Philip II’s Lessons For America

The problem was not Philip II’s revenues, but his expenses. Having decided that he was Europe’s only reliable protector of Catholicism (of which he was a dour and fanatical adherent) he engaged in an expensive albeit successful naval war against the Ottoman Empire, a prolonged intervention in France’s 40-year Wars of Religion, an 80-year attempt to prevent the Protestant Netherlands claiming independence and an entirely unnecessary, expensive and unsuccessful 15-year war against England’s relatively pacific Elizabeth I. As a result, Philip II through the defaults early in his reign turned the Augsberg-based banking family of Jakob Fugger the Rich (1459-1525) which had traditionally financed the Habsburgs into Fuggers-the-barely-middle-class, after which his fourth bankruptcy in 1596 put the over-optimistic Genoese bankers in deep trouble.

Debt markets were more inelastic in Philip II’s day, and interest rates higher. It is likely that today, he could carry on overspending on multiple simultaneous wars for considerably longer before the bond markets dried up, and that interest costs would not rise to anything like the 15% per annum (in real money – there was little inflation) he was paying in the 1590s. But the effect of his overspending on Spain’s fortunes for the next 200 years would be the same today as it was then. His son Philip III ended most of the wars but was unable to balance the budget because of the excessive debt burden; then under his grandson, Philip IV further bankruptcies occurred and Spain’s power went into rapid decline. From Europe’s most powerful country in the late 16th century, Spain became an unimportant appendage of an unsuccessful French foreign policy by the 18th century. Spain’s industries failed to develop because there was little capital available after the state had sucked out its share, and by 1800 the country was impoverished and underdeveloped, its population largely illiterate and far poorer than they had been 300 years earlier.

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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put ...

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