Spain’s Largest Regions Defy Madrid

Catalonia and Andalucia, two of Spain’s largest regional governments, have rebelled against attempts by the Mariano Rajoy government to rein in their spending as data showed the country’s central government budget shortfall surged at the end of the first half.

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This came as Spain suffered €41.3 billion ($50 billion) of capital flight in May, or a total of €163 billion ($200 billion) in the first half, equivalent to about 16 per cent of economic output, increasing concerns about Madrid’s ability to attract the foreign capital needed to finance itself.

Catalonia, Spain’s richest region with an economy equal in size to Portugal’s, boycotted a meeting held on Tuesday between Cristobal Montoro, budget minister, and the country’s 17 regional governments, where they were to set spending levels.

Meanwhile the economy representative of Andalucia, the most populous region, left the meeting early after being angered by demands for further cuts.

Concerns about overspending by the regions have damaged confidence that the central government will be able to meet budget deficit reduction targets agreed with Brussels.

The attempt to further squeeze regional spending came as data showed Spain’s central government budget deficit jumped to 4 per cent of gross domestic product for the first half of the year, compared with 3.41 per cent in the first five months, as money was transferred to cash-strapped regional governments and other parts of the public sector.

Earlier this month the region of Valencia requested aid from an €18bn central government liquidity mechanism to help local governments pay bills and refinance debts in the capital markets.

The Catalan government said it had asked Mr. Montoro and the central government to change their approach to limiting regional spending after European authorities allowed Spain an extra year to meet its deficit reduction targets.