I think there are a variety of things that Spain could have had to do to keep it's power from falling away with changing times. In the late 16th century, when much of Europe was or already had come to terms with the two different lines of Christian faith, much of Spain's religious structure (and cultural structure) was built around the Inquisition. A lot of energy was put into resisting a minority, and trying to supress a minority is always innefficient. Spain was already suffering from depopulation when the hundreds of thousands of Moriscos were driven from Spanish land. Spain lost valuable and essential elements of their workforce to religious bigotry.
While England essentially had the same religious intolerance policy-just in the opposite camp-as Spain, England also had a sense of national unity that was not just centered around their religion, it was centered around their country. The only element of Spanish unity was the Catholic Church, but the Inquisition in Spain was a big part of the Catholic Church. With a common ground so centered around total rejection of all other elements of Christianity, to the point of forcibly moving population, Spain went into decline once its "tolerance" level fell behind the curve. With a little more of an open mind, or an earlier shift away from the harsher sides of the Inquisition, Spain might have found more common ground as a nation.
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But if Spain had let up its only unity of Catholicism/ the Inquisition I feel like it would've jsut gone into a faster collapse. And then what? How could they recover from not having any form of unity what-so-ever? I like your idea of being less harsh to those not of full Catholic descent, and that the added population could've done Spain some good, I'm just not sure it would've helped in the long run.
I agree with Sam, in that Spain's intolerance of it's minorities were a big reason as to why Spain lost a ,ot of power in the late 16th and early 17th centuries but I think a lot of the reason the government did it was out of jealousy. The local governments in some Spanish cities, noticed how hard the Moriscos worked,and how effeicnt they were; They had to be because the threat of the Inquisition always loomed over their heads, and being a devout Catholic, and a harder worker allowed you some safety. Spanish leaders wanted to keep thier jobs in the hands of "true" spainards so the kicked Moriscos out. Every time the monarchy decided to expel some Moriscos, they lost some of the countries most skilled farmers and artisans. In 1609 and 1610 around 220,000 Moriscos kicked out of Aragon and Valencia. The loss of such a large, hard working, part of the Spanish workforce was something the monarchy couldn't recover from.
GWE
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