Catalonia’s vote largely misses the point

The bets are on at the moment that the Eurozone will dip back into recession for the third time since 2008 such is the incompetence of the policy makers and the policy framework they have erected to operate within. There is constant talk that the ECB will once again step in to save the day but all they can do is stop a nation going broke by guaranteeing their fiscal deficits and/or buying their debt. The central bank has very limited capacity to actually stimulate aggregate spending, which is the source of economic growth when there is massive idle productive capacity. In this context, the vote on Sunday by Catalonians (well around 33 per cent of them), which was overwhelmingly yes (81 per cent), is interesting although I doubt it will lead to anything constructive – like the Community exiting the Eurozone and really becoming independent. Most likely, Spanish prime minister Mariano Rajo will come up with some fiscal compromise to relieve the calls about Spain robbing Catalonia blind and the same problems will persist. I don’t pretend to know much about the cultural issues but in the scheme of things as I show below the economic circumstances the Community finds itself in are a direct consequence of being part of the Eurozone. That would have to change for there to be any meaning to the calls for secession. I don’t hear those arguments coming out strongly at all.

In terms of the likelihood of the triple-dip recession, the UK Guardian article (November 10, 2014) – Stagnant growth raises spectre of recession across eurozone – continued to spread the myth that the constraint on growth was the high price of credit in Europe.

It claimed that the “the eurozone risked slipping into a self-fulfilling period of stagnation without further efforts to cut the cost of credit”.

No mention of the fiscal constraints that are being imposed throughout and the pro-cyclical fiscal policies that follow those constraints.

When private spending is weak and entrenched unemployment is high, there will be no strong recovery in private spending when the government sector is continually undermining job creation. When will they understand that?

In that context, we have been following the Catalan events with some interest. While I have nothing to offer by way of insight into the cultural and historical drivers of the push for independence from Madrid, the economic debate is something that is worth commenting on.

The romanticism that underpins the push is clear – Catalonia is different to Spain. Its language is different, its has a definably separate cultural history and considers itself to be a self-contained collective. These factors have given it regional autonomy up until now.

But at a time when its prosperity is being continually undermined by Brussels and its buddies in Washington (IMF), who persuade kow-towing Spanish presidents to deliberately create unemployment and rising poverty, the meaning of independence should also become economic rather than just cultural etc.

Economic data

The following graph shows annual real GDP growth for Spain, Madrid and Catalonia from 2000 to 2011 (the most recent regional data from Eurostat). The Instituto Nacional de Estadística (the central statistics authority) provides more recent data which shows that in 2012, Catalonia declined further and in 2013 recorded zero growth but still outperformed the national economy.

Catalonia suffered a deeper recession than the national in general but returned to growth earlier, albeit in a very limited way.

The damage of this weak growth is shown in the next graph – total unemployment rates from 2000-13 (Eurostat data)

The next graph shows unemployment rates for youth (15-24 year olds). Catalonia’s future is right there! Being undermined by its association with Spain and its use of the euro. Youth unemployment rates of this magnitude are a disaster and would normally require immediate attention using job creation programs.

The next graph shows GDP per capita expressed in terms of the relative position to the EU average. So if the value is 100, the region is equal to the EU average. Catalonia and Madrid remained above the EU average for the period 2000-11 but that relative position was in decline.

Spain slipped from being right around the EU average to being well below it (10 pecrcentage points) by 2011. The relative positions declined in the last 2.5 years but the data is unavailable at present.

The next graph shows People at risk of poverty and social exclusion as a percentage of the total population. By the end of last year around 20 per cent of Catalonians were in this category a rise from 17.7 per cent since the introduction of the euro.

It is thus hard to make a case that Catalonia is doing better or worse than Spain or the capital for that matter. The big urban areas are doing a bit better than some of the basket case regions such as Principado de Asturias, Comunidad Valenciana, Andalucía, and the Región de Murcia, which were hammered in the downturn and are not yet seeing much light.

The following graph shows the complete distribution of regional unemployment rates (total and youth) as at 2013. It is not a pretty picture at all.

The argument

Catalonians have crafted an argument that they are being ripped off by the elites in Madrid – the so-called “El ‘España nos roba”. It is similar in tone to the right-wing calls from the north of Italy under the guise of the Lega Nord, who chant the catchcry “Roma ladrona, la Lega non perdona” (Rome is a robber and the Northern League will not forgive you).

They claim that their economic output (regional income) is siphoned off in the form of taxes by the central government to support the provision of public services elsewhere in Spain.

It is an interesting argument.

The English media has also supported the argument that Catalonia is being ripped off – for example, the Financial Times article (May 5, 2014) – Time to tackle the Catalonia crisis – claimed that secession was not a good idea given the uncertainty about EU and euro membership but that the region should gain more independence.

The FT rehearsed the usual arguments:

For years a healthy chunk of its tax revenues has in effect been given away to help fund the rest of the country’s public services. The sense that Catalonia is bailing out the poorer Spanish regions has become increasingly painful for its people.

It appears that the difference between what Catalonia pays in taxes from its regional income and what it receives back from the state is equal to around 8.5 per cent of its regional income per year.

If regional income was unchanged that amount reinvested back in the Community would be very beneficial. True enough. But perhaps that discrepancy is illusory once the Community would be responsible for the provision of all its infrasctructure (significant amounts currently provided by the central government).

Apparently, that component is equal to around 2.7 per cent of Catalonia’s regional income (Source) at least.

Then the question arises whether the regional income would endure as an independent nation. The claim by those opposing the secession is that Catalonia would be expelled from the EU and would suffer constraints on its trade and businesses would abandon the new nation.

I don’t believe that argument.

Nations such as Norway, Switzerland and Greenland do not seem to suffer from being outside the EU. Norway and Switzerland have never been members, but Greenland was part of the EEC, courtesy of Denmark’s membership.

Once it attained self-rule in 1979, strong domestic opposition against the EEC (particularly over fishing rights) led to Greenland formally leaving the EEC in 1985.

Nothing obviously bad has happened to them as a consequence. Interestingly, as part of its exit, Greenland negotiated the so-called ‘Greenland Treaty’, which allowed the nation to remain subject to some of the provisions of the European Treaties by dint of its status under the ‘Overseas Countries and Territories’ provision within the Treaty on the Functioning of the European Union.

Therefore it seems possible that any EU nation could abandon the euro unilaterally, negotiate to leave the EU, but on exit, sign a special ‘Catalonia Treaty’ (for example), which could, if there was the political will and the sense of mutual benefit, leave the nation within the EU scope.

It can also be argued that Iceland, another non-EU nation, has recovered from its financial collapse much more quickly and robustly as a result of exercising its own sovereignty.

It is highly unlikely that had it been part of the Eurozone, it would have navigated through the crisis as well as it did. The Troika would have surely imposed draconian austerity on it, forced it to prop up the zombie banks and carry the resulting financial burden, and demanded it to pay the spurious claims made by the British and Dutch governments for recompense for the losses their citizens incurred during the bank collapses.

The other scare tactic, which was also used to discourage the Scots recently is that (Source):

… the current Catalan public debt – the biggest in Spain by far – would have to be added the share of Spanish debt attributable to Catalonia in the division of assets according to international law. All that would produce an economic crisis that would last for many years, and the region that emerges from that crisis would not be the one we know now, but a much poorer Catalonia.

Well it depends on what Catalonia does with respect to its monetary system – see below.

Further, all is not as it seems.

I did some further exploration to analyse the distribution of funds under the – Fondo de Liquidez Autonómica – (Regional Liquidity Fund) or FLA, which was set up by the Spanish government in July 2012, to assist the regional communities that were unable to borrow in private bond markets to keep their local governments operating.

The FLA was endowed with 23,000 million euros from the central government funds. It then instructed the so-called – Instituto de Crédito Oficial – to manage the funds and make loans to the communities. In 2013, loans were provided to Andalusia, Catalonia, Asturias, Cantabria, Castilla-La Mancha, Valencia, Canary Islands, Murcia and the Balearic Islands.

The advantage of the FLA is that it can provide cheaper funds to the revenue-constrained community governments.

It appears that in 2014, Catalonia is to receive 7,000 million euros or around 1/3 of the total disbursements by the fund. But it also did very well in 2012 and 2013 as the following table shows.

The Comunidad autónoma that were beneficiaries of the distribution in 2012 and 2013 are shown. The final column shows what each community received per head of population (population estimates as at 2013).

It is hard to make the case that Catalonia was hard done by in the regional bailout fund distributions.

Even the FT said that “any federal state, however loosely constituted, there are bound to be transfers from rich regions to poor” although it urged the transfers to be reduced so that Catalonia’s “public services should not be underfunded when compared with those in other parts of Spain”.

I agree with both those propositions. But they miss the essential point, which I also think the vast majority of the secessionists miss also.

Which is? That Spain is not a functional federation and the Spanish government cannot guarantee first-class public services because it relinquished the right to issue its own currency when it joined the Eurozone.

The economic malaise that Catalonia is experiencing is a reflection of the nation’s decision to join the Eurozone more than anything else.

But it is clear the Catalonian political leadership do not want to leave the euro.

The Catalan News Agency report (September 19, 2013) – The Catalan President guarantees that Catalonia “will have the euro as its currency whatever happens” – tells you what that the independence move is unlikely to help the Community much.

Yes, Catalonia accounts for about 18 per cent of Spain’s real GDP and is hometo many multi-national firms. It has a sophisticated regional economy.

But without its own currency it become prey to the bond markets during economic downturns. It would be buying into the mindless Stability and Growth Pact that makes it virtually impossible for Member States to achieve sustained prosperity.

Just like the Italians recently, the new little nation of Catalonia would become surrender monkeys whenever Brussels flexed its muscles and demanded austerity.

Conclusion

I support the democratic rights of all citizens to determine their own fortunes. The introduction of the euro and the policy conduct since has not reflected that sort of process.

The citizenship had little idea of what their political leaders were taking them into (the leaders had little idea too).

The whole monetary system was imposed on the population and has since been justified with lies and fudged data.

But the reality is clear – it doesn’t work.

Catalonia should develop its own independent nation and use its own currency to build on its prosperity. It certainly has the economic structure in which to prosper materially.

That is enough for today!

(c) Copyright 2014 William Mitchell. All Rights Reserved.