Could Catalonia survive as an independent region?

By:
Kanika Saigal
Published on:

Fears over the regional independence push are likely to stalk Spain for years while the EU-wide ramifications run deep.

The eurozone debt crisis has triggered a surge of separatist sentiment in some of Spain's 17 semi-autonomous regions. Although calls for greater independence have been heard for years and, inevitably, ring louder during recessions, fears are growing that the country's economic crisis could radically redraw Spain's fiscal borders, with EU-wide consequences.

At first blush, it's not hard to understand why: unemployment in Spain is highest among all the eurozone countries at 24.6% and nearly half of all young people in the country are unemployed. In prime minister Mariano Rajoy’s budget for 2013, overall spending is due to be cut by €40 billion, public-sector worker salaries will be frozen and unemployment benefits will be cut, as austerity takes its grip on the country.

Although the debate about Catalan nationalism has been played out repeatedly since democracy in 1978, Catalan independence has gathered pace amid the debt crisis.  

As Alex White and Raphael Brun-Aguerre of JPMorgan point out, Catalonia – with 16% of the population – is among Spain’s wealthiest, contributing 18.6% of GDP in 2009, and making net fiscal transfers to the central government between 7% to 8% of regional product – outside recession periods. And the federal government's bid to seek greater fiscal powers comes just as the regions are fighting back. White and Brun-Aguerre state:

"Spain’s fiscal design problem is made more complex by the fact that the regions making the largest total net fiscal transfers, including Catalonia and Valencia, are also the most indebted, and have historically issued debt heavily to meet growing regional shortfalls. The fiscal crisis has limited their ability to cover obligations to the central government through debt issuance, and has forced consolidation. Both regions ... have recently needed to access support from the central government’s regional aid fund, the FLA ... 

"... Whatever the rights and wrongs of Catalonia’s position, it is clear that the current division of fiscal responsibilities is unsustainable politically ... The proposed solutions have been very different, however, with the central government now seeking to reassert centralized control of fiscal matters across Spain (notably with the implementation of the Budget Stability Law earlier this year), while many of the regions pull the other way. For Catalonia in particular, the solution has always been about securing more fiscal autonomy, not less."  

Of course, autonomy and independence are two distinct agendas, but what White and Brun-Aguerre highlight is that with the need for more autonomy, support for full independence is also on the up, accounting for 53% of Catalonians, which rises again to 62% of the population if EU membership can be assured for the region – although they note that these figures might not be reliable.

However, even if the movement was proven to be popular, there are myriad problems to gaining independence for Catalonia. Even though the Spanish constitution could be changed, as it stands, the analysts state:

"The Spanish Constitution of 1978 does not permit regional referenda; under the Constitution as it stands, there is no way that Catalan voters could even be asked about their views on greater fiscal autonomy, let alone independence." 

Moreover:

 "Were Catalonia ever to achieve independence, it would likely need to reapply for membership of both the euro area and the European Union as a whole ... The process of applying for membership, under Article 49 of the European Treaty, could present significant difficulties. An application would take considerable time, even under the most benign scenarios, and impose significant transition costs."

And the question of whether or not Catalan would be fiscally credible is even more difficult to assess.

So what will be Catalonia’s fate? White and Brun-Aguerre conclude:

"Given the scope of the political, legal and fiscal difficulties ahead of it, we think the path ahead for Catalonia is more likely to see a shift toward greater fiscal autonomy rather than full independence – but the fact that the independence option appears credible (if not necessarily attractive) will increase the likelihood of the region securing strong autonomy arrangements."  

Regional elections are due on November 25 and Catalonian support for independence will no doubt be shown then. In any case, fears about regional independence are likely to stalk Spain for years while the EU-wide ramifications run deep. As the analysts note: "There are larger questions: [one being] why should Germans support poorer Spanish regions if Catalans object?"

" We think there is real chance that Catalonia will secure significant  changes to its relationship with Spain; if correct, this would have major implications. Should Catalonia be able to renegotiate the terms of its relationship with the centre in a way which limits fiscal transfers this would have an impact on the Spanish central government’s fiscal path. It would also set a further precedent, which would have an impact on Madrid’s ability to control the other 16 regions, the wealthier of which may also be encouraged to request greater fiscal freedoms.

This would pile further pressure on the sovereign if, as is likely, it is the transferring regions which choose to renegotiate the terms of their relationship with the centre. More broadly, this opens a larger political question for the Euro area as a whole; namely that if Catalonia is unprepared to subsidize Spain’s poorer regions, why should Germany or other countries of the European north? This is the same question that IMF members (e.g., China) ask of the Euro area as a whole in its management of the crisis. We expect this question – of the political mandate for transfers - will ultimately need to be tested in referenda across other parts of the Euro area; Catalonia could simply be leading the way.