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Initially, playing Spain I was flummoxed by Granada. I would always get them, eventually. In the meantime they would run amok with small units and take over Murcia and/or Estramurda. Then I realized there was an ideal sequence.

Move the 40 SP army from Toledo to Andalusia. Have it wait there, it won't wait long. Granada will always attack Andalusia. Spain will win that battle 9 times out of 10. Pursue the fleeing defenders into Granada. Spain will win this battle too. Assault, do not besiege, -ASSAULT- Granada. Annex. I am now finished with Granada in two months.

Yes, it forces Spain to live with a bad boy rating early, but they probably should. Spain had spent over 400 years annexing Moslem provinces. Having one such annexation occur in the game seems reasonable. As for micromanaging Columbus... You -do- sail with extra ships by way of the Canary Islands before heading west right?
 
Granada deserves to live!

Having played mostly as Turkey (because they're fun) and Sweden (for the challenge), I've found that Grenada tends be a small power not to be forgotten, at least not from an AI point of view. I guess that if you play Spain, you make the process short, but if you don't the AI won't do it for you that easily. I haven't upgraded to 1.08 yet, since I need to finish some old games off, so maybe this has changed.