Demasiado largo, no lo leí: Catalonia needs Spain

Here is the TL;DR version of the last post.

Catalonia runs a budget deficit with the rest of Spain. That is disguised because Madrid kicks back a large chunk of Catalonia’s tax revenue in the form of soft loans. In other words, Catalonia has been taking debt owed private investors as it comes due and transforming it into debt owed to the central government. (This far to the tune of €52 billion.) That means that an independent Catalan state would need outside financing if it declared independence as its debt came due, to the tune of €4 billion per year; such financing would be impossible in a contested divorce. Even if Catalonia renounces its share of the national debt, Spain can lock it out of financial markets. The result will be crushing ... and that is before accounting from the trade shock that will come from Catalonia’s hard exit from the European Union.

(Note that tax revenues are lumpier than spending: even a state with a budget surplus needs access to short-term financing to make its payments. Losing access to finance will be crushing.)

Rough numbers for Spain:

Explanation: Spain in 2014 received a net transfer from Catalonia worth 0.8% of GDP. Losing the territory would cause an increase in spending of 0.3% of GDP, since the new smaller country would have to cover the same burden of fixed costs. (Defense, foreign affairs, regulatory authorities, public research, etcetera.) If Catalonia also renounced its share of the national debt, then the rest of Spain would also have to assume an addition 0.6% of GDP in interest costs. The total cost, then is either 1.1% of GDP or 1.7%, depending on what happens to the national debt. 

Rough numbers for Catalonia:

Explanation: with independence, the soft loans go away. Catalonia will be in deficit unless it renounces its share of the national debt or allows net taxes to rise substantially. Note, however, that Catalonia will still need access to short-term financing. Also note that these figures make no account for the inevitable trade shock that Catalexit from the E.U. will bring. That trade shock will depress revenues and raise spending, making access to capital even more critical. 

Comments

[Randy McDonald]

Yeah. This is not a surprise.

Question. How much different would things be if we assume a less significant shock, say, a successful negotiation of independence with Spain involving an assumption of a portion of the debt and painless access to the EU and the Euro?

[Noel Maurer]

The raw numbers in the graph don't assume any sort of shock, so you can use them to figure out the fiscal impact of a negotiated secession with the national debt divvied up the way the Finance Ministry currently allocates it.

For Spain, the effect is small. The total amount of new borrowing rises by 1.1% of GDP. The figure on the deficit rises by more, because the GDP denominator no longer includes Catalan output. That could cause some hassles under Article 135 of the Spanish constitution, which gives European budget commands the force of constitutional mandates. But I'd bet that the E.U. would give Madrid lots of wiggle room.

Catalonia also experiences a small impact. The lending from Madrid would go away, at least after a period, but it could be replaced by borrowing from the markets. The resulting budget deficit would be small. Conversely, Catalonia could raise its net tax burden.

Over the long-term, I have no idea. Catalonia isn't particularly better governed than Spain. So I don't see any reason for growth to magically accelerate. Over the long term, trade would fall, since even inside the European Union borders do matter. (As they do in Canada!) But in a negotiated divorce, that drag would be small.

TL;DR: negotiated independence inside the European Union would have mildly negative effects for both sides, but so small as to be a general nothingburger.

[J.H.]

But is negotiated independence within the European Union even possible? Between the debate (and statements from EU officials) in the run-up to the Scottish referendum and the debate concerning Brexit and even a transitional period (see here for instance: https://www.wsj.com/articles/legal-intricacies-complicate-mays-two-year-brexit-transition-period-1507740671), it seems that negotiated independence within the EU is practically impossible without a change to the treaties - to allow applications by non-independent entities or probably more likely to allow applications from "non-independent entities which are in the process of attaining agreed independence from a Member State, with accession occurring upon independence" or something like that to keep everyone happy (and which would allow say the Faroe Islands or Aland Islands to apply in the event they had agreed secessions from Denmark and Finland.

Otherwise, legally Catalonia (or any other secessionist area) would need to:

1. Secede from the Member State (and hard exit the EU)

2. adopt the euro unilaterally (like Kosovo or Montenegro) - this can be done at the stroke of independence

3. Apply for EU membership

4. Probably negotiate an association agreement containing a deep and comprehensive free trade agreement along the Ukrainian model plus a customs union agreement to be enacted within the first week (at least provisionally) to tide over the trade between Catalonia/Seceding Area and the rest of the EU in the meantime.

But actual accession would likely take at least 6 months to 1 year to go through after independence

[Noel Maurer]

Short answer to the question in your first sentence: No.

[Noel Maurer]

It's an open question what would have happened to Scotland. Not that you're wrong; just that they could have fudged by having Scotland go through the accession process before de jure secession from the U.K. Ironically, the big barrier to that sort of fudge was ... the Spanish government. Alternatively, Scotland could have parked itself in EFTA while formal accession talks proceeded.

The actual situation is worse for Catalonia than even your scenario.

Point (2): Holding on the euro will be hard as long as the dispute locks Catalonia out of capital markets. The pressure to introduce a new currency will be immense. It might not be immense enough to get over the costs, but if Spanish pressure keeps the Catalan state from paying the bills (or causes Catalan bank branches to run out of cash) then that will be that.

Point (3): Article 49 of the TEU requires a unanimous vote of the Council to start accession talks. That's gonna be an obvious problem for Catalonia.

Point (4): see above. Catalonia could join EFTA, but Spain could block that as well, since the EEA agreement requires consensus.