By: Diego L.-Casabuena

“The Catalonian government has no economic strategy and proposes a secession that will be paid for by their own voters.”

The world’s eyes turned to Spain on October 1, as international media delivered pictures of the injured faces of those who went out to cast vote at an illegal referendum for the secession of Catalonia. Over the past couple of weeks, the country has come to face the strongest threat to national unity since its consolidation of democracy in 1978. The situation has quickly built up in complexity and media abroad has fallen short to present a full account of the events and tensions to the international community. Instead, social media and even respected publications such as the New York Times^1,2 have opted to deliver a message of emotion and drama, providing implicit support for a nationalist movement that is poorly understood, and whose strategy is based on the deceit of its people and of those abroad.

As the above anti-constitutional referendum was confirmed to take place, the Supreme Court of Justice— enforcing the law of the Spanish constitution— ordered the shutdown of all illegal activity. This resulted in an  estimated 844 injured from confrontations with the national police forces.³  On Tuesday, October 10, tensions escalated as Carles Puigdemont, president of the local government, declared Catalonian independence based on the results of his referendum. In the same speech, he ambiguously suspended his announced independence to the uncertainty of Catalan people.⁴ The Spanish president, Mariano Rajoy, issued an ultimatum the following morning, giving the Catalan leaders five days to clarify whether they declared independence. Less than 24 hours remain for Puigdemont to make his final decision. Tomorrow, Spain may exercise Article 155 of the Spanish Constitution, which gives the central government the authority to override a local government under extreme circumstances and to preserve normalcy.

In order to understand the current events in Spain, it is imperative to consider the delicate interaction between the politics and the economics of the region. I will discuss many of the factors that have been overseen by the media to conclude that independence is in fact an economically irrational strategy for Catalonia, which has been empowered through the radicalisation and indoctrination of its citizens.

Spain became a sovereign, united state, following royal marriage between the Crowns of Castile and Aragon, the second of which includes the region of Catalonia^[1], in 1492. Since the War of Spanish Succession in 1714, the government of the Spanish regions has been delegated to the central government. At present, the country is a parliamentary democracy consolidated in 1978, with the unanimous vote of its 17 states upon the current Constitution. Spanish states, so called ‘autonomous communities,’ are  analogous to US states. Catalonia, with Barcelona as its capital, is the second most populous state (approx. 7.44 Million), the leading state by GDP (211,915MM€^[2]), and the fourth by GDP per capita (28,590€/capita).⁵ Its economic strength is determined amongst other factors by its population density, Barcelona’s role as a major trading port to the  Mediterranean, and the cultural and touristic attractive of the region. Catalonia is also the only state in Spain to share borders with the tax haven of Andorra.

Secessionist movements have long existed in this region, but with low support rates. The 2008 financial crisis hit Spain mercilessly, creating large social unrest. In 2010, as unemployment continued to rise, Artur Mas, leader of a major nationalist party, PDeCAT (formerly CDC^[1]), was elected premier of the local government— known as the Generalitat.⁶  Nationalists gained coalition support of extremist parties such as CUP and this has led to the current state of affairs and premier, Carles Puigdemont. Puigdemont, is responsible for the illegal referendum earlier this month and the declaration of independence last Tuesday— one which he immediately suspended.

As nationalism has risen to power in Catalonia, resentment and nationalist support has been incentivised by the implementation of nationalist public school curricula,⁷ the radicalisation of local public TV,⁸ and a bias in state funding in favour of nationalist regions of the state.⁹ Many arguments in support of succession highlight cultural differences between Catalonia and the rest of Spain, such as language.^4,23 Yet, the argument that is most relevant to the current events is a criticism of the structure for tax collection in Spain.

Spain implements a progressive tax system as do most  modern mixed economies such as the US and other EU countries. This means that higher income brackets pay proportionately higher taxes in order to promote wealth redistribution. At the state level, it means that states with higher GDP pay proportionately higher taxes to the central government than do less wealthy states. The nationalist claim is simple: Catalonia pays more to the central government of Spain— to the benefit of the nation— than it receives back— to the benefit of the Catalan people. However, this is always the case in a progressive tax system. The question is not whether they do, but by how much.

 

The Generalitat estimates this figure— called fiscal deficits— to be 16,000MM€ per year, but no supporting calculation is provided. The Spanish government, which on the other hand makes this figure public to promote transparency, states the fiscal deficit to be 9,900MM€. Using the official figures, it has been estimated that every Catalan is receiving 207€ per year (17.25€ per month) less than the  Spanish average in public services and infrastructure.¹⁰

In the view of Puigdemont and his supporters, this is a strong enough economic matter to break apart a country with more than 500 years of history. However, this is irrational, especially in the face of the high cost of succession and its associated risk. Breaking apart requires a contingent plan, which Catalonia does not have.

Nationalists claim that Catalonia would be able to self sustain as do small, wealthy nations in Europe such as Switzerland. While this is possible, it would only happen after a long period of heavy recession. If the Catalan state were to succeed, it would only be in the very long run and at the expense of the current and potentially the next generation of its people’s wealth. Luis de Guindos, the Spanish Minister of the Economy, has classified this cost as “detrimental to the Catalan society.”^11,12 In order to see this though, we need to consider three key factors: EU Status, Trade, and Government Deficits.

The European Union facilitates free trade and movement of factors of production between its member countries. The rules on admission into the Union are clearly stated, and in the words of the former president of the European Commission, Romano Prodi:

“When a part of the territory of a Member State ceases to be a part of that state, e.g. because that territory becomes an independent state, the treaties will no longer apply to that territory.”¹³

Catalonia would not be a part of the EU— losing all structural funds assigned by the EU— and to make things worse, Catalonia would likely stay outside of it. In the articles for the Enlargement of the Union, the EU says that the admission of new members requires the unanimous vote of its current states.¹⁴ It is hard to imagine that Spain would vote in favour of admitting the state of Catalonia. In a similar way, Catalonia would lose access to the World Commerce Organisation, the United Nations, the International Monetary Fund, and NATO.

Perhaps a worse, yet related problem is that of Catalan currency. This is important because, unlike the recently divorced United Kingdom, Spain uses the Euro and Catalonia would immediately be ejected from the Eurozone should it secede.¹⁵ Currency is a major determinant of the Catalan people’s purchasing power. It is plausible for Catalonia to continue informally using the Euro, but this would mean that the state would not have the authority to influence policies over interest rates or exchange rates. To other Eurozone countries, the bet is against independence as Catalonia’s exit would be a serious threat to the currency. Starting a new currency with a low international value would lead to a large devaluation of Catalonian goods and property. The low demand for a new, unstable foreign currency would bring financial uncertainty to households and firms alike. Those with savings in Catalonia at the time of secession would lose incredible amounts of money. Firms would lose export competitiveness in the international markets because of adverse exchange rates. The new currency would also be accompanied by a high setup cost, high levels of underground activity, and still a dependency on the Euro for trade.

Similar disfavour can be expected for trade. At present, Catalonian exports to Spain amount to 44 billion euros a year, followed by 37 billion to other EU members, and 22 billion to the rest of the world.^16,17 After independence, it is undoubtable that Spain will restrict its trade with a seceded state, jeopardising the largest segment of the Catalonian market for exports. The only other bordering country and close trade partner with Catalonia is France, which is a EU member and is separated for the most part by a dense mountain range called the Pyrenees. The tariff terms with the EU are a matter of political mediation, yet at any value, tariffs will make Catalan exports more expensive, reducing the latter’s  international competitiveness.

So what happens to Spanish companies operating in Catalonia and Catalan companies operating in Spain? The new border suggests higher administrative costs to companies in the new nation, leading to a capital drain from the region. This is already happening, and in the three day period Oct 9-11 at least 531 Catalonian companies have moved their headquarters to other regions in Spain following the imminent threat of secession.¹⁸ This includes six of the seven publicly traded Catalonian companies in the Spanish Stock market. Most notably, Caixabank and Sabadell Bank, the bread and butter of  Catalonian financial services, have already moved HQ to Mallorca and Alicante, respectively. Financial institutions require access to the European Interbank market and the possibility of liquidity injections from the European Central Bank in order to operate competitively. Overall, capital drain is likely to generate unemployment and, as Credit Suisse anticipates, drive per capita GDP below average GDP in Spain.¹⁹ On the other hand, many Spanish companies outside of Catalonia are likely to reduce their operations in Catalonia to avoid higher costs and the uncertainty associated with the rise of an extremist-backed government.

Lastly, we consider the government spending in the hypothetical Catalonian state and its associated deficits. A new state would require the formation of its own central government, which to be on par with the current system in Spain, it would require thirteen ministries including national defence, an internal revenue service, and social security. Spain benefits from economies of scale in managing a country of more than 46 million nationals. Setting up central institutions in a smaller environment will come at a high setup cost and a higher per capita overhead than in the present.

To make matters worse, the new state would have to pay for its own pensions. As of this September, Catalonia has over 1.7 million senior citizens (22% of its residents) with rights to monthly pensions for an average of 958 euros.²¹ Setting up a ‘Pay-as-you-go’ pension system to cover this need would be an extreme challenge for the new government. The new state would also have to take control of Spanish owned infrastructure, including high transit airports like El-Prat and Gerona and the high speed rail and road infrastructure connecting Catalonia with the rest of Spain. In short, running a Catalonian public sector would require either a higher total tax rate or a cut in the provisions of the government. It is highly implausible that this would not the case for the reasons outlined above.

Despite the pressure for higher tax rates in the new state, both declarations by Oriol Junqueras, the current vice-president of the Generalitat, and extracts from the ‘Junts Pel Si’ secessionist program, have promised a reduction of tax rates in the new state. These promises are inconsistent with the measures already taken by the Generalitat under Artur Mas and Carles Puigdemont. While the central government dictates nationwide tax rates (analogous to Federal tax), individual states have the ability to alter taxes at their autonomous level. Spain had an income and value added tax hike in 2010 to promote an expansionary fiscal policy offsetting the 2008 crisis. Catalonia, at the time led by the recently elected Artur Mas, was of the few states to not adjust by lowering regional tax rates, leaving an overall top tier tax rate of 56%— one of the highest in Europe— and also the highest tax rate in any Spanish state for lower income brackets.²²

Without hiking tax rates, an increased government spending is bound to generate deficits, and the region is already well in debt. In absolute figures, Catalonia’s debt is the highest amongst Spanish states at a total of 76,727 million euros with a current deficit adding 3% per year to this figure. 52,499 million are owed to the Spanish state, more than 8,000 million to banks, and about 5,000 million to private investors in bonds. Overall, Catalan debt amounts to 27% of the state-level debts in Spain.²⁰ Another way to phrase this is that Spain has provided Catalonia year over year with the most funding and the most trust out of all states in the country— and that Catalonia’s sheet doesn’t look good.

Catalonian secession can be summed up as a kamikaze^[5] move and it can only succeed at the expense of the Catalan people, namely, the voters. An initial long period of uncertainty would be paired with capital flight, unemployment, lower competitiveness in the international markets, higher deficits, and devaluation.  The only possible success of this strategy comes in the long run, when once stabilised, foreign investment would flood the new nation while it is still devalued, a phenomenal characteristic of less developed countries. This may lead to growth in Catalonia at a distant point in time, but only to benefit foreign investors and sophisticated Catalonians who by now have no skin in the game— not the Catalan people, much less the radicals or the unemployed.

Catalonian independence is no joke, especially to the millions of Spaniards at home and around the world, who work hard every day to potentiate a nation that is proud of itself and of its achievements over the past four decades since the consolidation of democracy. The unrealised risk and potential loss to both the people in Catalonia and in the rest of Spain is not to be taken lightly, even abroad. To foreigners, this conflict should not be a movie with heroes and villains set in a far away land. The Catalonian conflict is real and has far reaching consequences to the well-being of an entire nation and to those that share its currency.

What should be clear from this article is that the secessionist movement is not an economic strategy. It is an emotional, drama-driven game played by Catalan nationalist politicians, supported by extremist groups, to deceive an economically uninformed population of voters. The reason why Spain intervened in the illegal referendum and will continue to take drastic measures is to respect the law of the Constitution. The Constitution is highest level of legal agreement between the citizens of a democratic state and it is as sacred abroad as it is in the US — Catalonia itself signed it unanimously. What has failed is not the law or democracy, but the Catalonian leaders. As Toni Canto, Spanish actor and politician said in parliament earlier this week, “politics is about reason, not opportunism.”²³ We cannot sit back while a group of negligent politicians deceive their own people into detriment and ruin the merits of a whole nation.

^[1]   To rectify a common misconception, Catalonia has never been a state in itself, but a subset of other states.

^[2]  1€ (Euro) = $1.17 (USD) as of Oct 18, 2017. Source: Google Finance

^[3]  CiU was renamed as CDC, then as PDeCAT due to its linkage with a major corruption scandal. See: https://elpais.com/elpais/2015/10/23/inenglish/1445588373_583562.html

^[4]  The official language in Spain is Spanish. Spain also has four other co-official languages spoken in six of its states. Catalan is spoken in three of the states: Catalonia, Valencia, and Baleares.

^[5]  kamikaze — A kamikaze attack is a sudden violent attack on an enemy, especially one in which the person or people attacking know that they will be killed. (Online Cambridge Dictionary)

 

References:

1. Minder R., Barry E. Oct 1, 2017. Catalonia’s Independence Vote Descends Into Chaos and Clashes. The New York Times. Accessed Oct 15,2017 at https://www.nytimes.com/2017/10/01/world/europe/catalonia-independence-referendum.html
2. The New York Times. Sep 30, 2017. Catalonia’s Independence Referendum, in Photographs. The New York Times. Accessed Oct 15,2017 at https://www.nytimes.com/2017/09/30/world/europe/catalonia-referendum-photos.html
3. Noguer M. Oct 2, 2017. Rajoy recurre a la fuerza policial para descabezar el referéndum ilegal. El País. Accessed Oct 15,2017 at https://elpais.com/ccaa/2017/10/01/catalunya/1506820373_674242.html
4. El País. Oct 11, 2017. Discurso íntegro en el que Puigdemont declara la independencia de Cataluña y la suspende para apelar al diálogo. El País. Accessed Oct 15,2017 at https://politica.elpais.com/politica/2017/10/10/actualidad/1507658001_128339.html
5. Expansion. 2017. Cataluña. Datos Macro. Accessed Oct 15,2017 at https://www.datosmacro.com/ccaa/cataluna
6. Belmonte E., Mondelo V., Oms J. Nov 28, 2010. CiU arrasa y entierra el tripartito. El mundo. Accessed Oct 15,2017 at http://www.elmundo.es/elmundo/2010/11/28/barcelona/1290966180.html
7. Losada, L. Oct 13, 2012. Así adoctrina el nacionalismo a los niños en las escuelas de Cataluña. Periodista Digital. Accessed Oct 15,2017 at http://www.periodistadigital.com/cataluna/barcelona/2012/10/13/ebro-adoctrina-romanos-nacionalismo-wert-cataluna-escuelas-nacionalismo-catalana.shtml
8. Editorial. Aug 8, 2016. TV3 cae en el surrealismo en su delirio nacionalista. El Mundo. Accessed Oct 15,2017 at http://www.elmundo.es/opinion/2016/08/08/57a7841d268e3eb11e8b45f3.html
9. Domenech S. Sep 11, 2017. Cataluña gasta 500 millones al año en promocionar el independentismo. La Razón. Accessed Oct 15, 2017 at http://www.larazon.es/historico/3609-la-generalitat-gasta-500-millones-al-ano-en-promocionar-el-nacionalismo-MLLA_RAZON_486673
10. Maqueda A. Sep 26, 2017. No, Catalonia is not being robbed. El Mundo. Accessed Oct 15, 2017 at https://elpais.com/elpais/2017/09/26/inenglish/1506410252_592782.html
11. Tadeo, M., Lacqua F., Oriuela, L. Oct 5, 2017. Spain’s de Guindos Says Catalonia’s Independence Push Is Doomed. Bloomberg. Accessed Oct 15,2017 at https://www.bloomberg.com/news/articles/2017-10-05/spain-s-de-guindos-says-catalonia-s-independence-push-is-doomed
12. CNBC. Oct 12, 2017. Spanish economy minister hopes Catalan government returns to legality. CNBC. Accessed Oct 15,2017 at https://www.cnbc.com/video/2017/10/12/spanish-economy-minister-hopes-catalan-government-returns-to-legality.html
13. Cuadras-Morató X. 2016. Catalonia: A New Independent State in Europe?: A Debate on Secession. Accessed Oct 15,2017 at https://books.google.com/books?id=XjEFDAAAQBAJ&lpg=PA197&ots=O6xl08MXwj&dq=romano%20prodi%20then%20the%20treaties%20%20would%20cease%20to%20apply%20in%20that%20territory&pg=PA197#v=onepage&q=romano%20prodi%20then%20the%20treaties%20%20would%20cease%20to%20apply%20in%20that%20territory&f=false
14. European Parliament. The Enlargement of the Union. Accessed Oct 15,2017 at http://www.europarl.europa.eu/atyourservice/en/displayFtu.html?ftuId=FTU_6.5.1.html
15. The Economist. Oct 14, 2017. The EU will not help the Catalan secessionists’ cause.  The Economist. Accessed Oct 15,2017 at https://www.economist.com/news/europe/21730163-embracing-catalonia-holds-no-appeal-europes-leaders-eu-will-not-help-catalan
16. Gubern, Alex. ABC. Sep 20, 2015 Así es el Comercio de Cataluña y así sería en la Cataluña independiente (VIII). ABC. Accessed Oct 15,2017 at http://www.abc.es/elecciones/catalanas/2015/abci-comercio-cataluna-201509181834.html
17. Cerezal, P. Sep 26, 2017 El 80% de las ventas catalanas va al resto de España y a la UE. Expansión. Accessed Oct 15,2017 at  http://www.expansion.com/economia/2017/09/26/59c94eaa46163f261a8b45bf.html
18. Lopez, E. Oct 13, 2017. Al menos 531 empresas han trasladado su sede de Catalunya a otras zonas de España en octubre. El Periódico. Accessed Oct 15,2017 at http://www.elperiodico.com/es/economia/20171013/al-menos-531-empresas-se-han-ido-de-catalunya-este-octubre-6350721
19. Perret, S. Oct 10, 2017. Catalan Crisis: Is a Further Escalation Possible? Credit Suisse. Accessed Oct 15,2017 at https://www.credit-suisse.com/corporate/en/articles/news-and-expertise/catalan-crisis-is-a-further-escalation-possible-201710.html
20. Segovia, C., Viaña, D. Sep 29, 2017. La Generalitat de Cataluña eleva su deuda con el Estado a 52.500 millones, el doble que Andalucía. El Mundo. Accessed Oct 15,2017 at http://www.elmundo.es/economia/2017/09/29/59ce0ae222601dc75c8b45fb.html
21. Viaña, D. Sep 27, 2017. El coste en pensiones que Cataluña quiere que España siga pagando tras la ruptura: 1.635 millones al mes. El Mundo. Accessed Oct 15,2017 at http://www.elmundo.es/economia/macroeconomia/2017/09/27/59caa762468aeb27098b4653.html
22. Tahiri, J. Sept 30, 2017. Cataluña es la región donde las rentas bajas pagan más IRPF y con más impuestos. ABC. Accessed Oct 15,2017 at http://www.abc.es/economia/abci-cataluna-region-donde-rentas-bajas-pagan-mas-irpf-y-mas-impuestos-201709300321_noticia.html
23. Toni Cantó. Youtube. Oct 12, 2017. https://www.youtube.com/watch?v=sQSzUOAMycM

 

Further References:

A. Javier Tahiri. Sep 30, 2017. Cataluña es la región donde las rentas bajas pagan más IRPF y con más impuestos. Accessed Oct 15,2017 at http://www.abc.es/economia/abci-cataluna-region-donde-rentas-bajas-pagan-mas-irpf-y-mas-impuestos-201709300321_noticia.html

B. Segovia C. Aug 3, 2017. Cataluña aportó la mitad que Madrid en el año del ‘España nos roba’. Accessed Oct 15,2017 at http://www.elmundo.es/economia/2016/08/02/57a08f81e2704ee5098b4650.html

C. Maqueda, A. Sep 26, 2017. El inexistente expolio fiscal a Cataluña. Accessed Oct 15,2017 at https://elpais.com/economia/2017/09/25/actualidad/1506371396_191449.html

D. Cruz J. Oct 14, 2017. ‘En Francoland’, Muñoz Molina y el Instituto Cervantes. Accessed Oct 15,2017 at https://elpais.com/elpais/2017/10/14/opinion/1507990092_988521.html