Hopes that Catalonia’s woes could be contained are fading. By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET. On Tuesday night, for the briefest of moments, Catalonia’s government severed its ties with Spain. The region’s president, Carles Puigdemont, declared independence from Spain at around 7.40 p.m., Spanish time. Then, roughly ten seconds later, he put it all on hold, to the visible dismay of many of his fellow travelers. The markets were pleased, interpreting the suspended declaration of independence as a retreat from the brink. The Spanish stock index IBEX 35 surged 1.5% on Wednesday, and is up 3.4% in five trading days, making up a big part of what it had lost over the prior four trading days. It remains 7% below its year-to-date high at the end of April. For many
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Hopes that Catalonia’s woes could be contained are fading.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
On Tuesday night, for the briefest of moments, Catalonia’s government severed its ties with Spain. The region’s president, Carles Puigdemont, declared independence from Spain at around 7.40 p.m., Spanish time. Then, roughly ten seconds later, he put it all on hold, to the visible dismay of many of his fellow travelers.
The markets were pleased, interpreting the suspended declaration of independence as a retreat from the brink. The Spanish stock index IBEX 35 surged 1.5% on Wednesday, and is up 3.4% in five trading days, making up a big part of what it had lost over the prior four trading days. It remains 7% below its year-to-date high at the end of April.
For many other aspiring nation states, the key to independence lay in getting enough votes on the UN security council. But if Catalonia’s bid for self-determination ever made it to the UN, it probably wouldn’t garner enough support from the Security Council, for the simple reason that an independent Catalonia could encourage other separatist regions in the EU to launch similar bids.
So why did Puigdemont change the script at the very last minute? According to the Catalan government’s chief spokesperson, Jordi Turull, he did so in response to pressure from key international mediators that are insisting on dialogue between Barcelona and Madrid. “[They] said that if we did this they would be willing to act,” said Turull, who refused to reveal the identity of said mediators.
The problem is that Madrid has shown absolutely no interest in dialogue, for two main reasons:
- Votes — as shown by the recent rise in the opinion polls of Cuitadans, the party with the toughest line on Catalonia, in many parts of Spain these days taking a fiercely adversarial approach on Catalonia is a surefire way of winning votes. By the same logic, offering concessions is a surefire way of losing votes.
- Finance — even if Rajoy wanted, which he certainly doesn’t, Spain today could not afford to offer Catalonia the sort of financial arrangement that the much smaller Basque Country enjoys, which allows it to keep a much larger part of its tax proceeds. Spain’s public debt has mushroomed by almost 200% in the last ten years and for the first time in decades it is using debt to fund its very fast growing pension shortfall. In other words, it’s not in any kind of position to lose a large chunk of its tax revenues.
Rajoy’s initial response to Catalonia’s suspended declaration of independence has been to hint at the implementation of Article 155, which would see Catalonia’s autonomy suspended and allow Madrid’s central government to take control. But before activating the article, he asked Puigdemont to clarify whether or not he actually declared independence last night.
If Puigdemont responds that he didn’t, he risks losing the lion’s share of his political support in Catalonia. If he confirms that he has, he effectively signs his own arrest warrant.
If Madrid then proceeds with Article 155, it’s also likely to activate article 116, which governs the application of states of alarm, states of emergency and states of siege in Spain. As we’ve mentioned before, any attempt by Madrid to dissolve the Catalan parliament and arrest Puigdemont and other key Catalan government figures is likely to trigger a fierce public backlash. As such, Madrid will need all the manpower and firepower at its disposal. But putting the army on the streets of Catalonia could be an even bigger PR disaster than its handling of the Oct 1 referendum. It’s also likely to create even more separatists in Catalonia.
Naturally, none of these actions will help to improve relations between Madrid and Catalonia’s 2.5 million-strong separatist community. The worse relations get, the slimmer the chances of dialogue even beginning between Madrid and Barcelona, let alone bearing fruit.
Catalonia’s economy, whose share of Spanish GDP is roughly equivalent to London’s share of the UK’s, continues to suffer the chronic effects of rampant uncertainty. Over 30 major homegrown and international corporations have moved their headquarters to other parts of Spain, albeit only on paper for now, while the region’s tourist numbers continue to slide as a result of the terrorist attack in August and rising political tensions. Catalonia is Spain’s biggest tourist region and as we pointed out a few months ago, Spain’s unprecedented tourism boom is arguably the biggest driver of its economic recovery.
For some in the Rajoy administration, Catalonia’s largely self-inflicted economic woes may be viewed as an opportunity to further centralize Spain’s economy, but that could be a dangerous miscalculation. After all, this is not a zero-sum game. Barcelona is a global city that has carved a successful niche as a top tourist destination, a leading trade fair hub, and global business center. If international companies or travelers get cold feet, they’re more likely to turn to other European capitals than to other Spanish cities.
Any hopes that Catalonia’s woes could be contained within its territorial borders were recently dashed by Maurice Obstfeld, the IMF’s Chief Economist, who warned that “the situation in Catalonia is worrying, because it creates a lot of uncertainty, both for the Catalan and the Spanish economy.” He also cautioned about the potential “collateral effects” the Catalan crisis could have on other European economies.
As such, the recent market euphoria over Puigdemont’s is probably premature. For the moment there’s very little sign of any solution to the conflict between Madrid and Barcelona that doesn’t involve a massive escalation of tensions. By Don Quijones.
Money is fickle and fearful. Read… Spain Teaches Catalonia a Lesson about the Power of Money