Daily Management Review

Will the Catalan crisis bury the Spanish economy?


09/22/2017


The conflict between Catalonia and Spain can lead to major political turmoil and serious economic aftermath for the both sides.



Alex Muntada
Alex Muntada
Next month during the referendum, the inhabitants of Catalonia should resolve the issue of independence from Spain after the decree signed earlier in September.

"Catalonia belongs to the world which looks to the future, and that is why it must determine its future on October 1," Carles Puigdemont, Catalonia's leader, defiantly announced.

Legislators supporting the idea of Catalonia's independence hope that the north-eastern region will receive full economic and political autonomy from Spain, despite the fact that the referendum openly opposes Catalonia to the central authorities of Madrid. It is reported that this week the Spanish police raided a number of ministries of the regional government of Catalonia amid growing tensions in relation to the banned referendum.

Catalonia is one of the richest regions of Spain. It accounts for about 19% of the country's economy thanks to tourism, exports, production and industry.

The separatist attitude has been growing in Catalonia since Estat Català, a political movement that began in 1922, wa sfounded, and throughout the 36-year-long Franco dictatorship. However, the revival of the movement advocating separation has been renewed in the last few years mostly to Spain's economic problems, the decision of the Constitutional Court of 2010 to reduce the sovereignty of Catalonia and distrust of the centralized Spanish government.

Against the background of the discussion of Scotland's relations with the EU after the Brexit referendum, questions arose about the economic consequences of the split in Catalonia and Spain.

According to Alain Cuenca, professor of economics at the University of Zaragoza in Spain, the first results of the separation will be negative for both sides: "The creation of the border will lead to lost jobs, income and prosperity for all, no matter where they live. These losses will be caused by obstacles in trade, financial problems, and the new state’s need for spending. "

According to the regional government, Catalans make up about 16% of the overall Spanish population. The region makes a significant dotation to the overall economy of Spain - about € 223.6 billion per year. Official data from European and Catalan organizations suggests that the region will be able to receive about € 16 billion in a year in the event of a split, as taxes to Spain will be abolished. The annual loss of Spain's GDP will be about 2%.

Also Catalonia can deal a potential blow to Spain, as 35.5% of Catalonia's exports fall to the market of Spain. Catalonia will also have to pay for the creation of new government bodies (embassies, the central bank, etc.), which can also lead to large expenditures.

This week, Minister of Economy of Spain Luis de Guindos said that the new country could face a 25-30% drop in its economy, doubling unemployment if it detached to create a separate state.

Despite this, the future of both countries will ultimately depend on the decision taken after dealing with the debt issues and the EU.

According to central bank statistics, Spain's national debt amounted to $ 1.18 trillion in the last year. Meanwhile, Catalonia is one of the most credited Spanish regions - about € 72.2 billion in 2016. Approximately six billion euros are accounted for long-term papers, the rest are various loans.

Thus, the share of Catalonia accounts for 16.34% of the country's debt, which is not so little. This aspect and the loss of tax revenues will hit hard on Spain's economy.

The success of Catalonia is largely determined by whether it takes on a percentage of the Spanish debt and whether it is obliged to repay its own debt. Any situation can be harmful to the new Catalan nation and can damage the potential for economic expansion.

source: cnbc.com






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