Spain: Catalan crisis escalates, economic costs become visible - Rabobank

Spain’s central government is likely to suspend the Catalan government in the coming weeks as Puigdemont has not responded to the request of the central government to backtrack on succession moves, explains Maartje Wijffelaars, Senior economist at Rabobank.

Key Quotes

“The Spanish government has announced that on Saturday 21 October it will decide upon the measures it will take in line with article 155, to restore legality in Catalonia. Measures could include suspending the entire Catalan government and starting to control the region’s administration from Madrid. The Catalan president had until 10am 19 October to announce that he would discard the referendum outcome. Instead, Puigdemont wrote to Rajoy that the Catalan parliament would vote to declare independence and proceed with its path toward succession if Madrid would not open dialogue and/ or trigger article 155.”

“Article 155, and then what

• It remains very unclear what exactly will happen next. For one, because, article 155 has never been used before. Madrid could decide to suspend the entire Catalan government or to take control of only part of the region’s tasks. Before the central government can actually act, the Senate has to approve the measures. The Senate will gather and vote 27 October. Ultimately, invoking article 155 will lead to new elections in Catalonia, although there is no official timeframe. As the Catalan government does also not know exactly what path will be taken, it might feel it has a very short window to act and declare independence, before it gets ousted from office.
• At the same time, it might also decide to not act at all, to make Madrid look like the sole bogeyman. But even if the Catalan government unilaterally declares independence before Madrid takes over, it will not actually mean Catalonia is independent thereafter. Spain, the European Union and very likely all other international organisations will not recognise an independent state of Catalonia. Moreover, the region does not have the institutions necessary to act as if it is independent. And let’s also not forget that, based on polling in the past months, the majority of the Catalans seemingly do not want to be independent, and will remain loyal to Madrid. 
• It will be extremely difficult to put the current institutional crisis to bed. We still believe that in the end Catalonia will stay part of Spain, but it could take many years before tensions recede. Ultimately, a change of both the regional and central government is likely necessary.”

“The economic cost of the independence drift 

• As long as the situation does not deescalate, the Catalan economy will continue to suffer from the current uncertainty. Tourism activity, investment intentions, vehicle registrations and business start-ups have dropped in the run up to and/ or after the referendum. On top of that, more than 800 firms have moved headquarters to somewhere else in Spain. The move of headquarters hurts the Catalan economy, but benefits other regions.”

“Possible longer-term impact

• The current institutional crisis has several longer-term implications. For one, the institutional crisis fills the entire government’s agenda. As such, necessary policy measures and reforms to improve Spain’s growth potential are delayed, possibly restraining future economic growth. Furthermore, the minority government has not yet been able to get parliamentary approval for the 2018 budget. The government needs the support from the Basque party (PNV), which has said it will not lend its support before the Catalan crisis is over.”