Both sides could suffer in Catalan independence from Spain

With Barcelona and the Catalans on the precipice of achieving independence,

Last Monday, the Catalan parliament in Barcelona voted to begin the process of secession from the Spanish state, kicking off a process that could end in the establishment of a new Republic in north-eastern Spain.

The authorities in Madrid, the Spanish capital, have been quick to respond. The country’s Constitutional Court struck down the move while the country’s normally reticent King Felipe made a rare intervention, insisting that he would uphold the unity of his Kingdom.

So far, financial markets have been taking these developments in their stride but for how long will such tolerance last given the question marks, to say the least, now hanging over Spain’s nascent economic recovery?

Indeed, any rupture, particularly one involving acts of violence, would have seismic implications of a geopolitical nature across a Europe now feeling the huge strain of a refugee crisis of a scale foreseen by few.

The latest events are the culmination of a falling out between the Catalans and much of the rest of Spain that — like so much else — can be traced back to the financial crisis of 2007/8.

To those of us who recall the euphoria surrounding the Barcelona Olympics in 1992, the prospect of spreading disorder in the beautiful centre of the Catalan capital appears far-fetched, but then stranger things have come to pass.

In the 1930s the Leftists holding Barcelona spearheaded a three-year-long resistance to General Franco, whose lengthy dictatorship was loathed by many Catalans.

The restoration of democracy to Spain was accompanied by the revival of the ‘Generalitat’ or regional government of Catalonia in 1977.

For many years, the Catalans appeared happy with their lot as Barcelona, in particular, prospered.

The downturn, however, sparked much resentment among Catalans. Supporters of independence claim they pay €16bn more to the central coffers in Madrid than they receive.

Secession emerged as a real prospect early in 2012, at a time when unemployment across Spain had surged to more than 25% and the more prosperous Catalans were feeling the pinch.

All this has occurred — ironically enough — just when a peace process with Eta, the Basque army which fought a long war with Madrid, appears to have taken root.

The long-time father of Catalan nationalism, Jordi Pujol, explained that relations had reached a “negative turning point” because “many Spanish were getting cold feet about the amount of autonomy granted to the region”.

Pujol hinted at a new level of rigidity being shown by Prime Minister Mariano Rajoy, leader of the right-wing Popular party founded by the former Franco era minister, Manuel Fraga.

Others suggest the better-off Catalans are simply clutching their purses tightly, displaying a lack of solidarity. Any rupture would have very real consequences.

Economists estimate that both Catalonia and the rest of the country would suffer heavily from the lost revenues, reduced business activity, and higher borrowing costs that would come along with a split.

The Catalan region accounts for 16% of Spain’s population and almost 20% of its GDP. It also handles 70% of Spain’s exports, including much of its exports of cars and electronics.

Critics of the secession project point to the fact that some of the most indebted companies and banks listed on the Madrid stock exchange are Catalan. JPMorgan Chase and UBS have estimated that a split could result in a GDP loss of over 10% in Catalonia and around 3%-5% in the rest of Spain, though such estimates are speculative.

Catalan exports would suffer, in particular, given the fact that its major customers are located in other regions of Spain. The banks have suggested that job losses in Catalonia and the rest of the country could reach 700,000. What seems certain is that Spain’s economic recovery — with growth of 3% this year — would be derailed.

The Catalan secessionists counter that independence could trigger a new dynamism not only in their region, but across the Iberian peninsula.

But that would take time.

Borrowing costs would surge, reigniting a crisis on the periphery of the eurozone at a time when the EU is grappling with a crisis of refugees and economic migration with few parallels. It would also, by the way, mean that Barcelona and Real Madrid could end up playing in separate football leagues.

Ironically, events in Barcelona appear to have boosted the re-election chances of Rajoy, who is seen voters as a safe pair of hands in a crisis rather than as simply the dour political deadweight of wide repute. His Popular party has pulled ahead in the polls, though its re-election remains far from certain.

Should Rajoy retain power, he would be the first austerity-era leader in the eurozone to do so.

The secessionists in Barcelona, meanwhile, are showing signs of falling out among themselves, with splits developing between the moderates under the Catalan president Artur Mas and more militant groups. The pro-independence groupings took around half the vote in recent regional elections.

This may simply not be enough to swing the deal.

The Catalans should take a few lessons from the canny Scottish nationalist leader, Nicola Sturgeon, who is biding her time before committing to a second referendum on independence. The SNP leadership has avoided the temptation to go down the republican road, opting for gathering more powers to the administration it runs in Edinburgh.

The Catalan secessionists may achieve more of substance while avoiding the real risk of conflict in the streets if they commit to the existing settlement based on constitutional monarchy while wresting more fiscal concessions under a federalist model.

Rajoy might also do well to reflect on why it is that so many Catalan politicians, previously committed to the Spanish state, now support independence.

If the politicians across Spain, through a mixture of opportunism and rigidity, conspire to wreck the post-Franco dictatorship consensus, the consequences for European finances, politics, and defence (given Spain’s role in Nato) could be serious, if not severe.