After an unprecedented 2 million Catalans voted for independence during Sunday’s referendum, larger than the number who voted for independence during a prior independence referendum in November 2014, the will of Catalan people has been made abundantly clear: The regional government of Carles Puigdemont has an overwhelming popular mandate for independence. And in spite of the Madrid government’s brutality, the government in Barcelona hasn’t backed down.
After delivering a rousing speech last night where he called on the EU to intercede with the Spanish government to try and stop the violence being committed by the Civil Guard and the National Police, Puigdemont on Monday demanded that the national police withdraw from the region as his government prepares to declare independence. Puigdemont asserted that the result of the vote is legally binding – despite a Madrid court’s declaration that the referendum was illegal. The regional government is still verifying the final results of the ballot, but according to a preliminary count released early Monday local time, 89% of the 2.3 million Catalans who voted chose independence.
While the government in Barcelona initially said it would declare independence within 48 hours of the ‘yes’ vote being certified by the regional Parliament, Bloomberg is reporting that Puigdemont’s time frame could see him announce the formation of a Catalan republic on Oct. 6, exactly 83 years since his predecessor as regional president, Lluis Companys, declared independence. Companys was eventually executed by the dictatorship of Francisco Franco.
Puigdemont has said the vote will be sent to the Parliament for final ratification shortly.
However, in a sign that the international community is backing away from the secessionist region even as a potentially bloody conflict looms, the European Commission officially washed its hands of the constitutional crisis, saying in a statement released Monday that the issue “is an internal matter for Spain that has to be dealt with in line with the constitutional order of Spain.” In doing so, it ignored the Catalan government's pleas for recognition.
In the latest suggestion that it unequivocally backs Rajoy, the Commission clarified that, should Catalonia leave Spain, it would also “find itself outside of the European Union.”
Read the EC’s full statement below:
Under the Spanish Constitution, yesterday's vote in Catalonia was not legal.
For the European Commission, as President Juncker has reiterated repeatedly, this is an internal matter for Spain that has to be dealt with in line with the constitutional order of Spain.
We also reiterate the legal position held by this Commission as well as by its predecessors. If a referendum were to be organised in line with the Spanish Constitution it would mean that the territory leaving would find itself outside of the European Union.
Beyond the purely legal aspects of this matter, the Commission believes that these are times for unity and stability, not divisiveness and fragmentation.
We call on all relevant players to now move very swiftly from confrontation to dialogue. Violence can never be an instrument in politics. We trust the leadership of Prime Minister Mariano Rajoy to manage this difficult process in full respect of the Spanish Constitution and of the fundamental rights of citizens enshrined therein.
Indeed, while opposition figures like Jeremy Corbyn and Nicola Sturgeon (who may look to the Catalans to inspire another Scottish independence referendum) have called on Spain to end the violence, most of the European establishment unsurprisingly has sided with Rajoy.
Add to that list US President Donald Trump, who said he felt Catalonia should remain part of Spain during a press conference with Rajoy last week.
Meanwhile, a Spanish opposition party has called on Rajoy to implement article 155 of the country’s constitution in Catalonia, which allows Madrid to impose direct rule over the formerly autonomous region, according to the Independent.
Albert Rivera, head of the business-friendly Ciudadanos party, which considered Sunday’s referendum to be illegal, told various Spanish media channels on Monday that he believes suspending home rule for Catalonia was necessary to block a possible unilateral declaration of independence and to enable fresh regional elections to be called in Catalonia.
Article 155 of the Spanish constitution describes itself in the legislation as being “for exceptional cases only” such as when a region’s failure to obey laws “gravely damage Spain’s general interest.” It has never been invoked before.
Rivera said the article should be invoked to call for another referendum allowing all Catalans to vote. Given the police crackdown on a small percentage of polling stations – as well as efforts by the Madrid government to suppress the vote that included arresting local politicians, shuttering electronic voting infrastructure, and destroying ballots – only about half of Catalans 5 million eligible voters cast ballots.
“Applying article 155, even if it is only for a few hours, to call elections is the most straightforward and most democratic solution,” Rivera – who was born in Barcelona - said. “That way all the Catalans would get to vote, not just a part.”
The Independent reports that until now, Rajoy and the ruling Partido Popular PP have not discussed article 155 publicly. But that could change this week as Spain attempts to assert its dominance over the prosperous autonomous region, which has its own language and culture – not to mention a larger economy than neighboring Portugal.
Spain’s justice minister has said it will use all means at its disposal to uphold the law in Catalonia, before praising the police for their “exemplary” action in defense of the constitution.
“We have always said that we would use all the force of the law and all the mechanisms that the constitution and laws grant to the government,” Rafael Catala told broadcaster TVE in an interview. While images of police violence provoked alarmed reactions from some European government officials, Catala praised the security force for their “measured” response.
The market reaction is downbeat - in Europe - with Spanish bond yields blowing out to 3-month highs...
Spanish stocks are drastically underperforming...
And Spanish sovereign default risk has spiked...
Which brings to mind the biggest question, what would happen to Spain in case of Catalonia’s secession?
As GEFIRA explains, in terms of the debt sustainability parameters laid down by the Treaty of Maastricht, it’d be the Eurozone debt crisis 2.0.
As Spain now maintains the second year of 3% GDP growth, an even bigger, immediate fiscal threat is looming. After multiple ineffective referendums in the previous years, this time the Catalan government is likely to finally assert independence. What will it look like against the background of the Maastricht financial requirements?
Debt to GDP ratio
The Treaty of Maastricht says it should be 60%. Spain’s debt to GDP ratio was 39% in 2007, but after the financial crisis it gradually rose to 99.4% today. Should Catalonia leave, there are two possible scenarios:
1. Catalonia agrees to take a share of the Spanish total debt, as a “divorce bill”, because after all it benefited from the government spending in Catalonia itself;
2. Catalonia leaves without taking any share of the total Spanish debt.
In the first case, nothing would change, assuming Catalonia would agree to take the share of Spanish debt equal to its share in Spain’s total GDP. In that case, Catalonia accounts roughly for 20% of the Spanish GDP, which means it would take 20% of the Spanish debt. Given that the Spanish debt is right now almost the same size as the Spanish GDP, calculations are rather simple.
The second option is rather dramatic. Without Catalonia, Spanish GDP would automatically shrink by 20%, while having to service the entirety of the debt. The debt to GDP percentage ratio would go from 99.4% to 124% overnight.
Deficit to GDP percentage ratio
The Treaty of Maastricht says it should be 3%. Spain has been way outside it since the financial crisis, with a peak at 11% in 2011. For 2016 it was 4.5%.
Here the problem is understanding how much more tax revenue Spain gets from Catalonia than it gives. Catalonia says 11.1€ billion, Spain says 8.5€.
Either way, as the deficit is calculated as expenditure minus revenue, it would be a hole in the revenue of the Spanish government of 8.5 to 11.1€ billion. Last year the deficit/GDP ratio was 4.5%, corresponding to approximately 50€ billion. With the Catalan secession, assuming a 10€ billion hole for simplicity between the estimates of the Spanish and Catalan governments, Spain’s deficit would go up to 60€ billion, while its GDP would shrink by 20%. Result? The deficit to GDP percentage ratio would be 6.7%, back to 2013.
The doomsday scenario would be Spain waking up with a debt equal to 124% of its GDP and growing, due to the 6.7% deficit, which would take another 4-5 years to be contained. The EU’s response to the possibility of Spanish bankruptcy would be predictable: more austerity. It is important to note that while Spain has been growing for the past two years and unemployment is also decreasing, the recipe chosen by the Spanish government, flexibility of the labour market in the form of temporary jobs, has exacerbated income inequality: as the OECD points out that temporary jobs are low-productivity and thus earn low wages; the precariousness of the job prevents improvements in productivity, thus improvement in wages. The poor remains poor, while the rich gets richer and the gap widens.4)
Boosting GDP and employment statistics with mini-jobs is thus masquerading an issue common to other Western countries: the collapse of the middle class.
Catalan independence could prove to be the last nail in the coffin: either Spain goes bankrupt or is forced to implement even more austerity at the risk of facing a revolution from the economically displaced.
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And that's why Madrid doesn't want to lose Catalonia...
Once before, in October 1934, shortly before the Spanish Civil War (1936 to 1939) broke out, Catalonia had announced its independence from the rest of Spain. This prompted Madrid to sent the army to Barcelona.
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We suspect The EU may get more involved if this risk premia blowout starts to spread.