What Happens When "Scotland" Comes To Spain?

Friday saw the largest demonstration in the history of Barcelona with 1.8 million people showing up, exceeding all previous records, calling for Catalan independence...

As Martin Armstrong notes, demonstrators were waving independence flags and wearing yellow-and-red shirts with the phrase “Now is the time” shouting “Independencia!” as they swarmed into the semiautonomous area in northeastern Spain that hails Barcelona as its capital.

What is clear, we are seeing the beginning stages of what we have warned about – the rise of civil unrest that leaded to nations dividing or being overthrown in revolutions. What has taken place in Scotland is by no means going unnoticed.



“Independence, independence”, has been the new cry of the people today in Spain in the center of the Catalan capital. Two main roads that converge at a place filled over a distance of seven miles with people. Here, a “V” for “Victoria” (Victory) was formed. The amount of protesters is very impressive and the police have been gearing up for this because they know what is coming.



Catalonia has 7.6 million inhabitants and this is a very important region for Spain. Despite the economic crisis and an unemployment rate of more than 22 percent, Catalonia is around one fifth of total gross domestic product of the Southern European country is generated.  

Proponents of secession from Spain think an independent Catalonia would achieve a higher standard of living.

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Coming to another European country near you soon...

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Of course, this doesn't help...

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Just as we warned previously...

The history of Europe over the last 100 years shows that austerity can have severe consequences and outcomes and perhaps most notably, the independent variable that did result in more unrest: higher levels of government debt in the first place.

 

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And here is Deutsche Bank's take on how this might escalate...

From Edinburgh to Barcelona

The unexpected increase in the uncertainty about the outcome of next week’s Scottish independence referendum – see accompanying article in this issue of Focus Europe – re-focused press and clients’ attention on the possibility of a similar referendum in Catalonia on 9 November. The large demonstration in Barcelona on 11 September contributed to elevate media interest.

Catalonia matters

It will take years for Spain to work through the high public and private debt, but the country tends now to be described as a poster-child of the euro-area approach to the crisis along with Ireland, while France and above all Italy struggle to recover. Furthermore, contrary to France, the Spanish government is in a more solid position, and, contrary to Italy, it showed a greater determination in implementing structural reforms.

 

However, calls for a self-determination referendum in Catalonia add a significant element of uncertainty. Catalonia accounts for a larger proportion (18.8%) of the national economy than Scotland (8%). Indeed, Catalonia is the largest region in Spain (Figure 2).

Catalonia’s referendum would have less clear consequences than Scotland’s

The consequence of the Scottish referendum will be clear: a yes would imply that Scotland becomes independent and Great Britain would be a less united kingdom. The Catalan referendum would differ in at least two elements:

First, and most important, the Catalan referendum, if it takes place, would probably have a very different (lack of) legal basis. The Spanish Constitution opens the possibility of referenda, but specifically excludes from such a procedure the "basic principles" of the Spanish constitution, which include Spain's unity. Indeed, it appears highly likely that the Spanish Constitutional Court will reject Catalonia's request for a self-determination referendum to be held on 9 November.

 

Second, even if a non-binding referendum were to take place, it would probably ask two questions: (i) "Do you want Catalonia to become a state?" and (ii) "If yes, do you want this state to be independent?"

Will the Catalan referendum take place?

The referendum is promoted by the Catalan President Artus Mas, leader of Convergence and Union (CiU) and the junior regional government partner Republican Left of Catalonia (Esquerra Republicana per Catalunya – ERC). The latter is a more radical pro-independent party. The 2012 CiU-ERC government pact is based on the commitment that a self-determination referendum will take place by end-2014 unless socio-economic conditions require a postponement.

Assuming that as expected the constitutional court will declare the referendum illegal, we see four broad scenarios:

(I) Catalan President Mas and Spanish PM Rajoy’s reach a compromise and both referendum and early regional elections are avoided (positive for a macro-stability point of view). Rajoy could change approach and promise a constitutional reform after the end-2015 general election along with greater financial autonomy (for example in terms of tax treatment).

 

— Push-back: If Rajoy is seen as too lenient, his PP party could pay a political cost. But if Mas does not obtain major concessions, his position would weaken to the advantage of ERC. If a compromise was easy to reach we would not have come to the current situation. ERC could also react by triggering a fall of the Catalan government.

 

(II) Mas triggers early elections using the result as a de facto proindependence vote (potentially negative for a macro-stability point of view).

 

— Push-back: The risk for Mas would be to lose the presidency as his current junior coalition partner ERC is leading in opinion polls. The eventuality that Catalonia, contrary to Scotland, is not allowed to hold a referendum could further boost consensus for ERC.

 

(III) A variation of the second scenario is a crisis triggered by ERC (potentially negative for a macro-stability point of view). In this case CiU could try to form another government coalition (e.g. with the socialists) but the risk, however, would be that ERC would gain further consensus ahead of the next elections to the cost of the less radical CiU.

 

— Push-back: CiU will be perfectly aware of this risk – hence they will have to avoid providing a clear justification to ERC. This in turn complicates even further the relationship with Madrid.

 

(IV) Catalonia goes ahead with the referendum even if the Constitutional Court declares it illegal (potentially negative for a macro-stability point of view). According to the Financial Times (11 Sept.), the majority of analysts believes the vote will have to be called off after the Constitutional Court’s ruling. There are probably at least three reasons behind this view. First, going ahead with an illegal referendum could split Mas’ party. Second, a significant part of the Catalan population could boycott the referendum if it is declared illegal. Third, the referendum would have no legal validity and Madrid could argue that nothing has changed – it could also complicate the relationship of Catalonia with EU partners. However, we would not discard the possibility of a referendum taking place on 9 November:

 

— Push-back: ERC could push to hold an informal referendum anyway. Alternatively, Mas may want to avoid losing the initiative at the advantage of ERC and also use the result of the referendum to strengthen his bargaining position with Madrid.

Which scenario is more likely? Toward a muddle-through approach

In cases as complex as the one above the most likely scenario can sometimes be identified by finding the dominant strategy (in terms of game theory). However, it is extremely difficult to identify such a strategy given the above described constellations of incentives and constraints. For example, PM Rajoy could opt for a divide-and-rule strategy by trying to entice Mas’ CiU away from the alliance with ERC via material concessions. But that would cause the fall of the current government and more importantly could further boost ERC’s projected share of seats. On top of that, Rajoy will also have to take into account the repercussions of his concessions on other regions – for example on the Basque regions. The risk of ending up in a “prisoner’s-dilemma” conundrum, where the least optimal solution is selected, is material.

Alternatively, we could resort to economic arguments. The scenarios that lead to the greater economic benefit (i.e. probably scenario I above) should become the most likely. The central government may hope that the improving economic conditions will quell the demand for independence. Although it is true that the economic crisis shone a light on the financial transfers from Catalonia to the central government, our understanding is that the drivers of the independence movement in Catalonia are beyond economic considerations. They are rooted in a centuries-long history. This gives a strong emotional content to the debate beyond pure economic considerations like in Scotland.

The Scottish referendum and reactions to it will matter for Catalonia

Next week’s Scottish referendum could affect the likelihood of the above four scenarios via at least three elements.

The result: a yes vote would probably boost the independence movement.

 

The EU partner reactions: the pro-independent Catalans are in favour of Catalonia as an independent state within the European Union.3 If Scotland vote yes, joining the EU could become a complicated process. The European Union could be weary of being seen as supporting Scotland’s independence given the situation in Ukraine. Equally if not more relevant, a number of European countries will be also wary of the consequences for their own territorial unity, for example Belgium and to a lesser extent Italy. Overall, exiting the euro-crisis calls for further European integration. A break-up of the euro-area fourth largest country would be perpendicular to this trajectory.

 

Markets and business reaction: a negative reaction by the market and businesses potentially reallocating away from Scotland in case of a yes vote could weaken the pro-independence movement in Catalonia.

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Opinion polls on Catalonia independence

No regular, independent opinion polls are available to assess support for the pro-independence vote. However, there appears to have been an increase in the support for pro-independence over the past 3 years.

According to the State pollster CIS this year around 45% of the Catalan supports full independence, 20% a federal state and 23% an autonomous region (Reuters).

The Center for Opinion Studies of the Catalan presidency reported a 54.7% support for independence in 2013. The 2014 survey provides a less clear reading.