Black Swan of Barcelona

Secession crisis heaps pain on Spain – FT.com.

My visit to Barcelona in 2007 was full of surprises. I thought that the relationship between Catalonia and  the rest of Spain was like the union among the constituents pieces of the United Kingdom. I was wrong about that. Once I arrived, I realized that Catalonia is to Spain as Quebec is to Canada.

Quebec was annexed by the British in 1763 after they won the French and Indian War. French culture remained dominant in what is now Canada, but that began to change during the American Revolution. British loyalists began emigrating to Canada, and this trickle turned into a gusher following the Treaty of Paris that officially ended the war in 1783.

There were reprisals against the American Tories during and after the war, so these people packed up and moved to Canada. The English speakers eventually came to outnumber and dominate the French speakers. To this day, French is the dominant language in Quebec and in enclaves in Ontario and the maritime provinces. The Quebecois also maintain a distinct culture including a very tasty cuisine, which combines Norman cooking techniques with indigenous ingredients.

Catalonia has a similar history. It was an independent city-state centered around Barcelona after the dissolution of the Roman Empire to the Muslim invasion in the Middle Ages, but it has generally been a integral part of the Spanish Kingdom since the 16th Century.

In 1714, Catalonia attempted to secede from the Spanish Empire but was quickly conquered and oppressed as punishment. Secessionist yearnings popped up again during the Spanish Civil War in the 30’s. After Franco defeated republican forces, Catalonian culture was repressed. Catalan could not be used in an official capacity until 1978.

The Catalans have good reason to be disgruntled. They are the richest region in Spain per capita, and as a consequence pay to the treasury about 8% more than they receive in cash and benefits. Each point is worth about €2bn; hence the Catalans pay €16bn than they receive.

This year’s budget deficit for the Catalan region is expected to be €2.7bn. The Catalans are being asked to reduce that deficit by cutting social spending.

The calculus of Catalan secession is simple. Long simmering ethnic resentment plus a distorted fiscal funding scheme have led to calls for more autonomy.

Let’s look at this situation from the Catalan point of view. If the Spanish Central government gave Catalonia €4bn a year in additional funding, the region would be able to balance its books, restore social service cuts and still be the largest net contributor to the central government at €6bn per year.

Rajoy is playing hardball because he has to; the central government is broke. However, it may be wise for him to come to an agreement with Catalonia.

If the region attempts to secede, Spain does not have the money to put the rebellion down. It barely has access to bond markets now. Good luck getting investors to finance a civil war.

Letting the region secede will also be expensive. Catalonia accounts for 20% of Spanish GDP and is the largest net contributor to the treasury of all the regions.

The solution is simple. Find the €4bn and give Catalonia some political concessions that help it to strengthen its indigenous culture. These actions will both enable Spain to remain united and help to heal the wounds caused by centuries of oppression.

In the larger picture of the eurozone, this episode shows why it is impossible for a central authority to exert control over a dynamic system. For awhile, it appeared that Europe had succeeded in allaying fears of a Eurozone breakup, but no matter what tricks that the troika have up their sleeve, there are simply too many variable to account for.

Secession movements in countries are one variable. Another variable is the rise of populism in the eurozone since the onset of the crisis. It seems that by attempting to hold the eurozone together, they are creating a scenario where its countries begin to fall apart.

dareconomics.wordpress.com

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