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Catalans will vote to separate from Spain

Economic Report

  • Catalonia is planning to hold a referendum on independence on Sunday 1 October
  • The referendum is deemed unconstitutional by the Spanish Constitutional Court, yet the Catalan government has claimed to declare Catalonia independent from Spain in case of a yes-vote
  • We think that the outcome will be in favour of independence, but only because we expect most anti-separatists not to vote. Turnout will expectedly be low enough to prevent the Catalan government from taking large irreversible steps towards independence
  • In the end, we believe Catalonia will mainly use the outcome of the vote to negotiate better terms and more autonomy for the wealthy region. Madrid seems prepared to offer Catalonia more money and autonomy, but it is unclear to what extent
  • Given the risen tensions it will be extremely difficult to restore the relationship between the central and Catalan government. The negotiation period is set to take a long time and with the ultimate risk of unilaterally declared independence, uncertainty will linger in markets

Will the clock start ticking on 1 Oct?

Catalonia is planning to hold a referendum on independence on Sunday 1 October. The question the Catalan President Puigdemont will ask Catalans is straightforward: Do you want Catalonia to be an independent state in the form of a republic? Whether Catalans will actually vote will depend upon where they live and the political party they support. If the referendum follows through and the outcome is , the Catalan government has proclaimed to declare Catalonia independent from Spain within 48 hours.

Accounting for one-fifth of Spain’s GDP and tax income, and with a yearly net transfer of 10 to 15 billion euro’s to the central government[1], it is clear that Spain’s economy and government stand to lose considerable funding if Catalonia separates from Spain. Spain’s budget deficit would increase by 1pp to 2pp, requiring significant budget cuts to comply with Europe’s budget rules, among other things. Hence, it is no wonder that the central government is trying to do whatever lies in its power to prevent the referendum from taking place.

Figure 1: Catalonia produces one-fifth of Spain's GDP
Figure 1: Catalonia produces one-fifth of Spain's GDPSource: Macrobond, Rabobank calculations
Figure 2: Budget cuts necessary if Catalonia separates from Spain
Figure 2: Budget cuts necessary if Catalonia separates from SpainSource: Macrobond, European Commission, Catalan government, central government Spain, Rabobank calculations

Tensions between Madrid and Barcelona have risen fast

Before sketching the future, let’s first take a brief step back. Recent weeks have been turbulent. The Catalan government passed a law to hold the referendum. The Spanish Constitutional Court then ruled the bill unconstitutional and the central government is now trying hard to prevent that the referendum from being held.

So far, Madrid has announced that repercussions in the form of fines, bans from office and possibly even jail time will follow for political figures and public servants that facilitate the referendum. Currently, more than 700 Catalan mayors are under investigation for stating to facilitate the referendum and 13 Catalan officials have been arrested last week. Madrid has also sent the police to search for ballot boxes and printers for voting lists. Moreover, the central government has taken control of part of the Catalan budget to prevent public money from being  spent on the referendum. The latter is currently being challenged in Constitutional Court by the Catalan government. In short, the relationship between Madrid and Barcelona has exponentially worsened in the past months, and it’s unclear how to put the genie back in the bottle.

Pro-independence parties will likely win the referendum…

Polls have been rare recently, yet a poll of the regional government’s Opinion Studies Center in July showed that 41.1% of Catalans is in favour of independence (down from 47.5% in July 2016), 49.4% against and 9.5% undecided. 67.5% of the respondents said they will indeed vote in the upcoming referendum, 62.4% of them planned to vote Yes and 37.6% No. We believe the yes-camp will win the referendum, and quite possibly convincingly. The most important question, however, is how large the turnout will be. The turnout will determine the strength of the local government’s mandate to lead Catalonia to independence.

In our view, the outcome of the referendum will show a majority of voters to be in favour of separating from Spain. First and foremost this is, because most anti-independence parties discourage their supporters to vote. Among them are the Partido Popular of Spain’s Prime Minister Rajoy, Ciudadanos and the PSOE, as they state the referendum is illegal. These parties received about 40% of all votes during the last regional elections in 2015. In addition, the yes-camp is way more actively campaigning to induce people to vote. In any case, abstention by no-voters increases the chance of a yes-win.

Figure 3: 40% of the electorate supports opposition parties that oppose the referendum
Figure 3: 40% of the electorate supports opposition parties that oppose the referendumSource: Generalitat de Catalunya, Rabobank calculations

Recent actions by the central government mentioned before, likely have two opposing effects. On the one hand, they might persuade more moderate voters into voting Yes, to show their discontent with how Madrid is handling the situation. On the other hand, it will make it more difficult for voters to find an open ballot box with sufficient voting papers. All in all, the harsh pro-active stance of the central government likely lowers the turnout and the referendum’s perceived validity by the Catalans. Most other Spaniards think the referendum is illegitimate no matter what the turnout. 

…but the vote is unlikely to resemble an official referendum

The Catalan government has not set a minimum threshold for the vote to be valid. Still, if less than half of eligible Catalans vote, especially the moderates might feel uncomfortable to officially declare Catalonia an independent state.

So what should we expect for the turnout? There are a number of reasons to believe that it will be higher than in 2014:

  • One of the most important reasons is that this time around the referendum is presented as official, supported by public officials
  • Second, the Catalan government has tied actual consequences to the vote, while in 2014 the referendum was just advisory

Mayors versus Madrid

By the beginning of last week as much as 745 (out of 948) Catalan mayors had given their support to the vote, offering public spaces and public servants. Based on this figure, we calculate that around 55% of all Catalans should in theory be able to cast their vote. This number does not include Barcelona yet. A good week ago, Barcelona’s mayor Ada Colau said that the city’s 1.6 million citizens would be allowed to vote, although she has not given any information yet on how the vote would be organised and where ballot boxes can be opened. If, however, we include Barcelonians, slightly under 80% of all Catalans have a mayor who lends its support to the referendum.

That said, turnout is way more severely hampered by Madrid this time than in 2014. The central government’s searches for ballot boxes, the seizing of as much as 10 million voting papers, and the threat of prosecuting mayors and other civil servants facilitating the vote significantly lowers the possible turnout. It remains to be seen whether public servants indeed want to risk prosecution. Yet even if they will, if the police blocks ballot boxes and/or there are no ballot papers, citizens will have a hard time voting. If we add to that, that the voter base of the PP, Ciudadanos and PSOE is advised not to vote, we expect that turnout will come in substantially below 50%.

There is also still a slight chance the referendum will be called off. Both due to Madrid’s actions and the central government’s recent offer to open talks with Catalonia over giving the region more money to spend autonomously if it drops the referendum. Yet, despite the obstacles and Madrid’s opening bid, Puigdemont has said the referendum will be held no matter what. 

[1] The estimated net transfer depends upon the calculation used.

Limited moves by Catalonia, yet significant ongoing tensions

Looking to the future, what would be the consequences of the combination of a yes-outcome combined with a rather limited turnout? First of all, we believe it implies that Catalonia will start the official separation process 2 October in words and by minor low profile actions. But, the Catalan government will likely refrain from all too provocative measures such as diverting tax payments, firing public servants not supporting the independence process, create a central bank and so on. In the end, we believe Catalonia will mainly use the outcome of the vote to negotiate better terms and more autonomy for the wealthy region. Given Madrid’s recent opening bid, it seems safe to expect Madrid is prepared to meet Catalan demands to a certain extent.

Depending on the honesty of the Catalan actions, the central government will decide whether to block the region’s needed access to the Regional Liquidity Fund. For now, this risk is limited as it would spark a liquidity crisis for Catalonia. Yet, the risk should not be neglected as Madrid might feel it has no other options to get the region back in line. At the same time, long-term ongoing perceived suppression by Madrid without the perspective of receiving more autonomy might further fuel support for unilateral independence among Catalans.

Limited economic impact

Figure 4: Economic recovery Spain remains on track
Figure 4: Economic recovery Spain remains on trackSource: Macrobond, Rabobank, Nigem 

Both markets and the economy have barely been impressed by the increased tensions. In August, economic sentiment in Spain even rose to a 20-month high. Looking forward, turnout will expectedly be low enough to contain expectations about Catalonia actually separating from Spain. At least in the short term. By the same line of reasoning economic implications of the yes-win should be limited. Though, increased political and social tensions and the lingering risk of separation could hurt the economy through negative sentiment going forward. This likely holds more for the Catalan economy than for other Spanish regions. Indeed, the Madrid area might even stand to gain, if investments are diverted from Barcelona to Madrid. Again, this is based on the fact that we believe turnout will be low and that this will prevent the Catalan government from taking irreversible steps toward unilateral independence.

To conclude

To conclude, Catalans are expected to vote for an independent state of Catalonia in the referendum of 1 October. Turnout is, however, hampered by actions of the central government. The rather limited turnout likely tempers the speed with which the government of Catalonia will implement the process towards independence. We believe the main goal of Catalonia will ultimately be to get more autonomous powers and not full independence. At the same time, Madrid seems willing to adhere to Barcelona’s demands to some extent. Accordingly, Spain will expectedly be able to cope with the economic and market impact. That said, given the risen tensions it will be extremely difficult to put the genie back in the bottle and restore the relationship. Consequently, the negotiation period is set to take a long time and with the ultimate risk of unilaterally declared independence, uncertainty will linger in markets.


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