Catalan Independence a No-Win Situation

September 28, 2017

Ever since the economic recession of 2008, Spain has been a challenging place to do business. Unlike many other industrialized nations, Spain has struggled to regain its footing in the global economy. Unemployment jumped from a low of about 8% in 2007 to more than 26% in 2013. Although labor reforms have helped reverse the trend, today’s unemployment rate remains extremely high at 19.7% (source: CIA Factbook). This has put a strain on Spain’s public finances with the government spending more on social benefits to help those in need while tax revenues have fallen sharply. The country’s budget deficit, which peaked at 11.4% of GDP in 2010, has gradually lowered to 4.1% of GDP in 2016. Public debt, however, has increased substantially – from 60.1% of GDP in 2010 to nearly 99.5% in 2016. 

Fueled by a rise of nationalism across Europe, prolonged economic distress in Spain has reawakened a long-festering movement for independence within the Spanish community of Catalonia. Made up of four provinces that includes Barcelona, Catalonia is the most populous region of Spain with its own language and a thriving industrial hub. Officially, it is an autonomous community. Well known for a tumultuous independence movement that has waxed and waned for nearly 100 years, the political pendulum has gained momentum since the 2007 recession. On October 1, 2017, Catalonia will hold a binding referendum to determine whether it secedes from Spain and becomes its own country. 

Pro-independence supporters will do themselves a favor by stepping back from the proverbial forest for a just moment and put themselves in the shoes of foreign business executives and other global leaders who play a critically important role in determining Catalonia’s economic success. The major industries of Spain are textiles and apparel, food and beverage, metals and metal manufactures, chemicals, shipbuilding, automobiles, machine tools, tourism, clay and refractory products, pharmaceuticals and medical equipment. None of these industries are known for taking big risks, especially when it comes to economic uncertainty. Yet a Catalan secession from Spain will surely ignite a whole new level of economic volatility for both countries. A few of the major concerns are: 

1.    Employment
The current unemployment rate in Catalonia is 13.2%, which represents 552,800 people. Spain’s Ministry of Economy estimates that an independent Catalonia will more than double the rate of unemployment to as high as 30%. Here’s the logic as explained by Spain’s Economic Minister Luis de Guindos: “When a region of a euro zone country separates, it is immediately left out and all tariffs would be applied, it would be out of all EU trade agreements, which would have a very important impact on an exporting region like Catalonia, but they would also lose the euro as currency. 

“Given the circumstances of the financial system in Catalonia, that would mean that they would need their own currency, meaning a huge devaluation with the euro, which would cause a significant impoverishment of the Catalan savers and that would create a very high inflation rate. 

“This translates into a fall in GDP of between 25-30%, and a brutal impact on unemployment and hyperinflation.” 

2.    Import/Export Controls
The importing and exporting of goods to and from Spain is another major issue at stake with an independent Catalan government. Approximately 35.5 percent of Catalan exports are to the Spanish market, which means Catalonia would have pay to create new state structures (embassies, central banks, etc.), which carries a high price tag. At the same time, approximately 65% of goods that flow from Spain travel through Catalonia and up to France. Tariffs imposed on Spain could help offset some of the costs associated with creating new state structures, but Spain could establish new avenues for the flow of goods, bypassing Catalonia altogether. Likewise, new Spanish tariffs imposed on goods coming from Catalonia, will not only further diminish economic leverage, it will also make Catalonia far less attractive to major manufacturers and businesses that rely heavily on imports and exports. 

3.    Tourism Scare
Barcelona is a major tourism destination and constitutes the majority of Catalonia’s 14 million visitors per year. Regardless of this city’s popularity, foreign vacationers to Spain generally plan vacations that take them to various regions of the country. If border crossing is problematic, or worse yet, if civil unrest prevails, tourists will likely avoid Spain altogether.
Legislation regarding safe and secure border crossings will take time and public perception of civil unrest may take years to effectively change. Until then, don’t expect foreign visitors and their rich economic dividends. 

4.    Border Walls
As with any divorce, lines will be drawn. In this case, lines are borders and those who live and work in close proximity to border lines are sure to endure undue burdens simply by their geographic plight. Residents who live in Catalonia but work in Spain will have complicated tax issues to deal with as Catalonia creates tax laws from scratch, including its own tax code. Once that is decided, Spain will certainly need to consider how it may need to adjust its own tax laws regarding a new influx of “foreign” workers. As we’ve seen in the United States and in countries all over the world, border issues are never easy, never decided quickly, and always messy. 

Catalans will be wise to take heed of the similar situation that occurred in Britain last year: a political and economic calamity dubbed Brexit. As predicted by most economists and most of the industrialized world, England’s disastrous breakup from the European Union has been ugly from the start and continues to worsen.  Catalans are betting on the longer-term benefits of independence, and the EU’s patience, to allow them to overcome the (hopefully) shorter-term impacts of their divorce from Spain.  As the United Kingdom is currently learning, that can be a very uncertain wager indeed. 

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