Inevitable Economic Collapse
Why the Catalan economy wouldn't be able to cope with the so-called unilateral route to independence
"Parallel Lines" by Gerry Balding is licensed under CC BY-NC-ND 2.0.
“Politics is the art of the possible, the attainable - the art of the next best” - Otto von Bismarck
“Madrid ens roba” has been one of the most emotionally explosive slogans used by the Catalan separatist movement over the last decade. It is Catalan for “Madrid steals from us.” The basic idea is that Catalans pay more taxes than they should and receive fewer services than they deserve. The idea is widely accepted throughout the Spanish region, even by lukewarm supporters of independence and moderate Catalan nationalists.
The best way of visualizing the argument is by thinking of two parallel lines, like the railway track in the image above. The top line represents the amount of taxes paid by Catalans and the bottom one represents the services received. There is a gap between the two lines.
Of course, given the indifference to reality commonly shown by Catalan nationalists, it is unsurprising that the maths used to calculate the position of the lines is often sloppy and questionable. This probably isn’t the best forum for a take-down on the details because the basic point is absolutely true. There really is a gap, largely because Barcelona is Spain’s second city with 5.7m inhabitants in its metropolitan area (three quarters of the population of Catalonia). The same is true of Madrid and pretty much every major city in the West. Wealthy cities are always expected to generate enough wealth to support poorer rural areas with weaker economies.
Individual freedom tempered by solidarity and protected by robust institutions form the cornerstone of the values promoted by the Sharpen Your Axe project. For the sake of argument, let us press pause on our values and pretend that the rich inhabitants of cities have no duty to provide infrastructure for the poor inhabitants of villages. If we adopt such questionable values, at least for the time it takes to read this essay, we can still see that the idea of addressing the gap still fails to generate good outcomes. The reason is simple: The lines aren’t static.
Supporters of Catalan independence tried to force a split from Spain in 2017 with a coup d’etat (called “the unilateral route” by activists and politicians). The change was based on a transitional regime. This created an enormous problem for the business community. Should companies with headquarters in Catalonia continue paying tax to the Spanish authorities? Or should they take a punt on the success of the movement and pay taxes to the Catalan authorities?
Imagine choosing one of these scenarios and getting it wrong. You now have a massive tax bill with the other authority. You will be unlikely to get a return on the taxes you paid to the wrong authority. Expect years of legal battles. Executives have a fiduciary duty to protect the funds provided by shareholders and creditors. The risk of getting it wrong is just too high. The only safe option is to move the headquarters of your company outside Catalonia to gain absolute clarity on your tax regime.
This is in fact what happened in 2017, as we saw in this essay on capital flight. Even though Barcelona has become a startup hub in recent years, the most successful tech companies would be very likely to flip their headquarters if the regional government tried a second coup at some point in the future.
The inevitable result of companies moving their headquarters outside the region is that the top line (representing tax income) will always move lower in a unilateral scenario. However, the situation gets worse. The Catalan authorities would have to provide many services that are currently run by the central government, including pensions, embassies and an army. The bottom line would simultaneously have to move much higher.
What happens if the lines cross? The bottom line (the services needed) would now be higher than the top line (tax income). The only solution would be massive cuts. The new national government of Catalonia would almost certainly have to slash pensions, healthcare and education, as well as firing many public employees and cutting salaries. The result would be a brutal recession.
The Catalan authorities realized this would be the case. The regional government prepared a report showing that the economy would fall by around 20%, but, of course, never released it to the public. It was discovered by the national police after the coup attempt was blocked and then leaked to the press.
Destroying a fifth of the economy is a staggeringly negative scenario. It is the opposite of value creation, which we discussed last week. A recession this size would be almost three times as bad as the crisis that enveloped Spain (including Catalonia) between 2008 and 2013. It would be twice as bad as the recession generated by the tough lockdowns to tackle COVID-19.
It is difficult to see how Catalonia could remain both independent and a democracy in the face of such an appalling economic scenario. Would people still support independence after they had lost their jobs? Or when the bankrupt government failed to pay unemployment benefit and slashed pensions? It seems hard to imagine.
To make matters worse, Catalan nationalists were often very blasé about what it would take to get the new independent country back into the European Union (EU). In fact, defenders of independence ignored regular messages from Brussels that the new country would find itself outside the EU.
Supporters of independence also often declined to discuss how veto rights would keep an independent Catalonia outside the trading bloc. The leaders of countries like France and Italy would be unlikely to be happy about neo-imperialist fantasies about carving out a new entity out of the “Catalan Countries” found in three actually existing countries.
Article 1 of the French Constitution says the country is “indivisible"; as does Article 5 of the Italian Constitution. Article 2 of the Spanish Constitution is the same, although the Catalan nationalists fantasised about blackmailing the rest of Spain with bankruptcy in order to remove this obstacle.
Those of us who are clear eyed about the risks of capital flight and an economic crash leading to generalized poverty and misery are often accused by Catalan nationalists of being anti-Catalan. No. That is utterly wrong. We don’t hate Catalonia. We want Barcelona and its rural hinterland to remain free, diverse and successful within Catalonia, Spain and the EU. We also feel uncomfortable by right-wing nationalists who don’t include solidarity in their values.
As usual when we discuss Catalonia, the comments are closed for the week. If you are a rabid supporter of Catalan independence who feels uneasy at what you perceive as a slur on your power unit and want to ease the discomfort “by making some sharp retort,” then your best bet is to draft up an essay on why you think I am wrong. You can publish it for free on Medium or Substack. Make sure you link to this essay! See you next week!
Further Reading
Spain isn’t a fascist state
Catalan nationalism isn’t progressive
Catalan nationalists often over-state the support for independence
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