Catalonia’s discontent is a growing threat to the eurozone

A small country with a proud history that wants to break away from an overbearing, centralised government. A fiercely contested independence campaign, dividing a nation. A raft of arguments about whether small countries can survive, and whether they can remain in the European Union.

No, you have not accidentally picked up an old issue of MoneyWeek and absent-mindedly started reading yet another article about Scottish independence. Exactly the same arguments are now being played out in the northeast of Spain.

On 9 November, Catalonia was scheduled to hold a ‘consultative’ ballot on independence – although at the time of writing, the Spanish government was trying to block that. It had planned to hold a full-scale vote on independence, but that was overruled by Madrid, so instead a less formal vote will be staged.

Clearly, independence is a long way away, and there is a lot of wrangling ahead. And yet the momentum is clearly in that direction, and it seems unlikely the Spanish government will be able to resist a proper vote indefinitely.

A viable case for nationhood

Catalonia would be perfectly viable as an independent nation, just as Scotland would have been. With 7.5 million people, it would be the 99th biggest country in the world: hardly huge, but there are plenty that are smaller.

It would have a GDP of $314bn, according to calculations by rich-country think tank the OECD, which would make it the 34th largest economy in the world, bigger than Portugal or Hong Kong, which are successful by themselves.

On a GDP per capita basis it would make it wealthier than South Korea, Israel or Italy. There is nothing for anyone to be afraid of there.

That makes an eventual Catalan break-away a distinct possibility. For all the huffing and puffing by the Scottish nationalists, the economic arguments in favour of independence never really stacked up. The UK may have its problems, but it is one of the fastest-growing developed economies in the world right now.

Scotland is a relatively prosperous part of it, but with declining oil revenues it faced an uncertain future alone. It was hard to argue it would be richer by itself and there was a worryingpossibility that it might be poorer.

That is not true of Catalonia. The statistics are hotly debated, but there is plenty of evidence that a relatively wealthy Catalonia subsidises the rest of Spain. Catalonia accounts for 16% of the Spanish population, with seven million people, but 20% of its output and 26% of its exports. It is has high debts, but then so does the rest of the country.

Worse, Spain has locked itself into a dysfunctional currency union, which appears to offer little apart from grinding recession, mass unemployment, rising debt and endless austerity. Unemployment across Spain is now 23%, and youth unemployment is over 50%.

There is nothing very appealing about remaining inside a country in that kind of trouble. It is not hard to argue that Catalonia would do better by itself – and it would be hard to do much worse. In truth, people usually vote with their wallets. In Scotland, the wallet said no. In Catalonia, it is likely to say yes.

Could independence for Catalonia lead to chaos?

The trouble is that this decision could cause havoc for the markets. Spain is a part of the single currency, while Scotland was only a part of the sterling zone. What are the rules for a region within the eurozone leaving the state of which it is a member? Does it have to reapply for membership or will it automatically be part of the euro? What happens to the Spanish debts – does Catalonia take over a part of them, or leave all of them with Madrid?

No one has the faintest clue what the answers to any of those questions might be. But one thing is for sure. The eurozone already has enough uncertainty to deal with. It is unlikely to be robust enough to take Catalan succession in its stride.

Worse, it might cause political chaos. The government in London was relatively sanguine about a possible Scottish exit from the Union, although of course we never found out what would have happened if it had actually gone ahead. Spain is different.

Madrid is obstinately refusing to consider Catalonia’s demands. A divorce, if that is what happens, is clearly not going to be amicable – and may get very ugly indeed. The eurozone economy is already looking very fragile. A tense stand-off between Madrid and Catalonia is the last thing it needs.

Worse, if Catalonia gets out of Spain, and gets out of the euro at the same time, it may well encourage other regions in a similar position to do the same.

No one knows how the vote will go on Sunday, whether the government will recognise it, or whether it will lead to a proper referendum. The nature of the vote, and the intransigence of the Spanish government, may well encourage people to vote in favour of independence – if only to show they have not been cowed into submission.

Either way, sooner or later the people of Catalonia will have to make a decision about its future – and when that happens it could be a big threat to the stability of the markets.

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