Catalonian referendum to have lasting implications for Spanish economy

Spanish and European flags wave during a campaign meeting for the Catalan regional election. Pau Barrena / AFP

The legacy of the illegal referendum on Catalonian aspirations of independence from Spain will be felt for years to come.

With the Madrid government in stern mood, enraged that the poll took place and determined to see secessionist leaders punished, the region is wracked with social, political and economic turmoil.

Between 1,500 and 3,000 businesses are estimated to have moved their legal headquarters out of Catalonia since the referendum on October 1 and the Spanish prime minister Mariano Rajoy’s muscular response.

There are also signs of the region’s vital tourism sector being hit, with hotel bookings down and confidence dented.

And the country as a whole has been dragged into the fray, leading to falling GDP growth forecasts as instability threatens to undo Spain’s recent more positive performance.

Catalonia has four provinces – Barcelona, Gerona (or Girona in Catalan), Lerida (Lleida) and Tarragona – and despite accounting for only 16 to 18 per cent of Spain’s population, has disproportionate economic importance.

The region is responsible for a quarter of total Spanish exports - worth US$56bn (Dh205.6bn) in 2016, comfortably outstripping the next biggest exporter, the province that includes the capital.

Analysis by the ratings agency Moody’s Investors Service, published as the constitutional crisis deepened, outlines dangers for the credit status of both Catalonia and Spain.

“For Spain as a whole, political tensions over Catalonia and the associated uncertainty are likely to damage economic sentiment and consumer spending, both in the region and for the Spanish economy as a whole,” it says.

Highlighting the negative impact of political instability, Moody’s has lowered its 2017 and 2018 real GDP growth forecasts for Spain. It now projects full-year growth of 2.9 per cent in 2017 and, in line with the Madrid government’s own revised forecast, 2.3 per cent (down from 2.6 per cent) for 2018.

In fact, the Rajoy government and the European Union have delivered mixed messages, not all of them downbeat.

The prime minister himself admitted in November that the crisis was having a detrimental effect. “It is affecting tourism, it is affecting some entities and it is affecting trade,” he said. “We have seen some worrying figures.”

Almost simultaneously, however, the European Commission (EC) the EU’s executive arm – announced a modestly improved assessment of the Spanish economy, including higher growth forecasts (3.1 and 2.5 per cent for this year and next, respectively). The EC also suggested unemployment would fall significantly, down to 14 percent by 2019 having peaked alarmingly at 26 per cent four years ago.

The EC said market reactions to events in Catalonia had been contained but acknowledged that growth could be affected to an unpredictable degree in the future if instability worsened.

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Among specialist observers, too, opinions differ.

Ana Belén Perianes, an academic with expertise in international security, writes on the Global Risk Insights website that the longer the atmosphere of insecurity and uncertainty persists in Catalonia, the more significant the consequences will be.

Even by the end of October, she says, major businesses moving their formal headquarters away from Barcelona included Gas Natural and Abertis, two banks (Caixa and Sabadell, Catalonia’s biggest) and a number of prominent consumer brands such as the cava producers Codorniu and the energy drinks manufacturer Cola Cao.

The car maker Seat, a subsidiary of Volkswagen, has told its workforce of more than 14,000 that while it wants to retain its base at Martorell, in Barcelona province, its hand could be forced by a deterioration in the legal and security climate.

Ms Belen says the repercussions for Catalonia’s economy would be severe if the secessionist movement ultimately prevailed.

“Banks are particularly vulnerable because in an independent Catalonia they would not operate under the supervision of the EU Central Bank and the regulations of the European Banking Authority,” she writes. “This means that the banks could not count on EU coverage.”

But not all economists accept that break with Spain needs to be painful in the long term.

Hamish McRae, one of Britain’s best-knows commentators on economic affairs, insists there is no reason why a fully independent Catalonia should not have an extremely successful economy “after a period of disruption”.

He cites as advantages the Mediterranean coastline, Spain's two largest ports (Barcelona and Tarragona) and an established economic base as a manufacturing centre with prestigious business schools. "Were it to be fully independent, with Barcelona and its 1.6 million people, it would have one of the glitziest capital cities on earth," McRae says at the online British newspaper The Independent, of which he is an associate editor.

But for now, and despite the European Commission’s relative optimism, both Catalonia and Spain as a whole can expect testing times.

Madrid’s continuing Spanish crackdown, with several Catalonian political figures held in jail pending trial for sedition and rebellion and the president, Carles Puigdemont, facing certain arrest if he returns from Belgian exile, has cast a dark shadow over the hopes of the independence movement.

In an early test of the true state of public opinion, the new shape of the Catalonian assembly will be determined in regional elections on December 21. On the strength of a recent survey of voting intentions, pro-independence groups face losing their narrow majority.

For all the mass demonstrations, the highly publicised support of Manchester City’s Catalan manager Pep Guardiola and the disputed 92 per cent referendum vote in favour of independence (many opponents boycotted the poll and turnout was low, at 43 per cent), independence for Catalonia increasingly looks an unattainable dream.

But claims that Spain acted with needless brutality in countering the breakaway campaign are bound to fuel lasting resentment - and could stiffen the challenges facing the entire country.

* with Reuters.