As much as I'm loathe to make comparisons across four hundred years, the Dutch Revolt was kind of like Spain's Vietnam War. The Army of Flanders was a long way from home fighting a strange enemy with strange customs for which it had little respect. It got bogged down, and it didn't have a lot of chance of success because it wasn't handling the situation correctly.
Ok, I'm done making weak comparisons now. Let's look at the Dutch Revolt in the context of the Spanish Empire, which at the time was the largest on Earth (Spain, the Indies, large parts of Italy, the Burgundian Lands, later Portugal and its maritime Empire). This was a massive Empire for the time, and in the sixteenth century postal services weren't too hot. F. Braudel said that
"The Spanish Empire expended the better part of its energy in the struggle against distance."
It was hard for the central government in Madrid to control things effectively from a distance, and this was true of the Dutch Revolt. What was even worse was that Philip was, as Cardinal Granvelle put it, "eternally indecisive" and untrusting of all the advisors he surrounded himself with. He was very consistent on the Netherlands and not willing to compromise on what he saw as the main issues, but he provided very little help to people who were trying to work out the minutae. What made the Netherlands such a tricky issue for the Spanish Empire, and for Philip personally was that rebellion was mixed with heresy. In examining the first factor, we discover that rebellion kicked off after Philip tried to make the Netherlands financially self-sufficient by imposing the Tenth Penny, a ten per cent sales tax.
The thing was, the Spanish Empire was massively expensive. Because each part of it recognised Philip as head of state but not itself as been part of a larger Empire, they weren't willing to pay for the goings-on of each other. Castile (the heartland of the Empire, comprising half of Spain) ended up footing a lot of the bill, and the bullion flowing in from the mines of the New World were its main source of income. And even the Castillians sometimes had reservations about paying for the upkeep of their Empire. "Why should we pay a tax on flour here in order to stop heresy there?" asked a town representative (procurador) at the Cortes (Parliament) of Castile in 1588. Between 1566 and 1654 the Crown sent 218 million ducats to the Netherlands, and they received about 121 million from the Indies. This brings us to another peculiarity of the Spanish Empire, which is that it was built on largely imagined wealth.
Outwardly, it looked very impressive. Philip built the Escorial (part Summer palace, part mausoleum, part monastery) for 5.5 million ducats, spent 10 million ducats on the Spanish Armada, and was paying out over 700,000 ducats a month for the Army of Flanders in the mid-1570s. It looked like Philip's Spain was an economic powerhouse, but it was all paid for by massive state debts. Philip declared himself bankrupt no fewer than four times, and the bankers of Genoa wept many tears due to Philip's slipshod financial administration. The Army of Flanders frequently failed to receive wages and mutineered accordingly, including the infamous Spanish Fury of 1576. De Requesens (a regent of the Netherlands who complained frequently about his master's unwillingness to compromise) once told Philip that "no treasury in the world would be equal to the cost of this war."
As well as being expensive, the Spanish Empire was geographically disparate. Philip had two ways of getting to the Netherlands - over land, via the 'Spanish Road', which trailed around France, or through the English Channel (straits between England and France). France was Spain's traditional enemy and although religious civil war kept her occupied for most of Philip's reign, she could never be trusted not to interfere with troop movements. The English were growing wary of the large army in the Netherlands and decided to assist the rebels lest the army be turned towards English shores. In 1567 Elizabeth I impounded Spanish bullion ships headed to pay the Army of Flanders, reminding Philip who was in control of the Channel. This and the Treaty of Nonsuch are what eventually led Philip to send the Spanish Armada.
So the war was expensive, hard to conduct, seemingly impossible to win, and unpopular. It was things like Alva's Council of Troubles (nicknamed the Council of Blood) that led to the growth of the 'Black Legend' surrounding Philip II, which is a historiographical school of thought which holds Philip was a 'monstrous tyrant' (C. S. Cadoux) who commited 'the most odious and shocking crimes' (Robert Watson). These historians were invariably Protestant or Dutch, which makes them a bit biased. The other people who are always very biased about an event are those alive when it was taking place, and for quite a while after the war contemporaries "have no doubt that the wars in Flanders have been the ruin of the monarchy." Why did Philip bother to pursue it at all then?
Philip sent the prominent humanist Benito Arias Montano to have a look-see at the growing dissent. After the failure of the Duke of Alva's "pacification" program, he wrote wisely that "I see clearly an unending problem, unbearable expense and the loss of innumerable lives, both theirs and ours." After reviewing this set of correspondence and many others, Philip's insightful advice to the next regent was "I cannot suggest a remedy". Maybe if he'd visited the Netherlands he might have been able to see things more clearly (or reached peace personally, it was highly insulting to the nobles of the Netherlands that Philip never actually came to see them himself), but he never left the Iberian peninsula after 1559 ("It is neither useful nor decent to travel one's Kingdoms" is what he told Philip III, his son).
But he was determined. It is quite possible his concern was geostrategic, something we have several pieces of evidence for. Montano had originally argued that the Netherlands were important for strategic purposes because "from these states one can keep Germany at bay, constrain France and bind England." It was certainly useful to have the recalcitrant (and possibly soon Protestant) France layered between two slices of Spanish power. He once said that if the Netherlands fell all his Kingdoms would follow, and it is undoubtable that if they did fall the geopolitics of Northern Europe would change a lot. England had been aiding the Dutch rebels, and the Netherlands were very important to the English for trade reasons (albeit less so far the sack of Antwerp and the discovery of new markets for English cloth in Germany), and this would result in an unorthodox (as in not Catholic) power bloc.
Philip might not have seen himself as the leader and rightful heir to all of Christendom as his father had (a syndrome no doubt inherited with the title of Holy Roman Emperor), but he was a very pious Catholic. Heresy was poison to him (he did a very good job of keeping it out of Spain) and he was no doubt shocked and scared by its spread. Militant Calvinism of the type on the rise in the Netherlands was particularly bad news to him, and its spread was a danger to all of Christendom (in his eyes), and consequently all of his Empire. How could Christendom stand up to the Infidel if it was divided? Many pious Catholics would agree with him, but the problem came because, as I've mentioned, rebellion was mixed with heresy. In the sixteenth century, rebellion was a very serious matter.
Many people, Spaniards included, had empathy with the Dutch cause though. The nobles wanted their constitutional rights respected, and they wanted some power - this really shouldn't have been too much to ask. Naturally, the Spanish nobility sympathised. Spanish government policy swung between two axes: one was concerned with the heresy, one with the rebellion. Rebelling against your rightful ruler was punishable by death, this was a fact on which virtually everyone agreed. There was plenty of argument about religious freedom in the post-Erastian era though, and after 1577 religion was the area the Spanish government chose to focus on. This just made it easier for the rebels to look legitimate and gain support.
Many historians place the peak of Spanish imperialism in the early 1580s, which was a good time for both the Army of Flanders and time at which the Spanish annexation of Portugal occured. But when the Dutch war got nasty again all the deficiencies of the Spanish Empire were open to see, and the decline began. War with the Ottoman Turks, England and France drained Spain's resources even more, and eventually the whole rotten structure would collapse. The Spanish Empire had been beautiful and bright, at times brutal, and ultimately built on uneasy foundations which just couldn't deal with the weight being piled onto them.
Killsy, Jill. Spain Rise and Decline 1474 - 1643: Hodder & Stoughton, 1986.
Lotherington, John. Years of Renewel European History 1470-1600: Hodder & Stoughton, 1989.
Noung. Noung's class notes
Woodward, Geoffrey. Philip II: Longman, 1992.