Europe

An Economic Strategy for a United Spain


Spain is on the brink of a political crisis as the confrontation between Catalonia and the central government escalates over Catalonia’s future. The recent developments are indeed a wake-up call for Spain, which must address growing discontents in Catalonia with a long-term economic strategy.

Image courtesy of SBA73, © 2010.

In a non-binding referendum earlier this month, Catalonians voted overwhelmingly in favor of becoming an independent country. Despite calls for dialog following the referendum, Prime Minister Rajoy invoked Article 155 of the Spanish Constitution, and suspended Catalonia’s autonomy. Prime Minister Rajoy also declared that he will remove Carles Puigdemont, Catalonia’s leader, from office. While this heavy-handed approach is likely to suppress the independence movement temporarily, it will only foment Catalonia’s separationist fervor in the long run. If the Spanish central government wants to promote long-term harmony between Catalonia and Spain, it must instead adopt a more sophisticated and conciliatory strategy to address the on-going crisis.

Madrid must first recognize the economic divide between Catalonia and the rest of the Spain that lies at the heart of Catalonia’s economic disenchantment. One of the richest regions of Spain, Catalonia accounts for 20 percent of Spain’s economic output. Indeed, Catalonia boasts stronger growth and lower unemployment rates, and higher foreign investment levels than most regions in Spain.

As the economic performance between Catalonia and the rest of the Spain diverges, a growing number of Catalonians feel that the Spanish central government receives more than it returns in spending. A poll taken last year by the Catalonian regional government found that 80 percent of Catalonians agreed that the central government appropriated too much of their tax money and weakened Catalonia’s public infrastructure. According to the regional government, Catalonia sends in roughly €11 billion to €15 billion more to the central government than it receives, which represents a transfer payment of  €1,500 and €2,000 per person.

This tendency of wealthier regions receiving less money than poorer regions is common across the developed economies, including the United States, and hardly constitutes an argument for independence by and of itself. For instance, New Jersey gets only $0.88 in federal spending for each dollar it puts in, whereas Mississippi receives $3.07. Nevertheless, Madrid would be well-advised to placate Catalonia’s economic concerns by boosting public spending in Catalonia.

To this end, the Spanish government has a number of tools at its disposal, including setting goals to reach parity between Catalonia’s contribution to and outlays from the central budget. Spain would also be well-advised to restore and enhance Catalonia’s autonomy, which was previously curtailed by the Spanish Supreme Court in 2010, leading to widespread protests across Catalonia and laying the foundation for today’s independence movement.

Given the importance that Catalonian activists place on the economic gains of independence, Madrid must emphasize the economic losses that independence will cause. Catalonia expects that, if it splits from Spain, it will automatically become a member of the European Union. However, if Catalonia were to declare independence and this proclamation were recognized internationally, it would have to apply to join the EU—which Belgium and Italy, worried of a contagion effect, would most likely veto.

Even if Belgium, Italy, and Spain do not veto Catalonia’s adhesion to the European Union, the interim period alone is projected to cost Catalonia 0.5 percent of its annual economic growth, not including the costs of establishing government agencies and institutions required to run the new country.

Then there is the question of currency and national debt. Catalonia would not only inherit a significant portion of Spain’s sizeable national debt, but it would also have to remain an independent country for three years before it could even apply to become part of the euro area. The chances of a successful application—given the opposition of Spain, Italy and Belgium—is slim. Catalonia could of course issue its own currency using a floating exchange rate; however, a new Catalonian currency would experience wild fluctuations. As such, borrowers are likely to charge much higher rates, which would severely worsen Catalonia’s already strained finances and its future prospects for EU membership.

As a last resort, Catalonia could adopt the euro unilaterally, like Montenegro did in 2002, but even this arrangement might be untenable if foreign investment flees the country due to protracted uncertainties and heightened political risk.

In light of Catalonia’s economic performance, pro-independence activists argue that independence will pave the path for an even brighter economic future. However, Catalonia’s independence would be a leap in the dark for the region and would severely harm its economy in the long run. While this is a point that Madrid should emphasize, it must also heed Catalonia’s economic concerns and its demand for autonomy. Such a conciliatory approach, and not its current heavy-handed approach, should guide Spain’s long-term strategy in Catalonia.

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