Spain, Like U.S., Tackles Local Government Trouble

Spain may take over financial responsibility for some of its states. These crippled regions are one reason Spain’s finances are so badly hurt. The only other large OECD nation that has allowed the takeover of local governments is the United States. But some American courts also have allowed cities to essentially go bankrupt. The precedent for co-opting municipal and state governments may grow outside the two nations. It is a powerful way to protect against a spread of substantial local financial problems.

The U.S. and Spain have almost nothing in common at the national financial level. The U.S. has started a halting emergence from the deep recession. Spain has begun to dip into a new one. Spain’s unemployment rate is more than 23%. That figure is just over 8% in the U.S. and dropping. Two things the nations share are tremendous housing problems and local governments that could not handle the 2007 to 2009 financial crisis well. Housing is a problem that federal governments everywhere have been unable to address.

The U.S. form of the government taking control is that states take responsibility for city governments from local officials. That has happened in a number of municipalities across America. Detroit may be next; it was once the sixth-largest city in the U.S. The end of Detroit’s local autonomy will permit Michigan to restructure union obligations and negotiate down debt covenants.

Spain will need to do something similar with its states. There is no point in new national financial cuts if debt cannot be lowered nationally or eliminated, and national unions cannot be neutralized. Spain has begun the elimination of labor’s power on a federal level as part of austerity measures. It almost certainly is about to duplicate the action at the state level.

Spain and the U.S. cannot be the only nations in which local financial problems have ripples beyond them. The U.S. and Spanish actions may be precedents for nations with severe budget troubles that, to some extent, emanate from states and large cities. Forced austerity, implemented at the national level, has gone local, and the process may have only started.

Douglas A. McIntyre