Cata-lonia or Cata-strophe?
Updated: Nov 21, 2019
Cata-lonia or Cata-strophe? by: Dominic Seah
Catalonia, located in Iberian Peninsula, is an autonomous community of Spain comprising of 4 provinces; Barcelona, Lleida, Girona and Tarragona. Catalonia’s independence movement has been using referendum to move its agenda forward for years.
A political turmoil… On 1 October 2017, Catalonia held an independence referendum from Spain and the president of the Generalitat of Catalonia, Carles Puigdemont pledged to break away from Spain within 48 hours if the referendum were to pass.  On the actual day, Madrid flooded Catalonia with thousands of police in advance of the vote to prevent people from casting their ballots and this descended into violence, leaving hundreds of people injured. The results of the referendum ended in over 90% of the votes in favour of independence, with a low turnout rate of 42%.  However, this referendum was rejected and declared illegal by the Spanish government.
Image Title: Catalonia Region Source: BBC
Since the restoration of democracy in 1976, Catalonia enjoyed huge autonomy with a high degree of self-rule. In 2006, the Spanish government supported Catalonia’s call for greater independence and granted it “Nation” status.  However, this status was rescinded by the Spanish constitutional court in July 2010, stating that there is no legal basis to refer Catalonia as a nation. This angered the Catalans, leading to an autonomy protest with more than 10 million people marching in Barcelona in 2012  and another protest in 2014. 
End of “Hala Madrid” Since the global financial crisis in 2007-08, the Castilian speaking nation has entered into a recession with slow economic recovery over the years. In face of the recent political crisis, the euro dropped 0.7% against the dollar  and the Spanish 10-year bond yield spiked from 2.837% to 2.926% before hitting its peak of 3.006% on 4 October 2017  due to a strike in Barcelona.  This increase in bond yield means that investors are selling off the Spanish bonds since bond prices are inversely related to its yield. In addition to that, the main stock market index IBEX 35 plunged from 10,381.50 to its 6 months’ record low of 9964.90, eradicating 1.4% of previous gains. 
Image Title: Spain Bund 10-year spread Source: Bloomberg
The Cost of being Single Despite comprising of about 16% of Spain’s population, Catalonia itself accounts for more than 20% of Spain’s GDP. On top of that, its exports of €65.2 billion and foreign direct investments of €37 billion comprises of more than a quarter of Spain’s.  With the split, Catalonia would save up on taxes paid to Madrid and this equates to a loss of about 2% of GDP yearly for Spain. 
Image Title: Catalonia as % of Spain Source: theguardian
On the other hand, according to Spanish Economy Minister Luis de Guindos, Catalonia’s economy might shrink by 25 to 30% and its unemployment could double if the split happens.  This is plausible as Catalonia’s exports to the Spanish market and EU stands at 35.5%  and 65%  respectively. With the split, Catalonia may not be able to retain its trading partners and continue using euro as it does not have an automatic right to membership in EU. On top of that, Catalonia’s debt accounts for 35.4% of its GDP  and 16.34% of Spain’s debt . This actually poses a huge problem for Catalonia for debt repayment in the event of a separation, given that it is unable to borrow money on the international markets since the financial crisis. In addition to that, Catalonia may also face trade boycott from the rest of Spain and increased tariff on their goods and services.
Catalexit? The Spanish government has responded by using article 155 of Spanish constitution to sack the Catalan president and his entire cabinet, dissolving the regional parliament so as to regain control over Catalonia. In addition, the Deputy Prime Minister of Spain has been appointed to run the region temporarily and an early regional election has been called for 21 December 2017.  Moving forward, it seems entirely plausible that Madrid may be able to effectively and quickly regain control over Catalonia through article 155 of Spanish constitution, pulling Spain out of its political crisis. On the other hand, Catalonia may succeed in gaining independence with the huge support for independence referendum. Again, given all the uncertainty, whether either solution would be practical in Catalonia remains to be seen.
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The Heat: Catalonia Crisis Image (https://z4u03a0h98qmyuk34iyrjwb-wpengine.netdna-ssl.com/wp-content/uploads/2017/11/CATALONIA_LWALL-1920×840.jpg)