Economic Impacts of Catalonia’s Bid for Independence

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Less than two months after Scotland narrowly rejected independence, another separatist movement threatens to throw the precarious European system into turmoil. The northern Spanish region of Catalonia intends to hold a non-binding poll on independence from Spain on November 9, against the wishes of the Spanish government.

Catalonia has a distinctly separate language and a long history as an independent nation. It also makes up 16% of Spain’s total population and, more importantly, 19% of its total GDP. The consequences of independence would be so disastrous for Spain as a whole that the Spanish government has declared that the referendum is illegal and, if held, will constitute an act of open rebellion. However, the Catalan regional government claims that it can legally hold a “consultation vote” to express the will of the Catalan people. The situation is especially complicated, because the case for Catalan independence has deeply rooted historical and cultural origins. Catalonia has been a part of Spain for centuries, but the brutal repression of Francisco Franco’s regime (1938-1973) left a lingering bitterness against the central government in the hearts of a large number of Catalans.

The economic crisis that has plagued Europe since 2008 aggravated the complaints of many Catalans and triggered the latest movement for independence. Even before the crisis, Catalonia faced a budget deficit which many argued was a result of the taxes paid by the region to the central government. According to the Catalan government, it pays 16 billion Euros more to Madrid than it, in turn, receives. After 2008, the deficit became a major burden that required deep austerity measures in the region. The uncompromising attitude of the central government has only added to the resentment, and convinced many Catalans that the future for their people lies away from Spain.

An independent Catalan state would have massive consequences for Spain and Europe, and potentially destabilize the fragile global economy. In the first place, the loss of around 20% of its GDP would leave the Spanish economy immensely weaker. Scotland, for the sake of comparison, only makes up 9.5% of the GDP of the U.K. The central government would lose much of its ability to finance spending and to support other regions of the country that have fallen deeply in debt. Secondly, Catalonia is a major center for transportation, handling 70% of exports from the rest of Spain. If the region becomes a separate country, the cost of moving those products would increase and further weaken the Spanish economy. Finally, as reported by The Washington Post, GDP per capita in Catalonia is “one-fifth higher than the rest of Spain.” Catalonia also produces 45% of Spain’s high tech exports, such as automobiles and electronic products. The region is the most productive in Spain, and its loss would lead to a sharp decrease in confidence that the Spanish economy can recover from the crisis. The massive loss of confidence in the Spanish economy would in turn call into question the stability of other, interconnected European markets.

Independence, however, may have severe consequences for Catalonia itself. Exports are an important part of Catalonia’s economy, and the uncertainty resulting from new borders and regulations could have a negative impact on Catalan products. France is the top destination for Catalan exports, but the next three purchasers are other regions of Spain. With a wounded Spain shutting its doors to the potentially independent Catalan state, the region would face a significant loss of trade. The loss would become even greater if Catalonia is not readmitted into the EU, which would be unlikely but is a distinct possibility. Moreover, ratings agencies have already threatened to downgrade Catalonia’s regional debt if a solution to the problem is not found. The central Spanish government plays an important role in guaranteeing the payment of regional debts. Without this support the risk on Catalonia’s debt would increase to potentially problematic levels. An independent Catalonia would therefore run the risk of falling into a debt crisis painfully similar to Spain’s.

Proponents of independence argue that if Catalonia can reinvest the tax money that it sends to Madrid, equivalent to nearly 9% of its GDP, its economy will flourish. An independent Catalan state might also be better able to take its specific needs into account when spending this money. A complete break with Spain, which would cause the most harm to Catalan exports, is also relatively unlikely. Thus, some supporters of independence argue that Spain will be forced to become more competitive and both it and Catalonia will benefit. This outcome is possible in the long run, although by no means certain. In the short run, Catalonia and Spain would fall into such economic and political turmoil that it might be in the best interest of both parties to reach a negotiated solution.

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