Catalan Independence: Economic costs could be significant
22 October 2017
Those in favour of Catalan independence should not underestimate the potentially huge economic costs this would entail. A commentary by Kurt Bayer.
On October 9th the Austrian daily Der Standard published an interesting and timely interview with the Catalan economist Elisenda Paluzie entitled 'Campaign of fear will mostly damage Spain'. In this interview, Ms Paluzie argued that Catalan independence would have only very minor negative effects on the Catalan economy. Moreover, she asserted that consequent higher refinancing costs on Spanish public debt, plus the Catalan government’s position that an independent Catalonia would not assume responsibility for a share of Spanish sovereign debt, would result in the rest of Spain being the main loser from independence.
Figure 1: General government gross debt, % of GDP. Source: Eurostat.
This cannot be the whole truth. The idea that independence from Spain would have no impact on the Catalan economy does not stand up to much scrutiny.
Catalonia is wealthier than most of the rest of Spain (see chart below). However, this does not guarantee a smooth economic transition to independence. Among other things, an independent Catalonia would have to introduce a new currency, create a central bank, open new supervisory agencies, and transpose all its euro contracts into the new currency. Catalonia would also be faced with a hard EU external border with Spain and France, complete with the necessary customs checks. Unlike the UK, Catalonia could not count on falling back on World Trade Organisation (WTO) tariffs, given that it is not a WTO member.
Figure 2: GDP per capita, PPP, EU28 average = 100. Source: Eurostat.
After independence, Catalonia would have to negotiate a new economic relationship with a (probably hostile) EU, and this could take years. It does not take much imagination to foresee that Spain and its European partners would have little reason to give an independent Catalonia a preferential trade deal.
Any separation of Catalonia from Spain, therefore, would have a severely negative impact on the Catalan economy. Indeed, even the prospect of independence has already rattled businesses. A number of firms have relocated their headquarters to other parts of Spain. If moves towards independence continue, many more firms would likely follow. In this context, it seems astonishing that Ms Paluzie—an established university professor—neglected economics and Realpolitik in favour of her (possibly understandable) desire for Catalan independence.
This article has been previously released in German language at DerStandard.at and in Kurt Bayer's own blog.