The economic challenge of an independent Catalonia

Behind the political clash there are the numbers of a secession. Currency, debt — could a Catalan Republic succeed? The big banks are giving it no chance, but its vibrant industry might tell another story. Here's what citizens and businesses can expect if Catalonia votes "yes".

Protestors gather outside the Catalan region's economy ministry building during a raid by Spanish police on government offices, in Barcelona, Spain, September 20, 2017. REUTERS/Susana Vera
Protestors gather outside the Catalan region's economy ministry building during a raid by Spanish police on government offices, in Barcelona, Spain, September 20, 2017. REUTERS/Susana Vera

With only ten days to go to the Catalan referendum for independence, clashes between Madrid and Barcelona turned nasty. Following the ruling of the Supreme Court rejecting the plebiscite, the central government sent in the Civil Guard. Guardia Civil officials raided yesterday Catalonia government offices arresting 14 officials. A dangerous tug of war is now overlapping with the institutional crisis with demonstrators taking it to the streets on the one side and a government ready to have enforcement forces stop the poll. Then there is yet another subtler but critical clash going on: the economic sustainability of a secession. Can a Catalan Republic go it alone? How? Questions arise on crucial issues like currency (the Euro?) and debt, to name a few. "Catalonia will continue to be an open economy as it has always been," said reassuringly the Delegate of the Catalan Government in Italy, Dr. Luca Bellizzi. The relative calm in the markets could be signaling that economic agents believe that the referendum will not take place or that if it does it will not result in a break-up. The business and financial communities seem to all have contingency plans in place. Furthermore, economic scenarios after a secession have been discussed for years now and precisely since the beginning of the Great Recession, because it was the financial crisis that gave the critical push to the independentista movement, the political and historical reasons of which date back three centuries.

The moment of truth — and shock — came in 2008. Spain and its regions had gone into a spending spree prompted by abundant liquidity. ”The central government [Mr. Rajoy was president then too, EN] is passing much of the [austerity] pain on to the regional and local administrations," Catalan scholars of Collectiu Emma, a group whose mission is to inform abroad over Catalonia,  wrote then. ”We are already witnessing the damaging effect of those policies on the lives of citizens and some foreseeable angry reactions.” In Madrid Podemos was about to come on stream, in Catalonia it revived old resentments against blanket policies "making no distinction between the communities that rely on their own money to pay for the services they provide and those that are essentially living –quite regally in some cases– on public funds that the central government has extracted from the former.” Catalans endured austerity and unemployment, aware that many of Catalonia’s pains were self-inflicted, they conceded, but its economy was robust enough to overcome the crisis "if Catalonia had full use of the revenue it generates.”

Catalonia now caught up with pre-crisis levels, accounting for 19% of the Spanish GDP, exporting 30% of all national exports and contributing 20% to tax revenues — of which the state gives back 14% with expenditures. Translated in common language: "Spain steals from us.” “I wouldn’t put it this way," said Ferran Mascarell, Delegate of the Generalitat in Madrid speaking to El País. ”The problem is an inefficient Spanish state that was not capable of taking full advantage from Catalonia’s solidarity, but indeed used its complains to turn it into a scapegoat.”

From the point of view of the rest of Spain, Catalans are dreamers; from the point of view of Catalonia they have always been very alert. Shortly after the crisis, a finance expert gave me a book in English whose title sounded a bit ambitious: “Catalonia, an Emerging Economy”: Published in association with the Catalan Observatory of the London School of Economics, it explained "the miracle of Catalan exports that in 2001, only 15 years after Spain entered the common market, topped a record €36 billion (€65 in 2016), surpassing the exports of much larger, albeit crisis-stricken, Turkey or Argentina.

Devoid of fertile plains or mineral resources, the merit goes to Catalonia’s dynamic industrial sector, made both of SMEs and large multinational corporations. The latter grew from 3000 in 2006 to 6000 today over a total of 606,512 companies — equivalent to the same enterprise-inhabitant ratio of Lombardy.

Would these companies be willing to stay in a different country than the one they chose? In 2017, 222 companies left Catalonia, although some, according to a bank BBVA report, did so pursuing better tax regimes. New arrivals were 188, some very big. Giant online retailer Amazon stayed the course with its plan to open near Barcelona in the fall its largest logistic center for Southern Europe. Its centers in Spain will total 7, 4 of which in Catalonia. And this ”despite the 'process' and political tensions," said the Delegate of the Govern to Italy.

There are many examples of Catalonia’s solid industrial culture. In the 1980s, Volkswagen opened a car factory north of Barcelona, which multiplied the numbers of Catalan production and exports. In order to lower costs, in 2001 the company transferred part of Seat Ibiza's production to Bratislava — only to bring it back three years later. This did not owe to productivity, which was higher in Slovakia, but to the ancillary industry that was unable to supply quality components timely.

Exports, nonetheless, require regulations and a currency. ”It would be in the interest of European companies importing or exporting to Catalonia that we remain in the EU,” said Bellizzi, ”and the same applies to the German banks that hold much of the Spanish public debt. Their interests will urge European partners to press the Spanish government towards a negotiated outcome of the 1 October referendum. Standing one’s ground is not good for Catalonia, of course, but neither is it good for Spain or the EU. The European Union got us used us to very practical decisions on practical issues.”

Catalonia could actually continue to use the euro even without an EU consent, like Kosovo and Montenegro. ”No economic agent in Europe or in the world would want Catalonia to leave the euro," said economist David Ros, a member of the College of Economists in Catalonia. ”For the ECB it would entail little more than changing a zip code, and it would be in its interest, and in that of the EU, if the goal is to preserve the integrity of the European single market, its unified payment system, supervision over systemic risk, liquidity....”

As to liquidity, the Govern heavily depends on central government transfers. With a 319% debt over GDP, Catalonia badly needs liquidity for debt servicing and current expenditures. The Catalan administration could weather 2017, but the task could be a tougher one in 2018.

This and political tensions lead rating agencies to downgrade Catalonia and add a negative outlook. JPMorgan’s recommendation was to sell Catalan bonds. ”The market is betting a zero probability of a secession," is the take of an investment fund, ”also because we [Catalonia and Madrid] are united by the Spanish debt. You couldn’t tell bondholders that they will be paid back partly by Spain, partly by Catalonia, could you?”

"There are precedents of negotiations to allocate debt to territories that are splitting," said Ros, ”like Yugoslavia or Russia after the USSR. Within the frame of the 1983 Vienna Convention, the parties negotiate with arbitrators like the IMF, the ECB, the EU... .”

Growth could secure Catalonia’s financial survival. According to BBVA's report, Catalonia grew in 2016 by 3.5%, above the Spanish average, and despite political instability the trend towards 3.5-4% GDP growth is intact for 2017. With a lower unemployment rate and a higher per capita income (by 19, 6%) over the Spanish average, Catalonia is also the autonomous community with the highest public spending — two items of which are the network of delegations abroad, such as that in Rome or other European capitals and in New York, and that of commercial bureaus spread across all continents. The results are visible. Catalan administrations have been adept at taking advantage of Spain entering the EU and the funds made available in a far-sighted way. An example is the 1992 Olympics in Barcelona — one of the only three profitable Games since 1936. The administration used it as a catalyst to accomplish economic development goals and thoroughly revamp the city. A €10 billion investment paid for brand new infrastructures and fully rebuild neighborhoods, which in turn doubled tourism in the following years to a current 15% of Catalan GDP.

Are the Catalans just dreamers or will they realize their dreams? "Catalonia is making tremendous efforts in the fields of research, biotechnology, biomedicine, education, automotive and food," said Ros. ”The day this model will be run by an entrepreneurial government focusing on productivity spurred by research and talent, business profits will no longer be the outcome of low wages but of system efficiency. Yes, Catalonia could become a Denmark in the Mediterranean.”

@GuiomarParada

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