If Catalonia left Spain, it would be like London leaving the UK

Pro-unity demonstrators in Barcelona
Pro-unity demonstrators in Barcelona march to make their feelings heard about the mooted separation of Catalonia

Here in Britain we are experiencing a political crisis that threatens to prevent effective government. But this is nothing like as serious as the political crisis in Catalonia.

This has implications not just for the rest of Spain but for the whole EU project.

Catalonia may seem pretty small to most British people, whose knowledge of it comes mainly from occasional visits to its vibrant capital, Barcelona. But it contains about 16pc of Spain’s population and produces about 19pc of Spain’s GDP and about 25pc of its exports.

It also provides about 21pc of Spain’s total tax revenues. If Catalonia seceded without an agreement to take on its share of Spain’s central government debt, then the latter’s debt to GDP ratio would rise from 100pc now to 116pc. Moreover, since Catalonia is such a large contributor of tax revenues, well in excess of disbursements in Catalonia, Spain’s budget deficit would rise from 4pc now to almost 7pc.

Catalonia is sometimes compared with Scotland. But the economic and financial situations are quite different. If Catalonia seceded from Spain, it would be more like London seceding from the UK.

Catalonia's president Carles Puigdemont

And the Catalonian issue has major ramifications elsewhere, notably in Italy, where there has long been a movement supporting the secession of the prosperous north. Indeed, on the 22nd October, Veneto and Lombardy will hold advisory referendums on whether the regions should push for greater autonomy. Moreover, in Italy’s general election, due by May next year, the Northern League, which supports independence for these regions, looks set to become Italy’s third largest party.

Could a country as small as Catalonia function as an independent state? Of course it could. The size of its population and economy are similar to Denmark’s, Ireland’s and Finland’s.

But whether it could prosper is an altogether different question. Admittedly, if it no longer had to send tax revenues to Madrid then it would be able to enjoy the benefits of these. But this advantage would be quickly offset by several other costs. Catalonia currently has a large ratio of public debt to GDP.

Even if it didn’t take on its share of Spain’s central government debt, this would worry the markets, which would be likely to exact a penalty in the form of increased borrowing costs for the Catalan government. Indeed, the market interest rate on Catalan debt has already jumped in response to the crisis.

If Catalonia did assume its share of Spain’s central government debt, it would end up with a debt to GDP ratio of about 100pc, which is worryingly high for a small, new state with questionable economic prospects.

Perhaps most importantly, Catalonia would suffer difficulties with regard to its trading relationships. As we discovered during the course of the Scottish referendum, if a region, province or country secedes from an EU member state, it ceases to be a member of the EU. If it wishes to re-join, it must go to the back of the queue of countries wanting to join, and it must meet all the economic and political criteria governing eligibility for membership. So leaving Spain also means leaving the EU, at least for several years and perhaps forever, since Spain would be likely to block Catalonia’s EU application.

You might think that this would put Catalonia in a position no more serious than the one that would face the UK if we leave the EU without a deal. In fact, though, quite apart from the huge discrepancy in the size of the two other economies, whereas we would be fine outside the EU, Catalonia’s position would be tricky. Only about 40pc of our exports go to other EU members.

This means that even if our exports to the EU suffered tariffs and other barriers to trade, there is the potential to offset the adverse consequences through striking Free Trade Agreements with the rest of the world or through unilaterally declaring free trade. In principle, the same options would apply to Catalonia but the relative magnitudes are very different.

More than 80pc of Catalonia’s exports go to the rest of Spain and other parts of the EU. If these exports faced significant barriers it would be difficult for Catalonia to offset the ill-effects by expanding trade with the rest of the world.

Yet Catalan separatism also poses fundamental questions for the EU. For believers in the extreme integrationist version of the EU project, nation states are due to be dissolved and the identities of their populations are similarly set to fade away, as people identify themselves as Europeans rather than German, French or Spanish.

Some say that precisely because nation states might dissolve while the EU takes on many of their functions, this opens up the prospect for a strong revival of regions and even cities, alongside the development of a pan-European identity.

This would represent a return to the sort of Europe that existed centuries ago, with the difference that small regions and city states, rather than facing the risk of being gobbled up by rivalrous empires, would now be able to rest secure in the protection of the EU’s over-arching structures. On that interpretation, Catalonian separatism could be seen as fully consistent with an integrated Europe. In practice, though, the EU has so far supported the stance of the Spanish government.

But there is a more troublesome interpretation. The change of identity and transfer of allegiances away from European nation states to the EU was supposed to be fairly easy because in the modern world such traditional identities and allegiances are in the process of dissolution anyway.

Yet Catalan separatism marks the revival of an ancient identity. If this strength of feeling is replicated across the nation states of Europe then shoehorning people into a common European identity is going to be next to impossible.

Roger Bootle is chairman of Capital Economics. His latest book, “Making a Success of Brexit and Reforming the EU”, has just been published by Nicholas Brealey.

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