The Economics of Catalan Secession From Spain

Image by David Tubau (Energético)

Image by David Tubau (Energético)

One year on from the Brexit vote, Europe’s economy faces yet another monumental challenge in the shape of the Catalan independence referendum. There are doubts as to whether the referendum will go ahead; a referendum on independence was held in 2014, but after the Spanish constitutional court annulled it, the referendum went ahead as a non-binding plebiscite. The Spanish government has pledged again to do all it can to block the vote.

In the event of a Catalan secession there would undoubtedly be much to worry about economically for both Catalonia and Spain, as well as for the member states of the European Union. Catalonia is the main driving force of the Spanish economy and accounts for around 20% of Spanish GDP. Such a loss in production would represent an insurmountable challenge for the Spanish economy to face. Hence the national government’s resolute opposition to a binding referendum on the issue. Furthermore, Catalonia accounts for 25% of total exports from Spain while the capital of  Madrid only makes up 11% of that total. These figures stand as firm evidence of the economic muscle that Catalonia has in its hands, and as a stark reminder to the Spanish government of what they may lose if a secession were to proceed.

The main economic argument used by pro-independence advocates is that Catalonia is fiscally mistreated by the Spanish government. Year on year, Catalonia suffers from a fiscal deficit – the Spanish government redistributes Catalan tax revenues to all the autonomous regions of Spain, in a system whereby Catalonia receives less in funding from the government than what it contributes in tax payments. Moreover, the level of public funding per capita in Catalonia is lower than in many of the other autonomous regions, despite the fact that Catalonia is the biggest fiscal net-contributor of all the regions.

A crucial element of secession talks would concern the Catalan portion of national debt. The Catalan debt to GDP ratio currently sits at 35.4%; however, it is often argued by those in favour of independence that such levels of debt have accumulated due to the lack of funding Catalonia receives from the national government each year. In 2016, Catalonia received 10.7% of the allocation of territorial funding by the Spanish government, a relatively low figure considering the population makes up 16% of the entirety of the country’s populace, and that Catalonia contributes towards 20% of Spanish GDP. Therefore, it is logical to see how debt may accrue in the case of under-funding, leaving the Catalan government with no option but to borrow in order to fund public services. An independent Catalonia with complete fiscal autonomy would be able to use the totality of its tax revenue to reinvest in its economy and society.

Probably the most vital component of Catalan independence negotiations would come with the discussions of its currency. In the event that Catalonia secedes from Spain, it would be imperative for the region to remain in the euro zone. An expulsion from the euro area would leave the Catalan government with a multitude of obstacles to face. These problems would be linked to the prohibitive access Catalonia would have to the European Central Bank. It is possible that the region could keep the euro as its de facto currency. However, its inability to receive financing from the ECB would likely lead to an increase in debt, consequently placing significant strain on the economy.

The intention of remaining in the euro zone will go hand in hand with Catalonia’s plan to maintain its position as a member of the European Union. Anti-independence proponents argue that Catalonia’s transition back into the EU would be an arduous effort, as it could take several years to negotiate and ratify, which would be detrimental to the Catalan economy. Joining the EU requires ratification from all existing member states, and just one veto would see its membership attempt rejected. Worryingly for Catalonia, Spain could be the EU member state to use its veto against the region which left it. Other countries such as Turkey and Macedonia have been in contention for accession to the European Union for several years to no avail.

Notwithstanding the opposition to Catalan independence from the EU and Spain, it would still make rational economic sense for all parties involved to maintain a customs union. Catalonia is an important infrastructural region for trade – it is the biggest Mediterranean port in terms of goods volume. In 2016, exports for Catalonia grew by 2%, a figure considerably greater than that of the Euro area (0.7%), Spain (1.7%), and Germany (1.2%). France and Germany are two of the main destinations for Catalan exports, along with other regions in Spain. This could continue post-secession, but would depend entirely upon the nature of negotiations. In the event of independence, Catalonia would have the opportunity to become a more prominent force in the international realm, allowing it to forge closer relations with other states such as France, Italy, and Germany. Again, this would rely upon the nature of secession, specifically with regard to the Catalan position in the EU.

The most pertinent question many will ask in the economic context of Catalan independence is this: Would an independent Catalonia be economically viable? The simple answer to this question is yes. Catalonia’s GDP in 2016 was 223 billion euros. To put this in perspective, the total GDP of Portugal in the same year was significantly less at around 180 billion euros. Moreover, GDP per capita in Catalonia was around 29 thousand euros in 2015, more than that of Italy, which was approximately 26 thousand euros. Thus, the Catalan economy certainly seems capable of being able to sustain an independent Catalan state.

Despite the impressive economic power of the Catalan region, the most critical question surrounding the debate does not concern the economic feasibility of Catalan independence, but rather the nature of the secession process. If Catalonia can maintain peaceful and progressive negotiations with both Spain and the EU, while securing the advantageous position of gaining quick access to the single market and the euro zone, then there is no reason to assume that the Catalan economy could not hold its own as an independent state. However, the people of Catalonia should be very aware of the detrimental economic consequences of an acrimonious secession.

Image courtesy of David Tubau (Energético)

Iain Goldie

About Iain Goldie

I am a third year student in Glasgow at the University of Strathclyde studying Economics, Politics and International Relations. My interests lie mainly in macroeconomics and foreign policy analysis.

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