Thursday, January 10, 2013

Catalonian independence and the Catalan economy

Catalonian independence and the Catalan economy

By Ambrus Bárány

A number of regions within the EU might want to secede from their country, the newest example being Spain’s Catalonia. However, the economic consequences of such a secession are grave.

Separatist movements are one the rise in the EU. Belgium’s richer Dutch-speaking Northern half, Flanders, would want to secede from Wallonia, its poorer French-speaking counterpart. Scotland will also have a referendum on independence soon. The newest and most interesting case might be Catalonia’s: this wealthy region of Spain just held regional elections, which were widely recognized as a contest between parties for and against secession. These elections were a victory for those backing independence ambitions.

This short post will endeavor to leave politics out of the picture as much as possible, and concentrate on the economic analysis of the issue: how would independence affect Catalonia’s economy? The most important question for the economic outlook of an independent Catalonia is in particular is trade: will trade structure, exports and imports change greatly in case of secession. It is important to understand that currently Catalonia’s most important trading partner is actually –not surprisingly- the rest of Spain. The map below comes from Pankaj Gherawat of IESE Business School Barcelona, and it shows the area of Catalonia’s export destinations proportionally to their relative weight in Catalan exports (based on 2010 data). The map takes Spain’s regions as separate export partners. It shows that although this way Catalonia’s biggest export partner –accounting for 10% of its exports is France, Spanish regions are not at all that far behind: if taken as a whole Spain is obviously the region’s largest trading partner, with almost half its exports. It is even more shocking to realize that Aragon, a neighboring Spanish region, is not that far behind France in terms of Catalonia’s exports (7% vs. 10%), though its economy is less than a fiftieth of France’s. Imports are similar to exports in the sense that Spain is very important to the Catalan region, though imports tend to come from further away while exports travel little: Catalonia actually re-exports a lot of its imports to Spain (often with added value). The region would have a large trade deficit with the world; however, exports to the rest of Spain rebalance this in such a way that Catalonia’s economy shows a healthy trade surplus.


However, the question is whether or not Catalonia’s trade would be affected by a secession from Spain. Though many think it’s clear that an independent Catalonia would automatically be part of the European Union, that is not at all necessary: it’s unprecedented for an EU member state to divide into two countries, and EU law isn’t equivocal on the matter. It seems more likely that an independent Catalonia would have to apply for EU membership. In this case if tariffs were imposed on Catalan goods even for a short time, that would definitely bruise the economy severely. But even if automatic EU membership weren’t a problem, Catalonia’s economy most likely wouldn’t stay undamaged by secession. Most basic empirics of geographical economy show that trade between two regions, or two companies located in different regions is much smaller if the regions are located on different sides of a border (they are in different countries). This can be shown by a number of examples: US states trade much less with Canadian provinces of the same size than between themselves (even if accounting for differences in distance), and Canadian provinces likewise. German Bundeslander also trade much less intensively with other countries than between themselves: and it is usually accepted empirically that trade falls by about two-thirds due to national borders (if we assume distance to be constant zero between the two regions). If Catalonia’s trade were to fall with Spain to a third of its pre-secession level, even that would have devastating effects on its economy: the trade surplus would turn into a deficit, and its GDP would plunge greatly.

One could argue that it’s not at all clear why established business ties should fade away (or cease abruptly). However, there is one example of a friendly bifurcation when trade between the two countries fell by roughly 75% in a few years time, despite serious measures taken to mitigate the separation’s affect on trade: the example of the Velvet Divorce of Czechoslovakia. And there are talks of a possible Spanish boycott on Catalan products (obviously fuelled by national pride and indignation), as many Spaniards would simply stop buying products from the seceded region in order to punish the ungrateful Catalans. It is also plausible that reexports from Catalonia to Spain would drop sharply in case of secession: Spain and Spanish firms can improve goods from other countries just as well as Catalonia can, and Spanish consumers would probably boost Spanish importers with an increased demand (due to the “embargo” on Catalan products). Thus it is reasonable to assume that even in the best case scenario, with automatic EU membership as a given, Catalonia’s trade and GDP would be hard hit by the craved independence.

Why then are there so many “independentistas” is Catalonia? Most are angry about Catalonia being a net contributor to Spain’s budget: in other words, Catalonia –as a rich Spanish region- provides fiscal transfers to other Spanish region. If these transfers could be stopped, a tax relief could be given to Catalans. Nationalistic, pro-independence feelings were thus fuelled by this “economic reasoning of fiscal transfers making Catalonia poorer than it should be”, especially since the region was very much hard-hit by the crisis. However, Catalonia’s people should weigh the pros and contras together more thoroughly, carefully considering possible affects on Catalan trade and economy. If they were to do this, their enthusiasm for independence would surely decline fast. 


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