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Riots of catalan people protesting for spanish government decision about referendum of independence of catalunya

How Catalan Independence Impacts the EU Economy

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Catalonia just voted to leave Spain, and the move could have widespread economic impacts throughout the EU.

The UK led the way with Brexit, but now the Spanish region of Catalonia is threatening Catalexit, which could have huge impacts on the local and global economy. The region voted to become independent, and according to ING, Catalonia leaving Spain would have negative effects that “proportionally exceed” those of Brexit and would plunge the region into long-term uncertainty.

The shock change of government in Spain has recast the die for Catalonia’s independence bid, with the prospects of a compromise in the air as Socialist leader Pedro Sánchez takes the reins of the country.

The ouster of conservative former prime minister Mariano Rajoy last weekend has given new hope that the political crisis in Spain’s economic heartland can be avoided. Sánchez has historically been more sympathetic to the Catalan cause than Rajoy, who took a hard line against separatists when they voted for independence last year.

“This doesn’t mean independence is in any way more likely but it does change the mood music,” said Dr Andrew Dowling, Senior Lecturer in Hispanic Studies at Cardiff University. “It’s important that the new government addresses the Catalan issue in negotiations very soon if there is any chance of compromise. And I think there can be compromise — the less hardline separatists are likely to be willing to talk.”

Catalan Independence Poll Results

people voting during illegal referendum for catalan indepedence

Catalonia has long been fighting to preserve its culture, and the recent Catalan independence poll found that 90% of voters support leaving Spain.

“With this day of hope and suffering, the citizens of Catalonia have won the right to an independent state in the form of a republic,” said Catalan leader Carles Puigdemont. “My government in the next few days will send the results of today’s vote to the Catalan parliament, where the sovereignty of our people lies, so that it can act in accordance with the law of the referendum.”

Spain’s central government didn’t view the vote as legitimate and went to great efforts to disrupt it. Rajoy’s response after the count was announced was to crackdown on the separatists, unleashing police operations that ended in riots and bloodshed. It also ordered the arrest of Catalan leader Carles Puigdemont, who subsequently fled the country and is now living in exile in Belgium.

Global Economic Impacts

If Catalonia really does declare independence from Spain, it could lead to economic impacts around the world, with experts predicting negativity in the private sector.

European markets rose after Sánchez took power as investors bet an alliance he forged with Catalan lawmakers to force Rajoy’s removal would ease political tensions. Markets have much to fear from a separate Catalonia. A declaration of independence from Spain could lead to economic impacts around the world, with experts predicting negativity in the private sector.

Much of the economic possibilities depend on Spain’s response to the exit—an agreed secession would keep Catalonia in the EU and on the euro, which means things would economically stay mostly the same except that Catalonia would no longer be paying taxes to Spain. However, if Catalonia becomes an independent state against Spain’s will, things could be dicier, with the region potentially being forced to pay tariffs, change its currency, and start new trade agreements.

One of the reasons Catalonia’s exit would be so impactful is that the region’s economy is widespread and powerful. Home to Barcelona and 7.5 million people, the region generates 20% of Spain’s GDP and produces one-third of Spain’s exports. Any changes to the area’s economy would have a ripple effect around the world.

The most immediate impact would be a fall in consumer goods from Catalan households and uncertainty in consumer behaviour. That uncertainty would likely lead to drops in business investments in the region. Without Catalonia, Spain wouldn’t lose its standing as the fourth largest economy in Europe, but its power would be significantly diminished.

Shipments of car and truck parts, chemicals and food contributed to a 7.4% surge in exports last year, notching up earnings of more than €70bn euros for the first time on record, according to the Spanish Ministry Economy and Competitiveness. Catalonia left its closest regional competitors – Madrid, Andalusia and Valencia – way behind, with each posting just 11% of the nation’s exports, according to data compiled by Trading Economics.

Any changes to the region’s economy would have a ripple effect around the world.

The most immediate impact would be a fall in consumer goods from Catalan households and uncertainty in consumer behavior. That uncertainty would likely lead to drops in business investments in the region. Without Catalonia, Spain wouldn’t lose its standing as the fourth largest economy in Europe, but its power would be significantly diminished.

EU Economic Changes

Catalonia’s potential independence from Spain also draws into question its membership in the EU. Spain has already made it clear that if Catalonia leaves, it will push for the region to also be forced out of the EU. But in order for Catalonia to be kicked out of the EU, all member countries would have to be in agreement, which seems unlikely. However, many experts say that there isn’t a reason for Catalonia to stop using the euro or to leave the EU single market, even if it is no longer a member of the EU.

Catalonia has a large amount of exports, meaning the most impacted companies would be those exporting to the EU. The EU accounted for 65% of exports and 70% of foreign investment in Catalonia over the past few years.

The Catalan economic effect on the EU is still unpredictable. With such a powerful economy, a Catalonia that isn’t a member of the EU could become a threat to the EU and Spain, especially if it secures competing trade agreements. A divisive exit could cause a Spanish commercial war, which could impact spending and consumer behaviour throughout the EU and change long-accepted trade policies.

Catalonia is to declare independence much of its economic future would be determined based on its relationships with Spain and other European countries.

The more compassion Spain, the UK, and the rest of the EU have on Catalonia, the stronger its economy will be. While time will tell how other countries react and how the EU’s economy is impacted, Dowling said Spain’s new government makes it less likely the separatists will find any allies.

“They had no international support going into the independence vote and no major country recognised the result,” Dowling said. “It’s vital that the matter is discusses soon and I would expect a meeting between Sánchez and the Catalan leadership soon.”

Note: This article was updated on 14.6.2018.

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Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.