Catalonia: a referendum for prosperity or disaster?
The Catalan referendum on 1st October marked the start of weeks of struggle and tension in Spain. Making headlines daily, the outcome of the crisis is still unclear. The illegal referendum, with only 43% voter turnout, resulted in a 90% vote to transfer power from Madrid to an independent Catalonia. The two major regions are now stuck in stalemate following the use of emergency powers under Article 155 of the Spanish Constitution to dissolve the Catalan parliament and impose direct Spanish control on Catalonia. With its own regional government, Catalonia is home to 7.5 million Spaniards and possesses its own language, flag and police force. So what would be the economic impacts if one of Spain’s wealthiest regions becomes an independent republic?
Catalonia is home to 16% of the total Spanish population, yet the region accounts for 19% of the country’s GDP and 25.6% of its exports. The popular slogan of the region, Madrid nos roba (Madrid robs us), is a reflection of the sense of nationalism among the Catalans as they contribute more to Madrid than they gain in return. Consequently, Catalan independence would relieve the region of the fiscal deficit that it currently suffers through paying high taxes and imposing austerity measures to help support the rest of Spain.
However, the overall short term economic impact would undoubtedly be negative for everyone involved. The economic shock of the referendum has already provoked substantial uncertainty – over 1600 companies have moved their headquarters from Catalonia since the referendum, including the banks Caixa and Sabadell. This uncertainty would inevitably be reflected by a fall in consumption in Catalonia, leading to business uncertainty and an overall economic slowdown as people are less willing to risk spending their money. The rise in Spanish bond yields recently (inverse to price movements) is a clear signal of the concerns of investors. The establishment of a border would simply compound this economic downturn by causing a job and income losses due to trade obstacles and the initial spending required for a new state. Embassies, central banks and border control are only a few of the structures necessary for a new state. Furthermore, trade obstacles could be caused by the populations of Spain and Catalonia boycotting the other’s exported goods and services. 35.5% of Catalan exports are to Spain so this would represent a severe knock to their export economy.
Debt negotiations are also an area of significant concern. Catalonia currently suffers its own public debt of 35.4% of Catalan GDP, with a large portion of this owed to the Spanish government, as well as its proportional share of the Spanish national debt. The success of their independence is heavily dependent on whether they would be required to pay off their own debt, as well as being burdened with their share of the Spanish government debt. This could provide a substantial financial strain on the Catalan economy at a time when they need to focus on the spending needs of creating a new independent state.
The final major issue in Catalan independence is that of EU membership. If it does remain a part of the EU, little would change for either side. Catalonia however does not have an immediate right to membership of the EU, and may be required to independently apply to be a member. Under this circumstance, all of the bloc’s current members would need to consent to Catalonia’s membership, including Spain. Foreign companies would be far less likely to invest in Catalonia if it means they risk losing access to the European single market. This, combined with higher trade barriers and transition costs, could represent a significant fall in the region’s short-term GDP. Luis de Guindos, the Spanish Economy Minister, has stated that if Catalonia leaves the EU, it risks a fall in GDP of 25-30% and a doubling of its current unemployment level.
So overall what does this mean for Catalonia? It seems that Catalonian independence would have severe negative economic consequences, at least for the short term. The longer-term impacts however would be heavily determined by debt negotiations between Catalonia and Madrid, as well as being dependent on the EU position towards Catalonia’s membership of the trading bloc. Both aspects could make or break Catalonia’s future as an independent state.