Here’s how bad economically a Spain-Catalonia split could really be.
A split between Spain and Catalonia would cause a major political shake-up in the country but would also have significant consequences for the economy of both sides, experts have told CNBC.
Voters in the prosperous Spanish region are set to be asked next month to choose if they want to secede from Spain following a decree signed on September 7. “Catalonia belongs to this world that looks forward, and that’s why it will decide its own future on the 1st of October,” Carles Puigdemont, the president of the Catalonia region, said defiantly earlier this month.
Pro-independence lawmakers hope the northeastern region will gain complete political and economic autonomy from Spain despite the referendum putting Catalonia in open defiance of central authorities in Madrid. Spanish police are reported to have raided several departments of Catalonia’s regional government this week as tensions rise over the banned independence referendum.
As the most prosperous of Spain’s 17 regions, Catalonia houses roughly 19 percent of Spain’s economy, benefiting from tourism, exports, manufacturing, and industry.
Catalonia has talked of separation from Spain since the founding of Estat Català – a political movement which began in 1922 – and throughout the 36-year dictatorship of Franco, however, the resurgence of the pro-secession movement over the past few years is due primarily to Spain’s economic woes, a 2010 constitutional court decision to lessen Catalonia’s sovereignty, and a distrust of Madrid or the centralized Spanish government.
Immediate impacts of the separation
The short-term outcomes of separation would be negative for both parties, according to Alain Cuenca, an economics professor at the University of Zaragoza in Spain.
“The establishment of a border would result in a loss of jobs, income and wealth for everybody, whether they live in Catalonia or in the rest of Spain,” Cuenca told CNBC via email.
“Those losses would be provoked by the obstacles to trade, by financial problems, by the spending needs of the new state.”
While Catalans only account for about 16 percent of the Spanish population, Catalonia makes a hefty contribution to the overall Spanish economy, making 223.6 billion euros ($262.96 billion) a year, according to the regional government.
Using figures from official European and Catalonian organizations, Business Insider claimed earlier this year that the region would quickly gain about 16 billion euros yearly in the case of a split, as they would no longer have to pay taxes to Spain. This would then result in a loss of about 2 percent to the Spanish GDP (gross domestic product) yearly.
At the same time, Catalonia could take a potential hit, as 35.5 percent of Catalan exports are to the Spanish market. Catalonia would also have pay to create new state structures (embassies, central banks, etc.) which carry a large price tag.
This week, Spanish Economy Minister Luis de Guindos claimed that Catalonia could see its economy shrink by 25 to 30 percent and its unemployment double if it splits to form a separate state.
Regardless, the fate of both nations would ultimately come down to the decisions made in post-separation negotiations on debt and the European Union.
“How many jobs, how many investments, how many commercial operations would be lost during transition? No one knows precisely.”
The debt issue
Spain’s national public debt in 2016 was priced at roughly $1.18 trillion, according to central bank statistics. Meanwhile, Catalonia has amassed one of the largest public debts of Spain’s regions, at roughly 72.2 billion euros ($86.9 billion) in 2016. Around 6 billion euros of this is for long-term securities that have been issued and the rest being various loans from different institutions.
Therefore, Catalonia accounts for 16.34 percent of Spain’s debt, which is not a small price tag. This aspect, combined with the loss of Catalonia’s tax revenues, would be a hit to the Spanish economy.
While many believe that the public debt of the new nation “would inevitably be assumed by the Kingdom of Spain,” Cuenca explains that the direct separation impact to the debt is impossible to predict.
“The problem, again, is transition: For how many years would financial trouble last? How many jobs, how many investments, how many commercial operations would be lost during transition? No one knows precisely,” Cuenca said.
The success of Catalonia is determined heavily on whether or not they would assume a percentage of the Spanish debt and if they would be required to pay off their own debt. Either situation could prove to be detrimental to a new Catalan nation and would damage the potential for economic expansion.
The European Union
“In terms of trade, if Catalonia were to remain as part of the EU, nothing would change,” Albert Banal-Estañol, an economics professor at Universitat Pompeu Fabra, said.
This is because Catalonia would retain its current trading partners and continue to use the euro. Catalonia, however, does not have an automatic right to membership in the European Union. This issue echoes problems that arose during Scotland’s own independence referendum in 2014.
In order to become a part of the union it must receive a unanimous “yes” from EU members and that includes Spain and its allies, which are unlikely to vote for Catalonia’s addition to the union. If the new nation were to be denied entrance or have difficulty joining the union, the Catalan economy would face large transition costs, as the EU accounts for roughly 65.8 percent of Catalan exports.
Furthermore, Catalonia may also face a trade boycott from the rest of Spain.
For Banal-Estañol, this is not a deal-breaker as boycotts have been circumvented by Catalonia in the past.
“It is unclear how long a boycott would last, and how strong it would be,” Banal-Estañol said.
“Businesses may search for other markets, as they did in the past, during previous boycotts (as in the case of the Cava, the sparkling wine of Catalonia) or during the severe economic crisis in Spain.”
Catalonia could also face economic turmoil due to its separation for the European single currency, and increased tariffs on their goods and services. Ultimately though, Catalan nationalists will pay any price for independence, regardless of the economic losses.
“The economic arguments will not be the prevailing ones in the debate over Catalonia’s independence,” Cuenca said. “The arguments used by both sides appeal to identity.”