The economic cost of Catalan secession

Essays - November 9, 2022

Very often, arguments regarding a potential secession of Catalonia from Spain deal with immaterial issues, sometimes of an ideological nature, which operates on or even manipulates people’s mind-set.

Without prejudice to historical, legal and political considerations, all of them relevant and legitimate as long as they correspond to the truth, it is important also to take a look at the problem from an economic point of view.

A study published in February 2021 tries to bring light on the matter.  Its conclusions are negative with regards to Catalonia’s viability as an independent nation and to the price that would have to be paid for such situation.

The first consequence Catalans would have to face is a decrease in exports, at least in the short term.  Being a part of the European Union, all Spanish regions benefit from a common market; independence from Spain would place Catalonia outside of the Union, which would provoke Catalan exporters to pay tariffs calculated as much as 15% of price increase.

In the midterm, Catalonia could try to re-enter the European Union again, negotiating in order to override a potential veto coming from Spain.  But, until then, new exporting markets would need to be accessed, bearing in mind that more than 60% of Catalan exports have the EU as a destination.

But actually the situation would not only be detrimental for Catalonia, but also for Spain.  Catalonia accounts for 25.6% of Spanish exports, so a Spain without Catalonia would also have to make up for that percentage.

Furthermore, bot Catalonia as well as the rest of Spain would compete in export markets to compensate those gaps:  a true lose-lose scenario, being Catalonia the region with the highest gross domestic product (GDP) in Spain.  The study estimates the fall in exports for Catalonia at 43%, a dramatic change.

And hat about imports?  21% of Catalonian inputs come from the rest of Spain while 55% have an EU origin.  Therefore, the loss of preferential status within the EU would potentially affect 76% of goods and services that Catalonia needs to acquire, a very high proportion of dependence risk.

Tourism is an economic sector that would also be heavily impacted.  In fact, it has already been damaged during the past years when the nationalist road towards independence has increased intensity.

Foreign investment is estimated to fall between 33% and 40% in the case of independence, due to the instability that is so undesired in capital markets.  So far, the variation of foreign investment figures in Catalonia between 2016 and 2020 does not show a downward trend, but this could well change for the worse if independentists get their way.

Public debt in Catalonia is already high, with a debt-to-GDP ratio of 33.7%.  Outside of Spain, having to pay for public services like defence, justice or foreign affairs (currently assumed by the central government), the study estimates the increase of the ratio to a figure between 112% and 126%.

That is double the figure of the Reinhart and Rogoff 60% ratio according to which a country’s annual growth declines by 2%, and well over their rule of 90% where annual growth gets cut by half.

It is true that an independent Catalonian government could collect higher taxes, currently distributed to poorer regions in Spain.  But such increase could not compensate the huge amount of public debt needed after seceeding, as has been pointed out.

The monetary policy is another source of gloomy perspectives after a hypothetical independence.  It is probable that even a seceeding Catalonia would keep the euro as a free circulating currency, with the counterpart of surrendering monetary sovereignty to the European Central Bank (ECB) in Frankfurt, as it is the case for all member states within the European Monetary Union; but even if that monetary choice were made, banks in Catalonia would not benefit anymore from the support of the ECB and a negative external balance for Catalonia would create financing problems.

If a new currency were created with no euro circulation in Catalonia, all kinds of doubts would arise in international markets, with a potential risk of capitals fleeing the region and further difficulties to return to the EU due to such economic instability.

Source of the picture:  El Confidencial Digital