Catalonia political turmoil risks hurting Spanish economy

0
14
Catalonian protesting for independence

Separatism has emerged as one of the greatest threats to economic and political stability in today’s world. Catalonia, the region around Barcelona, is threatening to derail Spain’s economic recovery by breaking away after a large number of its citizens voted for independence.

A referendum called by the region’s separatist government on 1 October, but ruled illegal by the country’s central government, had led to Spain’s senate voting on dismissing the Catalonian government and reinstating central control over the region’s affairs. Less than an hour before the vote was due to take place in Madrid, a motion was passed in Barcelona that essentially declared independence and initiated a secession process.

Shortly after, the senate’s vote also passed in Madrid, triggering Article 155 of Spain’s constitution, imposing direct rule and officially disbanding Catalonia’s regional government. Carles Puigdemont, Catalonia’s deposed president, travelled to Brussels to lobby European leaders while 8 of his former ministers were arrested pending potential charges for sedition, rebellion and misuse of public funds.

An arrest warrant was also issued for Puigdemont, who voluntarily surrendered himself to Belgian authorities before being released, pending the decision on an extradition request submitted by Spain.

Madrid has since tried to tread the fine line between zero-tolerance on the Catalonian threat to Spain’s continued unity, and avoiding the kind of clumsy heavy-handed approach that would likely enflame the situation. New regional elections have been called for 21 December to the form a new semi-autonomy Catalonian government.

However, it is feared that the turmoil and political uncertainty provoked by events of the past several weeks will have a serious impact on Spain’s economy over the year ahead, possibly longer if political unrest in the region continues. With a pre-financial crisis economy heavily reliant on the construction industry, Spain was worse affected than most when the world financial systems broke down in 2008. However, after several years in the doldrums, the economy has been staging a strong recovery delivering impressive GDP (Gross Domestic Product) growth for the past three years.

Spain’s Finance Minister Luis de Guindos fears that progress may be impeded. “For 2018, we expect growth of 2.3 percent, which would be 2.7 or 2.8 percent without the Catalan issue,” he told reporters as he arrived at a meeting with his EU counterparts, Reuters reported.

Catalonia is one of the most productive and largest regions in Spain, representing one-fifth of its total GDP. So, any major disruptions will have a significant knock-on effect on the country’s economic performance.

In context, Catalonia attracts 23.8% of all of the tourists visiting Spain and has a lower unemployment with a jobless rate of 13.2% compared to the national average of 17.2%.

In addition, with only 16% of the country’s population, the region manages to pull almost a third of the total new inward investments and exporting more than 25% of the national total.

Among Spain’s 17 regions, Catalonia’s 2016 GDP per capita of €28,590 is surpassed only by the Basque Country’s (another agitator for secession) €31,805 and Madrid’s €32,723. Catalonia also has a lower degree of income inequality compared to other areas of Spain, a factor that contributes significantly towards Catalonians feeling generally wealthier than the population of other regions.

Catalonia’s economic importance to Spain is, ironically, also the source from which the independence movement draws much of its strength. Historically, Catalonia has been the industrial heartland of Spain. Its economy was founded on maritime prowess and the related development of a thriving hub of trade and commerce in textiles and other goods. That has subsequently evolved into a diverse modern economy with the tourism, finance, services and tech industries all thriving.

Fira Barcelona - Mobile World Congress 2017
Fira Barcelona – Mobile World Congress 2017

The industrial history of Catalonia from which the modern economy has evolved can be credited with providing the foundations for its evenly dispersed wealth. It is also likely why the region’s politics have traditionally seen the left have a far stronger influence than in Spain’s other wealthier regions. The coalition of Catalan nationalist parties that formed the government of former-President Puigdemont, while also including conservative representation, are predominantly of a leftist nature.

Until the War of the Spanish Succession lead to the formation of modern Spain between 1713 and 1715, Catalonia was an independent region with its own language, customs and laws. It was though linked with Aragon from the twelfth century by the marriage between Petronilia, Queen of Aragon and Ramon Berenguer IV, Count of Barcelona which united the crowns of the two regions. However, Catalonia was rarely a willing participant in the united Spain and a succession of Kings struggled to impose Spanish language and laws in the region.

In 1931, Catalonia was again granted semi-autonomy within Spain with the establishment of a regional government. That, however, was short-lived with General Franco taking exception to Catalan separatism, marching on the region and winning back control with victory at the Battle of Ebro in 7 years later in 1938. When democracy returned to Spain in 1977, Catalonia was again granted semi-autonomy and up until the financial crisis Catalans seemed reasonably content and enjoyed a peaceful dual identity as both Spanish and Catalonian.

Spain’s economic woes following the international financial crisis provided a new platform for Catalan’s nationalist parties to gather popular support on the ticket that the region’s stronger economy was propping up much of the rest of the country. Despite a wider recovery over the past few years, that momentum has built, eventually culminating in last month’s events. With it clear that Madrid, and Europe, will do everything in their power to prevent Catalonia’s secession (independence would almost certainly trigger similar movements in the Basque country and across Europe) the question is now how to build bridges and mend fences.

Hope lies in the fact that it is still believed that a majority of Catalans would prefer to find a solution that does not involve full independence. While 90% of voters who turned out for the illegal referendum voted in favour of independence, overall turnout was only 42%. Those in favour of remaining as part of Spain are thought to account for the vast majority of the remaining 58%.

The reaction of Catalonia-based business also suggests that the local economy would also be far less successful as an independent nation. Reports, admittedly Spanish government reports, suggest that more than 2,000 Catalonia-based firms decided to leave the region following the referendum vote. The two largest banks in the region, CaixaBank and Sabadell were at the vanguard of the exit amid reports the uncertainty was have a negative effect on deposits.

The Chief Executive of Freixenet, a Cava maker strongly identified as Catalonian, indicated the company is also considering its position by stating “businesses need legal certainty and we do not have it right now.”

It is clear that much relies on next month’s elections and the hope that a new Catalonian government can negotiate terms that will lead to an amicable solution to the secession argument. Catalonian independence would undoubtedly inflict a deep wound on Spain’s economy but the region itself would also suffer hugely. There would be no likelihood of the EU accepting an independent Catalonia into the fold in the foreseeable future as doing so would set a precedent for every region in Europe with political parties holding similar aspirations.

How Catalonia’s economy might bounce back in the longer term is impossible to predict but it would certainly be a painful adjustment in the shorter and medium terms.

With so much at stake on both sides, the chances are that a new government will negotiate concessions such as greater financial autonomy for the region and possibly recognition as a ‘nation’ within Spain. In the meanwhile, the uncertainty has already knocked at least a few percentage points from Spain’s GDP growth for 2018 and the situation needs to be resolved with expediency.

 

LEAVE A REPLY

Please enter your comment!
Please enter your name here