Catalans Would Pay a High Price for Independence
The Spanish government has firmly ruled out independence for Catalonia. But even if Barcelona were to go it alone its citizens would almost certainly pay a hefty price, at least in the short-term. The transition to a new state would be tortuous and costly. Any financial benefits from independence would take years to materialize.
The economic case for an independent Catalonia rests on the region's wealth. In 2016, each Catalan citizen earned on average 28,600 euros ($33,500), which is roughly 19 percent higher than the income of an average Spaniard. Catalonia produces a fifth of Spain's economic output and more than a quarter of its exports. It also pays in taxes more than it receives in public spending though the exact figure is disputed. Over the long run, Catalonia would no doubt be a viable economy.
However, the transition to that new, steady state would be messy. Catalonia would need to reapply to join the EU and the euro zone. This would be a lengthy process and require the approval of all member states, including Spain. In the meanwhile, Catalonia would have two options. One would be to set up its own independent currency. The other, which is more likely, would be to introduce the euro unilaterally, much like Montenegro did. Catalonia would not, however, have any say on the conduct of monetary policy, since only euro zone member states are represented on the governing council of the European Central Bank.
Either arrangement would create problems for financial stability. The introduction of a new currency would prompt depositors to pull their money from banks, fearing devaluation. A new central bank of Catalonia would be forced to print more money to stop the run, contributing to the currency plunge and stoking inflation.
Alternatively, the "eurofication" of the Catalan economy would leave Barcelona without a meaningful backstop for its banks, as they would stop being under the umbrella of the European Central Bank and of the European Stability Mechanism. Banco Sabadell, the second largest bank located in Catalonia, has already relocated its headquarters. CaixaBank SA, the biggest bank in the region, is considering doing the same.
As it faces a major financial crisis, Catalonia would need to negotiate a new trade deal with the EU. The EU would likely demand as a precondition that Barcelona takes on a portion of Spain's sovereign debt. One option would be for Catalonia to accept an amount of debt equal to its share of GDP. That solution would leave Spain's debt-to-GDP ratio unchanged at around 100 percent, Catalonia's debt would shoot up from its current level of roughly 35 percent to nearly 100 percent of its own income (far above the EU's admittedly unenforced 60 percent convergence criteria joining the euro zone). The good news would be that such a split could open the way to a negotiated deal over market access to the EU and the rest of Spain.
The alternative would be for the Catalan government to retain only the debt it owes to private investors. This would mean defaulting on the money owed to Madrid and refusing to shoulder any debt currently owed by the national government. However, it is not clear such a selective approach would be acceptable to rating agencies: The risk is that investors may consider a decision to renege on debts owed to Madrid as a more general default.
Furthermore, the hit to the Catalan economy from a "hard" departure could be substantial: In 2015, 65 percent of Catalonia's exports went to the rest of the EU, and this does not include the goods and services which would be traded over the newly formed border with Spain. Were tariffs to go up, Barcelona would be bound to suffer.
There is no doubt that Madrid would also have much to lose from a Catalan secession. Barcelona's departure would cause a hole in its budget deficit which would need to be filled in. The trade balance of a rump Spain would worsen significantly. Depending on the arrangements made, Spain's sovereign debt could also rise significantly. However, Madrid would have a cushion to fall back on: the EU single market and the safety net of the ECB and, eventually the ESM. Catalonia would soon discover that solitude comes at a price.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Therese Raphael at email@example.com