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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