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It has more than 7.5 million inhabitants, represents 8% of the national territory and accounts for 20% of the national GDP. Catalonia, in the North East of Spain, is considered to be one of the wealthiest and most productive autonomous regions in the country; however, its relationship with the national government has always been defined by the debate about independence. Once again, secession seems to be at the top of political agenda. But how viable is independence? And, above all, what would be its cost?

One of the arguments used to explain why this region should consider becoming an independent country is the disparity between what Catalonia contributes to the state through tax revenue and what it receives from the state in terms of funding and public spending. This is what economists have called “fiscal imbalance”.

According to Alfons Durán-Pitch, from ESADE, Catalonia transfers Spain twice as much money as the EU every year. Professor of Financial Economics and Accounting at Pompeu Fabra University Oriol Amat offers other examples.

“Catalonia represents 20% of GDP, 21% of taxes, 24% of exports, but only 14% of public spending, 8% of investment in infrastructures, 4% of toll free highways…”.

That means Catalonia may be losing the equivalent to 8% of its GDP per annum – 16 billion euros, whereas if that money were to stay in the region, Catalonia would be better off.

Independence debate is more complex than that, though.

The viability of independence

Catalonia’s GDP grew 0.32% and 0.82% in 2010 and 2011. Even though unemployment has increased and many companies have shut down – as in the rest of the country, Catalonia presents positive indicators. For instance, sales rose by 2% in 2011 due to exports to other European countries that are recovering from the economic crisis faster than Spain.

Being able to diversify its offer and the markets where Catalonia positions its products and services has notably helped the regional economy. Oriol Amat highlights Catalonia’s strengths:

“Its location, a diversified tourist offer – beaches, mountains, snow, gastronomy, architecture…, a diversified economic activity – car industry, agro food industry, chemistry, tourism…, its export oriented economy, and its entrepreneurship and business culture”.

Nuria Bosch, professor of Economics at the University of Barcelona, agrees with him. This researcher at the Barcelona Economics Institute is co-author of the Viabilidad de Catalunya como Estado report (Viability of Catalonia as a State). The document states that, as an independent country within the EU-15, Catalonia would mean 1.84% of the EU population – it would be bigger than Denmark and Finland – and its GDP (2009 figures) would be higher than Luxemburg, Netherlands, Ireland, Austria, Denmark and Sweden. Looking at 2011’s statistics, Catalonia’s GDP per capita – 27,400 euros – would still be higher than the EU average – 25,200 euros, surpassing even Italy and Spain. As a result, she reckons, the region should not have important flaws that could make independence unviable, apart from the aforementioned “fiscal drainage”.

GDP Spanish regions - Growth rate - Source: Statistics National Institute

GDP Spanish regions – Growth rate – Source: Statistics National Institute

Downsides

Oriol Amat also talks about the fiscal imbalance when asked about Catalonia’s flaws from an economic point of view.

The region has a lack of raw materials, he explains, “a public sector not oriented to business, and a lack of infrastructure policy focused to improve business environment”. Nevertheless, “every year Catalonia transfers 16,000 million euros to Spain which do not come back to Catalonia via public spending. This explains why Catalonia is the fourth richest region in Spain but after the interregional transfers Catalonia passes to the ninth position. This means that five regions which generate less wealth become richer than Catalonia because of this regional compensation”.

By contrast, advocates of centralism warn that, on becoming independent, the new state would not necessarily recover that money. As a separate country, Catalonia would need to start paying for services that are currently provided by the Spanish government, and those services would mean at least 2.7% of the region’s GDP. Moreover, Catalonia would need to face the cost of creating a new state’s institutions and it would not receive the five billion euro rescue fund it has apply to the Spanish government for.

Mikel Buesa, professor of Applied Economics at the Complutense University of Madrid, says separation from Spain would make Catalonia’s GDP fall by 23%; not to say, its external deficit would considerably grow. Furthermore, it would still have to take on its own share of the national Spanish debt and would be out of the euro – and the latter could certainly make a difference: the percentage of Catalans supporting independence, currently between 46 and 57%, drops 10% if Catalonia cannot stay in the EU.

Leaving the Eurozone

President of the European Commission Jose Manuel Durao Barroso has already said that an independent Catalonia would not automatically become a member of the EU. Professor at the University of Barcelona Nuria Bosch reckons that if Catalonia were not immediately in the UE, there would be practical reasons why it would be undesirable for everybody to introduce duties or restrictions on trade or the circulation of goods, capital or labour. Her opinion contrasts however with all the reports that say Catalonia would lose any type of financial support from the EU, citizens would not enjoy passport-free travel anymore and cross-border regulations would apply.

That situation may increase the risk of disinvestment and relocation of businesses, which may move to Spain and other neighbouring countries to access the common market, as well as affecting exports inside and outside of Spanish borders, which currently accounts for 50% of the region’s GDP. Thus, Catalonia’s GDP could drop between 4 and 19% – note these estimates depend on who provides the forecasts; the latter is provided by the Spanish Ministry of Foreign Affairs.

The impact of the debate

Leaving forecasts aside, many economists point out the independence debate itself may have already had impact on Catalan and Spanish economy.

Proportional map produced by Pankaj Ghemawat, IESE Business School, Barcelona

Proportional map produced by Pankaj Ghemawat, IESE Business School, Barcelona

Half of Catalonia’s trade flows outside of Spanish borders. The proportional maps produced by Pankaj Ghemawat, (see image) a business thinker at IESE Business School in Barcelona, show France is the top destination of Catalonian products and services – 10%, but the next three biggest destinations are the regions of Andalucia, Aragon and Valencia. According to this, Spain is still Catalonia’s largest trading partner and the independence debate could be detrimental to that relationship.

That is what happened in 2005, when discussions around the statute of autonomy of Catalonia resulted in a drop in the sales of Catalan cava in other Spanish regions. That was known as the “cava boycott”. Sales of cava outside of Spanish borders grew 6.3% whereas sales to the rest of the country fall by 6.6%.

“The Spanish boycott against Catalonian products has existed for decades, but in special moments it gets higher”, professor Oriol Amat explains. “As a consequence of the present debate, some Spanish companies have announced that they have cancelled orders to Catalan suppliers”.

Of course, the situation has changed in the last seven years. Catalonia is less and less dependent on the Spanish market and even if Spanish customers decided to stop buying Catalan products, a boycott always works two ways. The effect of the independence debate is therefore difficult to predict. So is the impact Catalonia’s secession may have. Economics is not an exact science, after all.

And what about Spain?

The majority of the reports and analysis that have been published in the last months focus on the impact independence would have on Catalonia. However, as an autonomous region of Spain, secession would also affect the country.

For example, Catalonia is home to some of Spain’s largest companies and almost a third of Spain’s exports come from the region, which has drawn in more than 3,000 multinational investors. Boycott could also happen the other way round – from Catalonia to Spain.

Director of the European Centre for International Political Economy (ECIPE) Fredrik Erixon is concerned about the overall uncertainty Catalonia’s secession may cause. “The Spanish government still runs significant fiscal deficits and has to roll over about a fourth of its total debt stock every year – that, it has to take up those loans on the market again as they expire. And given the palpable downside risks of further economic decline in 2013 and 2014, any development that erodes the capacity of Madrid to honour its debt and confidently pursue a policy of consolidation will have strong implications for the markets. Furthermore, Catalonia is a prosperous region of Spain and a withdrawal from Spain of the revenues generated in the commercially active region will negatively affect Spain’s fiscal policy”.

Even so, there can always be positive effects. Regarding the independence debate and how it may affect Spain, Nuria Bosch says: “In the long run, it could be a regenerative factor for the Spanish economy, especially in the regions that are over-dependent on subsidies”, Nuria Bosch says.

(Published on 1st January 2013 – www.wavemagazine.net)

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