Interesting topic, Strike. AFAIK, Don Quixote was a satire of the literary conventions of the time, not a comment on the management of the empire as such. How do you think that chivalry factored in? Bad military decisions based on an outdated code? Excessive emphasis on military matters at the expense of economic issues? Your reference to Protestant work ethic suggest you are talking about the economy but I’m not sure.
You mentioned taxation, but I think that the sheer amount of taxes is only part of a poor economic situation. The Spanish nobility did not pay taxes, and so everyone else had to pay more. Also the New World treasure caused massive inflation and thus high prices. High prices hurt exports. Maybe it was okay for the rich, but it was really bad for the economy. The attempt to spread the tax burden by reforming the Netherlands tax system contributed to rebellion in the Netherlands. So problems with the economy and lack of effective action in dealing with them played a role.
The Catholic Church of course played a role too. I see three areas where this would make a difference.
1: Hostility toward Protestants. The persecution of Protestants in the Netherlands was another cause of rebellion. Philip II’s goal of gaining control of Protestant England (in which he was encouraged by the Catholic Church) led to great expense for no results (loss of one invasion fleet in harbor and of the Spanish Armada at sea).
2: Catholics had more holy days (holidays) than Protestants, and so their workers were less productive and got less practice. Maybe that comes under your work ethic comment.
3: I cannot prove it, but I assume that a culture where you could get burned alive for having the “wrong” idea would not foster creativity or flexibility. The church did provide identity, unity, learning, etc., but at a heavy price.
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