RaboResearch - Economic Research

Catalonia declares itself independent, but loses self-governance

Economic Report

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  • Catalonia declared unilateral independence last Friday, but the regional government was then dismissed by the central government
  • The transition of power from Barcelona to Madrid went without notable clashes
  • More strikes and ongoing demonstrations should be expected the coming weeks
  • Snap elections will be held on 21 December. Currently, pro-independence parties stand to lose, but polls are too close to call and elections will not solve the crisis
  • Most important for now is that Catalonia is not really independent and still part of Spain and the EU. We believe that Catalonia will remain part of Spain, but ends up with more autonomy
  • For 2018 we forecast economic growth of around 2.2%, after 3.1% in 2017

A brief recap of events

On Friday, the Catalan Parliament voted in favour of a unilateral declaration of independence by a margin of 70 votes to 10. However, 53 members of the opposition marched out of the room prior to the illegal vote.

Shortly after the declaration, the Spanish Senate approved the central government’s intended measures under article 155. The Catalan government was then dismissed, the parliament dissolved and several high ranking officers of the regional police were fired. The central government has announced that new regional elections will be held on 21 December. Until then, Spain’s Deputy Prime Minister Soraya Sáenz de Santamaría will serve as Interim President of Catalonia and ministers from the central government will take up the roles of their regional counterparts. While the transition of power within the police force went rather smooth on Friday, the ex-President Puigdemont, amongst others, seemed not to accept his dismissal. Instead he asked Catalans in a speech from his hometown Girona to democratically and peacefully resist control by Madrid. Yet on Monday, instead of going to his former office or meeting party members to discuss the way forward, as others did, he went to Belgium to hire a Belgian lawyer. Carles Puigdemont and other officials involved in the rebellion are being prosecuted and may face criminal charges.

All in all, the transition of power from Barcelona to Madrid went without notable clashes as only very few former members of the government and parliament decided to challenge Madrid and go to their office on Monday.

Local public media left untouched, for now

Unlike initial intentions, the central government will not intervene in regional public media such as the TV channel TV3. The PSOE, which is the country’s largest opposition party, asked the government not to. The socialists argued that control of the regional media should remain in the hands of to the regional parliament, as it could even be counterproductive to take that away. While the ruling PP didn’t need PSOE support in the Senate to get all measures under article 155 approved, the PP accepted this demand. Earlier, employees of the regional public media had already expressed their loyalty to the separatist government. Given that (for example) TV3 was also used as a propaganda channel by Catalan separatists, the central government might still decide later on to intervene, to make sure the news is balanced. This might prove especially essential in the run up to the regional elections.

Short-term (economic) implications

As mentioned in previous notes, a unilateral declaration of independence does not make Catalonia an independent state. As expected, after the declaration, countries around the world noted that they do not recognise an independent Catalan Republic. Hence, Catalonia is not really independent and still part of Spain and the EU.

That said, clashes between the regional public pro-independence administration and the central officials who took over control are likely, lowering the efficiency of the public administration. We’ll have to wait and see for a few days how this all plays out. At the same time, more strikes and ongoing demonstrations should be expected the coming weeks. It aren’t just the pro-independence Catalans who take it to the streets. Last night hundreds of thousands pro-unity Catalans marched through the streets of Catalonia, waving Spanish flags and asking for Puigdemont to be put in jail.

So far, almost 1,700 businesses have filed the paperwork to move headquarters. The declaration of independence is likely to induce more firms to move. Investment, tourism and car sales are also suffering in Catalonia. The Bank of Spain and the national statistics office have estimated (independently) that Spain’s GDP growth only slightly moderated in the third quarter, to 0.8% QoQ from 0.9% QoQ in Q2. The minor slowdown was in line with our own forecast. We expect economic growth to slow further in the coming quarters. For 2018 as a whole, we forecast economic growth of around 2.2%, after 3.1% in 2017. The moderation stems from, amongst other things, lower pent-up demand and employment growth, historically low household saving rates, and higher uncertainty as a result of the institutional crisis. The increased uncertainty is expected to mainly impact spending in Catalonia. Obviously, the longer it takes before tensions in the region recede, the larger the negative economic impact.

Regional election outcome is unpredictable

The central government surprised friends and foes by calling snap regional elections already within two months. Parties will have to decide within ten days (from past Friday) whether to run in the elections or not. The separatist parties face a real dilemma: if they boycott the elections because Madrid shouldn’t have say in the independent Catalan Republic, they will lose power and control of official public institutions after 21 December. Conversely, if they do decide to run they acknowledge that Catalonia is not an independent state and then might lose voter support. While the radical party CUP may indeed decide not to run, the centre-right PDeCAT of Puigdemont and the somewhat more radical centre-left ERC decided on Monday that they will participate in the elections. In our view, simply because the longer-term costs of not participating are too large.

Recent poll suggests a loss for separatists

According to a poll by Sigma Dos, which was held between 23 and 26 October and published yesterday in the Spanish newspaper El Mundo, the current separatist government would have lost its majority if regional elections were held last week. But they would only come three to five votes short, so the margins remain very slim. This underscores the polarisation in the region and also implies that the institutional crisis is not simply resolved by holding snap elections.

When asked whether Catalans favour no changes to the current situation, more autonomy or an independent state, 46% replied that they wanted more autonomy, whereas 29% opted for an independent Catalonia. The Spanish Minister of Foreign Affairs, Alfonso Dastis, already said that he rules out independence, but not necessarily more autonomy. In the end, we believe Catalonia will remain part of Spain, but with more autonomy. However, it will likely take a new parliamentary elections before Catalonia will indeed receive more autonomy.

The fact that Spanish asset prices have generally reacted positive to recent developments (IBEX-35 up 2.6% on Monday) does seem to indicate, in our view, that participants in financial markets see the call for elections in eight weeks, the absence of violence over the weekend, the large pro-unity demonstration on Sunday, and the relative latency by Catalan officials following the decision by the Senate on Friday as a sign that there will be more fruitful talks after the elections.

Figure 1: Separatists would lose their majority according to recent polls
Figure 1: Separatists would lose their majority according to recent pollsNote: The poll was held prior to the unilateral declaration of independence by the Catalan government and the suspension of the Catalan government by Madrid.
Source: Sigma Dos, El Mundo
Figure 2: Catalans prefer more autonomy over independence
Figure 2: Catalans prefer more autonomy over independence Source: Metroscopia, El País
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