Catalonia’s referendum has attracted attention across Spain and Europe, fuelling tensions unseen in the country since its return to democracy 40 years ago. Sunday’s chaotic events have distracted observers from the economic and political consequences.
The narrative presenting the dispute between ‘oppressors’ and ‘liberators’, and the question marks over what was an illegal plebiscite, have made Prime Minister Mariano Rajoy’s conservative government a target.
The appeal of economically advanced, liberal and cosmopolitan Barcelona has been juxtaposed with discussions on possible Spanish similarities to the emotions behind the UK’s referendum on leaving the European Union, or indeed the election of President Donald Trump. Like in the UK, some critics have castigated judges and parliamentarians as ‘enemies of the people’.
This binary interpretation is unhelpful. Modern Spain is a pluralist democracy ranking high on international metrics of governance and freedom. Rather than a clash between authority and self-determination, the Catalan issue is a nuanced conflict of democratic legitimacies. Reacting to the illegitimate nature of the Catalan government’s approach to the referendum is not an easy task for any government. Ultimately, however, modern-day concepts of democracy lie in parliamentary politics, not referendums that reduce the complexities of modern societies to a ‘yes’ or ‘no’ answer.
The economic reaction has been more explicit. Catalonia is Spain’s most economically important region, contributing 19% of Spanish GDP (roughly similar to Madrid) and a 25% share of exports. At €255bn, its GDP is higher than that of Greece, Ireland or Portugal. In the improbable scenario of independence, Catalonia would need independent financial and monetary institutions to manage its economy. Some, such as a tax authority, are already in place. Others, like a central bank, would have to be created.
Catalan leaders have promised voters they would remain part of European economic and monetary union. The Banco de España made clear ahead of the 2015 independence consultation that any newly sovereign Catalonia would no longer have the euro as its currency. While the euro could be adopted as a de facto medium of exchange without a formal legal agreement with Brussels, the transition would involve loss of control over monetary policy until a central bank was established. This would pose challenges for banks as access to European Central Bank facilities would stop. This could be followed by capital controls. The Catalan government has further threatened to refuse to pay its share of Spain’s debt if the absence of an amicable resolution of events.
Within half an hour of opening in Madrid the Ibex35, Spain’s leading stock index, fell by 200 points. Yields on Spain’s benchmark 10-year bond rose by seven basis points.
Meanwhile, the euro fell close to 1.17 against the dollar, close to its lowest mark in six weeks.
The medium- and long-term economic impact will depend on the effect on Spanish politics. Carles Puigdemont, Catalonian president, has vowed to declare independence.
This will meet with heavy opposition in Madrid. In addition to the illegitimate origins of the referendum, turnout was low and the execution did not comply with international standards of transparency. Regardless, Rajoy will have to strike a delicate balance in expressing opposition and avoiding straining relations further with the social democratic, left-wing and liberal opposition parties on which his minority government relies in parliament.
The 2018 budget, already postponed because of the referendum, could trigger the fall of his government if he fails to secure support from liberal Ciudadanos party and the Basque Nationalist Party. Regional or national elections could ensue, as could a reform of the constitution. For Rajoy, securing a majority to for either constitutional or economic steps will be a difficult task.
Danae Kyriakopoulou is Chief Economist and Head of Research at OMFIF.