If Catalonia Splits, Spain Will Lose Over 20% of Its Current Economy

Catalonia the region of Spain that wants to become independent held a controversial referendum Sunday on its independence that would have major implications for Spain’s economy as well as Europe’s.

The central government of Spain is fiercely opposed to the referendum with polling stations raided by police.

Regional officials indicated that the overwhelming majority of votes cast had been for independence, but the overall turnout was quite low.

On the news, the euro fell 0.7% versus the dollar Monday, and the yield on 10-year Spanish bonds increased. Madrid’s main stock market opened over 1.4% down prior to parring some of its losses.

This vote comes when Spain is emerging from close to 10 years of economic problems. Catalonia is the country’s most economically productive area.

Catalonia represents close to 20% of Spain’s overall economy and is the leader in exports for all regions representing over 25%.

It also contributes more in taxes than it receives back.

Supporters of independence have been seizing upon the country’s imbalance, arguing stopping transfers to Madrid would turn the budget deficit in Catalonia into a big surplus.

The region has a long record of attracting new investment, with close to a 33% of foreign companies now in Spain choosing Barcelona the region’s capital as their headquarters. Nissan and Volkswagen have both opened plants close to Barcelona.

However, many questions remain unanswered, including a continuing as a member of the European Union. One big worry is if Catalonia would have to apply independently for membership to the EU, it would be required to convince all of the current members of the bloc to agree, which means Spain would have to give its approval.

One economist in Germany said that he found no practical way that Catalonia would become an independent nation in the EU, as the majority of supporters for becoming independent want.

Dropping from the bloc would be costly as it would likely increase costs of exporting goods that are produced within Catalonia to members of the EU and other countries.

If the region left the EU it would be able to us the euro as its official currency but would not hold a seat with the European Central Bank.

The highest court in Spain banned Catalonia’s referendum saying it was unconstitutional. However, the separatist government of the region pushed forward with its vote. A split would create a big hole in the finances of Spain and dramatically increase uncertainty.

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