We have moved down the game tree one step towards sensibility! Premier Puigdemont declared that Catalunya has the moral right to secede but will not declare independence. Relief!
Except, well, now the Spanish government needs to decide its response. The sensible thing, of course, is to do nothing. Either nothing nothing, or possibly a more active form of nothing where nobody speaks about secession but Catalan representatives in Parliament meet with other parties to see if they can hammer out an acceptable constitutional reform. Some politicians, like Socialist leader Pedro Sánchez, are doing just that. Prime Minister Rajoy, unfortunately, appears to be doing his best to push the Catalan leader into a corner by insisting that he loudly and unequivocally back down.
It is never a good idea to leave your opponent with no face-saving exit, especially when you have just won. I would bet on Puigdemont trying to give Madrid what it asked for without a full about-face. (After all, Puigdemont has to keep his own hardliners onside.)
Rajoy should accept the offer.
But if he does not and we re-enter the conflict, it is worth discussing what is at stake. The answer: less downside than you might think for Spain, and rather more for Catalonia.
First the figures for Spain. Catalonia is a net payer into the national budget. The reason that Catalonia is a net payer is that individual Catalans are richer than elsewhere.
The baseline calculation is straightforward. Spain in 2014 ran a budget deficit of 3.5% of GDP. Excluding Catalonia , the Spanish state collected €305 billion and spent €345 billion, over a GDP of €840 billion. That implies a budget deficit of 4.8% without Catalonia .
Except, well, it seems plausible that Madrid would assume all of the fixed costs of the Spanish state: defense, foreign affairs, research and development, debt interest and the like. That would increase spending to €353 billion and the deficit to 5.7%. That is not comfortable, but it is far from an economic disaster.
So there you have it, a net cost of 2.2% of GDP ... with one more complication. Spain currently provides a fund to help the autonomous communities. The fund lends cheaply to the communities, as in at zero interest for three years and 0.834% thereafter. These expenditures do not count as part of the Spanish State’s budget deficit since they are technically loans: the central government increases its public debt in return for accounts payable given to the communities. That said, the account represents a flow of resources that somehow needs to be financed. Along with sundry other loans from the central government, Catalonia received €4.7 billion in such soft credits in 2014. If it seceded, Spain would no longer need to borrow that money. That said, this should probably not be counted as a benefit to Spanish taxpayers, considering as the costs are (in theory) borne by Catalan taxpayers. Of course, if you do not believe that the debt will ever really be paid back, then the calculation changes and losing Catalonia would cost only 1.6% of GDP.
What about the Catalan side? Total spending at all levels of government there currently comes to about €66.3 billion, while taxes amount to €70.4 billion. That would give the Republic of Catalonia an additional 2.1% of GDP.
But it gets more complicated. The Spanish treasury assigns Catalonia a share of fixed costs and interest payments. Right now, that comes to about €2.6 billion in fixed costs and €5.0 billion in interest payments.
The €2.6 billion share of fixed costs is about 1.3% of Catalonia’s GDP. That is less than the independent country would have to spend to set up its own army, foreign service, statistical agency, tax authority, additional courts, weather service, competition authority, securities regulator, and everything else now done by the central government. In the long-term, you are looking at a rise of about 0.2% of GDP (bringing it up to roughly what Spain spends).
In the short-term, you are looking at much higher expenses as Catalonia ramps up, but I have no idea how to estimate that. So let’s run with a baseline saving of 1.9% of GDP. This is not small, but it is less than transformative.
Except, well, those pesky financing operations from the central government. They give Catalonia about €4.7 billion every year. Even if you expect Catalonia to pay back the loans, they represent a liability that will need to be financed somehow. Which means independence would blow at least a temporary hole in the Catalan budget on the order of 2.4% of GDP. There go the cost savings!
So independence would cost 0.5% of GDP? Not exactly. What would actually be happening is that borrowing from the Spanish central government would need to be replaced by borrowing from other sources. In a mutual divorce, nothing would change save a small rise in the interest charged on the loans.
But in a contested divorce, it would mean that Madrid has some substantial leverage. Rather more than the headline figures would indicate.
What about the national debt? If Catalonia assumes its share of the national debt, then Spanish expenditures rise to €348 billion: for an additional cost of 1.6% of GDP compared to the status quo. On other hand, if Catalonia dumps the entire current national debt onto Madrid, then (as calculated above) Spain’s fiscal burden will rise by 2.2% of GDP.
Catalonia, on the other hand, would save €5.0 billion in interest payments. That is more than enough to cover the loss of financing from the central government. Hooray!
Except ... well ... this will get ugly. Spain can tie the new republic up in legal knots, made worse by the fact that the republic’s banks will have all moved their headquarters to Spain. Interrupted payments, attached accounts, you name it. The fiscal squeeze will be immense.
The good thing, ironically, is that if its banks flee to Spain proper then they will still have access to ECB support. So that would slightly lower the pressure on Catalonia, since depositors will not have to fear an Argentine-style corralito. But they would still face corralónes: the Catalan government will likely limit withdrawals to prevent capital flight. And the new republic would also find itself unable to finance its current level of operations, and that would be horrendous.
Anything else for a Catalexit? Yes! Even assuming that Spain does not close the border, Catalonia will crash out of the E.U. with no WTO schedules and no trade agreements. In other words, Catalonia will suffer all of the effects that a hard Brexit would impose on the U.K., only with the added problems of having no independent currency and no way to access capital markets. Spain would also suffer a recession, of course, as trade fell with Catalonia ... but Spain will only have problems with Catalonia whereas Catalonia will have problems with everywhere.
TL;DR: Both Spain and Catalonia will lose on the long-term fiscal side, even if independence is negotiated. But Catalonia borrows a lot more than people realize, and losing that in a unilateral secession will crush its national economy. The result will be a terrible financial crunch (even if the banks survive by relocating to Spain). Falling out of the European Union will add insult to injury. Spain will be battered, but as long as the ECB supports it the impact will be less than the 2008 crisis ... while Catalonia goes the way of Greece.