists consider the task impossible, though Rajoy insists his government will make it.

The inspectors were expected to demand proof that Rajoy's government can avoid the pitfalls of last year.

Rajoy has this month presented a budget with €27bn of tax hikes and spending cuts in the central government budget, but the key to meeting targets lies in the regions. Last year they failed to cut any of the €17bn they were asked to find. This year they have been set a savings target of €15bn.

The socialist government of prime minister José Luis Rodríguez Zapatero, which lost elections in November 2011, had claimed until the very end that the regions were under control. Finance minister Elena Salgado even claimed the regions had produced a budget surplus during the third quarter.

But Spain was off track. It had promised its national deficit would drop from 9.5% of GDP to 6%, but turned in an 8.5% deficit that made it the laughing stock of austerity Europe – and left Rajoy's new government with the task of cleaning up the mess, which also includes 24% unemployment and a recession that will shrink the economy by 1.7%.

Cutting regional spending will be painful. The regions provide the key services of the welfare state, including health and education. Regional austerity, then, means cuts to basic services. Protests have been loudest and, on occasions violent, in those regions like Catalonia and Murcia that last year managed some deficit reduction.

Spooked by market pressure, Rajoy last week announced a further €10bn in health and education "savings" which will be implemented by regional governments. On Thursday, Rajoy's government passed a law that allows it to take control of the finances of regions that fail to stick to the austerity plans they must present to Madrid.

Rajoy, however, may find it politically inopportune to take control of three of the four regions that account for most of the deficit headache. They include Valencia and Castilla La Mancha, which — like most of the regions — are run by his own People's party, and Catalonia, where any central government intervention would inflame nationalist sentiment.

He may, however, enjoy taking control of the finances of Andalucía, which is run by the opposition socialists. Rajoy's party failed to win elections for the region's parliament in March.