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Economy

Charles V had left his son Philip with a debt of about 36 million ducats and an annual deficit of 1 million ducats. This debt caused Philip II to default on loans in 1557, 1560, 1575, and 1596 (including debt to Poland, known as Neapolitan sums). Lenders had no power over the King and could not force him to repay his loans. These defaults were just the beginning of Spain's economic troubles as its kings would default six more times in the next 65 years. Aside from reducing state revenues for overseas expeditions, the domestic policies of Philip II further burdened the Spanish kingdoms and would, in the following century, contribute to its decline, as maintained by some historians.

The Spanish kingdoms were subject to different assemblies: the Cortes in Castile, the assembly in Navarre, and one each for the four kingdoms of Aragon, which preserved traditional rights and laws from the time when they were separate kingdoms. This made the Spanish kingdoms and its possessions difficult to rule, unlike France, which while divided into regional states, had a single Estates General. The lack of a viable supreme assembly led to power defaulting into Philip II's hands, especially as manager and final arbiter of the constant conflict between different authorities. To deal with the difficulties arising from this situation, authority was administered by local agents appointed by the crown and viceroys carrying out crown instructions. Philip II felt it necessary to be involved in the detail, and he presided over specialised councils for state affairs, finance, war, and the Inquisition.

Philip II played groups against each other, leading to a system of checks and balances that managed affairs inefficiently, even to the extent of damaging state business, as in the Perez affair. Following a fire in Valladolid in 1561, he resisted calls to move his Court to Lisbon, an act that could have curbed centralisation and bureaucracy domestically as well as relaxed rule in the Empire as a whole. Instead, with the traditional Royal and Primacy seat of Toledo now essentially obsolete, he moved his Court to the Castilian stronghold of Madrid. Except for a brief period under Philip III of Spain, Madrid has remained the capital of Spain. It was around this time that Philip II converted the Royal Alcázar of Madrid into a royal palace; the works, which lasted from 1561 until 1598, were done by tradesmen who came from the Netherlands, Italy, and France.

King Philip II ruled at a critical turning point in European history toward modernity whereas his father Charles V had been forced to an itinerant rule as a medieval king. He mainly directed state affairs, even when not at Court. Indeed, when his health began failing, he worked from his quarters at the Palace-Monastery-Pantheon of El Escorial that he had built in 1584, a palace built as a monument to Spain's role as a center of the Christian world. But Philip did not enjoy the supremacy that King Louis XIV of France would in the next century, nor was such a rule necessarily possible at his time. The inefficiencies of the Spanish state and the restrictively regulated industry under his rule were common to many contemporary countries. Further, the dispersal of the Moriscos from Granada—motivated by the fear they might support a Muslim invasion—had serious negative effects on the economy, particularly in that region.