By Saul Howerton, VP, Advisory, Radius
A December 21 election in which Catalonian separatists in northern Spain won a majority of parliamentary seats has created an atmosphere of worry and uncertainty for multinational businesses. Separatists would like to set up their own independent country, though many other citizens in the region remain deeply divided about the wisdom and feasibility of such a plan.
There is much at stake. The region, which includes Barcelona, is an economic powerhouse accounting for nearly 19 percent of Spain’s economy and 16 percent of its population. It receives the country’s second-highest amount of foreign investment after Madrid. Multinational corporations in Barcelona include companies in the biomedical, agricultural, food, automotive and telecommunication sectors.
How Did This Happen?
A proud region with its own culture and traditional language, Catalonia has always had a strong identity. Some residents resent paying more in taxes than they receive in services, though figures are difficult to nail down. The separatist movement gained traction after the 2008 financial crisis and resulting public spending cuts.
The December election followed a notorious October 1 referendum on independence that the national government tried to squelch. There have been reports that police pulled elderly voters away from polls and tried to remove ballots from polling stations, firing rubber bullets and wielding batons against voters who tried to stop them. Though the turnout was just over 42 percent, separatists declared victory and made a unilateral declaration of independence on October 27.
Spanish Prime Minister Mariano Rajoy declared the vote illegal under the country’s constitution. The government dissolved the Catalan parliament, and judges ordered the arrest of prominent Catalan leaders, some of whom fled into exile.
The hastily-called December election appears to have been a bad bet by Rajoy, who ordered it believing separatists would lose. Some commentators have compared Rajoy’s election gamble to similar miscalculations by Greece’s Alexis Tsipras, Britain’s David Cameron and Italy’s Matteo Renzi.
Spanish markets fell about 1 percent on the election news, though if the UK offers any model, they could bounce back quickly. Perhaps more serious is the fact that more than 3,100 firms, including energy companies and banks, have moved their headquarters out of the region since the October referendum. More could now be inspired to follow those early movers.
An independent, non-EU Catalonia would likely raise the cost of exporting local goods to EU states — where two-thirds of the region’s products are sent — and import prices would also likely rise. Boycotts by both Spain and Catalonia would certainly disrupt trade. The area could also experience job losses and might find borrowing difficult, according to some economists. Spain would suffer a tax revenue loss and would need to negotiate a separation of assets and liabilities.
Spain’s central bank recently cut the country’s national growth forecast by 1 percent to 2.4 percent next year and 2.1 percent in 2019 because of the separatist vote.
A Fragmented Win
Catalonia itself is deeply divided about separating from Spain. Though the three separatist parties together won 70 of the 135 seats in the region’s parliament, they only won 48 percent of the popular vote. Unionist candidate Ines Arrimadas, who won 25 percent of the vote, gained 37 seats, more than any of the individual separatist parties.
Another complication is that the separatist parties are anything but unified, spanning the political spectrum from far left to center-right. Some analysts believe they will be incapable of running an independent government, or even achieving one. Exiled separatist leader Carles Puigdemont has requested to meet with Rajoy, who has so far refused. Like other separatist leaders, Puigdemont currently faces charges of rebellion, sedition and embezzlement of official funds if he returns to the country. If prosecuted, he and other separatist leaders who hope to govern the new state could receive long prison sentences, though some predecessors have been jailed briefly and then released on bail.
Most of Spain, including its powerful business groups, is opposed to Catalonian independence. EU officials back Rajoy and have not offered support to the movement.
Negotiations to try to form a government are likely to start after January 6. The regional parliament needs to vote by February 8 on putting a new government into place. If no leader receives an absolute majority of seats, another vote will be held in which a leader only needs a simple majority. If that doesn’t work, talks will be held for two months and should they fail, the parliament will be dissolved and new elections will be held. At any point, Rajoy could again invoke the constitution to denounce an independent Catalonia as illegal.
Some separatists have expressed interest in having Catalonia join the EU, but the prospect seems far-fetched. Countries must apply for membership, and a majority of EU states would need to approve, but to date none have offered support.
Whether a separate Catalonia could continue to use the euro without EU membership is uncertain. The Bank of Spain has said that independence would cause the region to drop out of the euro and lose access the European Central Bank, though some commentators disagree. Currently, Vatican City and a few other small states are allowed to use the euro without being EU members. Others, such as Kosovo and Montenegro, use the euro without specific permission and do not have access to the European Central Bank.
Though it’s still early days for the Catalonian independence movement, markets and businesses hate uncertainty, and much uncertainty lies ahead for the region. Recent economic figures show a drop in retail sales and tourism and rising unemployment. If separatists want to keep the area’s economic engine running, they’ll need to come up with a viable plan quickly.