The Financial Issues of Catalan Independence

In what journalists are insisting on calling “Catalexit”, the Spanish region of Catalonia recently held a vote on separating from the Kingdom of Spain. The Spanish government has decreed the vote illegal, and the police were sent in on the day itself to disrupt the vote, but nevertheless, the Catalan government is pressing ahead. The issue is predominantly cultural and political, but it’s undeniable that independence for the region will have a significant economic impact.

Immediately after the results were announced, and despite the vote not being legally binding or, even, sanctioned by the Spanish government, the Euro dropped against the dollar.

What happens if independence is achieved?

It’s impossible to accurately predict the effects of an independent Catalonia, but certainly, the period of uncertainty immediately following a separation would have significant economic and political repercussions. The final result would be entirely dependent on the willingness of Spain and the rest of the EU to work with the newly formed nation.

Spain has demonstrated continual reluctance to allow Catalonia to become an independent state, as has the EU in general, so the leniency which they’d show the new nation is questionable. While Catalonia would technically meet all the requirements to rejoin the EU, it requires each member state to agree for that to happen. Given that Spain is not the only nation with a domestic independence movement - prominent movements in the rest of Europe include the Flemish region of Belgium and the Bavarian region of Germany - it’s likely that these countries would vote no on re-entry to the EU for Catalonia to avoid setting a precedent.

A wealthy, prosperous region

Catalonia is one of the wealthiest parts of Spain and the most economically productive of the 17 autonomous regions in the country. The historical region accounts for almost a fifth of the Spanish economy and produces a quarter of the country’s exports. There are 7.5 million inhabitants, which equals about 15% of the population of the nation, and they generate almost 20% of the entire GDP of Spain. Not only that, but the region also contributes more in tax than it receives back from the government. An independent Catalonia would have an economy similar to Denmark or Finland.

Barcelona itself is the country’s second most populous city and is world famous for its culture and history. Of all the foreign companies in Spain, a third choose Barcelona as their base. It’s the largest port in the Mediterranean sea and the city is home to two top business schools: ESADE and IESE.

Evidently losing Catalonia would be a significant blow to the rest of Spain.

Obstacles on the path to independence

Despite the myriad of factors which suggest that Catalonia could be a very prosperous independent nation, there are a number of barriers in the way. The most pressing issue is EU membership. As with the Scotland independence referendum, Catalan independence would result in immediate exclusion from the EU and the nation would have to apply to rejoin. Leaving the European Single Market would have a very damaging effect on the region. Of Catalonia’s exports, 35.5% go to Spain and 65% go to the EU in general. Furthermore, the EU accounts for 70% of foreign investment in the region. Leaving the bloc could be disastrous.

On top of this, creating a new nation is expensive. State structures, such as a national bank and embassy will take time and money to set up. The Spanish Economy Minister, Luis de Guindos, suggested that the region’s economy could shrink by up to 30% and unemployment could double as a result of independence. Then there is the issue of public debt. Many assume the region's debt will be assumed by Spain, but this is not necessarily the case. If Catalonia is required to assume part of the national debt it could very severely damage the new nation.

The government of Spain has also passed another law which will further hinder the process, by making it easier for companies to move their official base out of Catalonia. A number of companies have already decided to relocate their headquarters to other parts of Spain, including Banco Sabadell and several major banks.

This is even assuming independence could be established. The region itself does not have the resources in place to establish a new nation, and the Spanish government controls tax, defence, transport and other basic structures necessary for a nation.

The impact on business schools

The effect Catalan independence would have on business schools in the region echoes the situation in the UK. The region dropping out of the EU would make it significantly harder for prospective EU students to live and work in the new country, and issues surrounding visas and work allowances would severely impact the attractiveness of the region. However, it's the uncertainty which would cause much of the initial impact. People value security. An independent, new country with damaged links to Spain and the EU, and a tempestuous immediate future could put off many students from applying.

Given time, the new country would undoubtedly stabilize and the uncertainty would fade, but there's no telling how severely the initial impact would damage the sector.

The coming weeks and months will show us the implications this movement will have on Catalonia, Spain and Europe in general.