Why Madrid Will Never Let Go – Catalonia Is Closer To The Eurozone Than Spain

September 30, 2017
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As we have detailed previously, the Spanish region of Catalonia in the North-Eastern corner of Spain will attempt to hold an independence referendum tomorrow, against the will of the central government in Madrid.

Apart from the Baleares and the Madrid region itself, Catalonia together with its capital Barcelona is one of the most economically-powerful parts of the country.

Notably, as Statista’s infographic below shows that the gross domestic product (GDP) per capita of Catalonia lies closer to that of the Eurozone than of Spain as a whole.

Infographic: Catalonia Closer to the Eurozone Than to Spain | Statista

You will find more statistics at Statista

This in mind, it comes as no surprise that Madrid is by all means opposed to letting go of Catalonia.

As The BBC notes, Catalonia, a wealthy region of 7.5 million people in north-eastern Spain, has its own language and culture. It also has a high degree of autonomy, but is not recognised as a separate nation under the Spanish constitution. Pressure for a vote on self-determination has grown over the past five years as austerity has hit the Spanish economy and people hard.

Why is Madrid so opposed?

Spanish Prime Minister Mariano Rajoy stared down Catalan secessionists when they held a trial referendum in 2014, offering no concessions to their demand for a legal vote.

He has pledged to stop the 2017 vote, saying it goes against the constitution which refers to “the indissoluble unity of the Spanish Nation, the common and indivisible homeland of all Spaniards”.

Which brings to mind the biggest question, what would happen to Spain in case of Catalonia’s secession?

As GEFIRA explains, in terms of the debt sustainability parameters laid down by the Treaty of Maastricht, it’d be the Eurozone debt crisis 2.0.

As Spain now maintains the second year of 3% GDP growth, an even bigger, immediate fiscal threat is looming. After multiple ineffective referendums in the previous years, this time the Catalan government is likely to finally assert independence. What will it look like against the background of the Maastricht financial requirements?

Debt to GDP ratio

The Treaty of Maastricht says it should be 60%. Spain’s debt to GDP ratio was 39% in 2007, but after the financial crisis it gradually rose to 99.4% today. Should Catalonia leave, there are two possible scenarios:

1. Catalonia agrees to take a share of the Spanish total debt, as a “divorce bill”, because after all it benefited from the government spending in Catalonia itself;

or

2. Catalonia leaves without taking any share of the total Spanish debt.

In the first case, nothing would change, assuming Catalonia would agree to take the share of Spanish debt equal to its share in Spain’s total GDP. In that case, Catalonia accounts roughly for 20% of the Spanish GDP, which means it would take 20% of the Spanish debt. Given that the Spanish debt is right now almost the same size as the Spanish GDP, calculations are rather simple.

Source: Statista.

The second option is rather dramatic. Without Catalonia, Spanish GDP would automatically shrink by 20%, while having to service the entirety of the debt. The debt to GDP percentage ratio would go from 99.4% to 124% overnight.

Deficit to GDP percentage ratio

The Treaty of Maastricht says it should be 3%. Spain has been way outside it since the financial crisis, with a peak at 11% in 2011. For 2016 it was 4.5%.

Here the problem is understanding how much more tax revenue Spain gets from Catalonia than it gives. Catalonia says 11.1€ billion, Spain says 8.5€.

Either way, as the deficit is calculated as expenditure minus revenue, it would be a hole in the revenue of the Spanish government of 8.5 to 11.1€ billion. Last year the deficit/GDP ratio was 4.5%, corresponding to approximately 21€ billion. With the Catalan secession, assuming a 10€ billion hole for simplicity between the estimates of the Spanish and Catalan governments, Spain’s deficit would go up to 60€ billion, while its GDP would shrink by 20%. Result? The deficit to GDP percentage ratio would be 6.7%, back to 2013.

Conclusion

The doomsday scenario would be Spain waking up with a debt equal to 124% of its GDP and growing, due to the 6.7% deficit, which would take another 4-5 years to be contained. The EU’s response to the possibility of Spanish bankruptcy would be predictable: more austerity. It is important to note that while Spain has been growing for the past two years and unemployment is also decreasing, the recipe chosen by the Spanish government, flexibility of the labour market in the form of temporary jobs, has exacerbated income inequality: as the OECD points out that temporary jobs are low-productivity and thus earn low wages; the precariousness of the job prevents improvements in productivity, thus improvement in wages. The poor remains poor, while the rich gets richer and the gap widens.4)

Boosting GDP and employment statistics with mini-jobs is thus masquerading an issue common to other Western countries: the collapse of the middle class.

Catalan independence could prove to be the last nail in the coffin: either Spain goes bankrupt or is forced to implement even more austerity at the risk of facing a revolution from the economically displaced.

*  *  *

And that’s why Madrid doesn’t want to lose Catalonia…

Once before, in October 1934, shortly before the Spanish Civil War (1936 to 1939) broke out, Catalonia had announced its independence from the rest of Spain. This prompted Madrid to sent the army to Barcelona.

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