Sunday, January 21, 2018
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Andreu Missé

​The Catalonian economy in danger

Director of Economic Alternatives

On November 16th, Andreu Missé, Director of Economic Alternatives, published in the international edition of "Alternatives Economiques" a chronicle that we reproduce here due to its high interest.


Economia catalana peligro


The Catalonian political crisis is undergoing a disturbing judicial drift. Apart from that, its grave economic consequences could seriously affect employment in Catalonia and the rest of Spain. On the juridical plane, a National Court judge, in one of the main Spanish courts, on November 2nd decided the provisional detention of the ex-vice-president of the government of the Generalitat, Oriol Junqueras, and seven other advisers to the Catalonian Government, without being able avoid prison through posting bail. In parallel, the former president of this government, Carles Puigdemont, and four other councillors remained in Belgium, where they had moved to a few days previously, awaiting the outcome of judicial deliberations.


THE IMPRISONED EXECUTIVE


The Catalonian crisis underwent a dangerous escalation on October 27th with the unilateral declaration of independence proclaimed by the Catalonian Parliament, and ruled illegal by the courts. The declaration had the votes of 70 of the 135 members of the chamber. Just after, the Spanish Senate authorized the government of Madrid, by 132 votes in favour (PP, PSOE and The general public) to 47 against, to act against the declaration and apply Article 155 of the Constitution. Invoking the powers conferred by this article, the central government, led by Mariano Rajoy, leader of the PP, took control of the Catalonian government after having dismissed the team led by Carles Puigdemont, and called regional elections in advance for Catalonia on December 21st. 


This call has brought something of a political calm, but the tension came back after the imprisonment of most of the members of the Catalonian Executive.


These events are at the root of the social tension that the country has been suffering for months. The Catalonian political crisis is causing a worrying deterioration of economic activity that has resulted in the flight of companies from the Regional Government. As many as 1,982 of them, among which are leaders in the country, and the two main banks have moved their headquarters -and in many cases, also their fiscal domicile- to other cities, mainly Madrid, but d also Valencia and Zaragoza. The main argument invoked by these companies is the lack of legal security, resulting from the decisions taken by the Catalonian political authorities.


Different business associations have warned of the of secessionist drift's serious consequences in the trade, tourism, hotels, car sales or the real estate sectors.


For its part, the Bank of Spain issued a report in which it pronounced that "the uncertainty generated by the independence challenge in Catalonia could translate into a decline in activity and employment in the coming months". Something that could cause an accumulated loss of between 0.3 and 2.5% of GDP between the end of 2017 and 2019. The most pessimistic hypothesis pronounced "a reduction of around 60% of growth for the entire of the Spanish economy "and "a recession of the Catalonian economy".


THREATS TO EMPLOYMENT


These risks for the economy and employment have also been pronounced by another official body, the Independent Authority for Fiscal Responsibility (AIReF), which estimates that the Catalonian crisis could reduce the growth of the Spanish economy by 1.5% in 2018, against the 2.3% predicted by the Government. Such a reduction would have quite a negative impact on job development, estimated to be 250,000 jobs as regards the employment forecasts for next year. 


The government has reduced its own employment forecasts for 2018, from the 500,000 initially planned jobs to 425,000. 


We have to take into account that, if job development had continued at the rate of the last two years, we would still need half a million new jobs in 2019 to reach pre-crisis employment levels.


For most people, the change that the country has undergone in a few months, after decades of economic, political and social progress, is worrying. A few days ago, the former leader of the Democratic Union of Catalonia, Josep Antoni Durán Lleida, who represents moderate nationalism, wrote in La Vanguardia newspaper that "the period of greatest economic progress for all, and the highest degree of self-government that Catalonia has enjoyed in its history, is a consequence of the Spanish Constitution of 1978. Why are we not able to renew and adapt today the consensus that made it possible?


The latest European statistics confirm this analysis. The GDP per capita of Catalonia is 30,900 Euros, 107% of the European average and higher than that of Spain, which is 90%. The level of income in Catalonia is similar to that of the United Kingdom and higher than that of any of the French regions, with the exception of the Parisian one.


Catalonia had managed to maintain this comfortable position despite the deep economic crisis Spain suffered in recent years, because it has a strong network of several hundred modern companies, quite well equipped technologically, with a strong presence in the rest of Spain, and great export capacity. Entrepreneurs in Catalonia have created an advanced and open economy. They do not see frontiers as obstacles to their expansion.


The independence spiral that has escalated the Generalitat government in recent months, which has acted beyond these harsh realities.


The secessionist discourse rests essentially on political and ideological arguments, turning its back on the needs and demands of the economy.


What is most disturbing is that this lack of interest in the economic subject has a direct impact on social welfare and employment, which largely depend on companies benefiting from a favourable climate for their operation in an increasingly competitive commercial environment.


REFINANCING DEBT


One of the largest debts hanging over the economy of the country is Spain's huge foreign debt (about 240% of GDP). It needs an annual refinancing of around 300,000 million Euros, according to Josep Oliver, professor of applied economics. Thus, the current situation increases international investors' concerns, who want to avoid risks and uncertainties.


The discrepancy between political discourse and economic and social reality is demonstrated by the Catalonian government's total inability, and that of its economic advisers, to deal with the notable flight of the largest companies in the Community. The only response from Carles Puigdemont and his team has been to deny the reality of the phenomenon, stating that the change in the company's headquarters would have no real economic impact.


The harsh reality is that nearly 2,000 companies, including the two major banks, Caixa Bank and Sabadell, have opted to leave due to lack of legal security and above all, to continue under the umbrella of the European Central Bank, protection that would be lost if Catalonia were to leave the European Union, as a consequence of the independence process. In the case of financial institutions, the change in location was precipitated by the flight of funds deposited in Catalonian banks to financial institutions in the rest of Spain. A flight that amounts to many billions of Euros in just a few days. This fact is that this the most serious episode that has occurred in the Community, something that the Catalonian government had not foreseen.


Following the relocation in the companies' headquarters, a transfer of tax domiciles, addresses, board of directors meetings, executive commissions and legal services is beginning to take place. 


Experience shows that the decisions adopted by the companies indicate that most of them will not return to Catalonia. These changes will have a profound impact on future investment decisions and, consequently on employment. Investments that prioritize new locations in other territories. In any case, as Professor Josep Oliver points out, the most serious thing is "the loss of credibility for Catalonia that all this implies".


The modern economy knows no borders. In an open and globalised world, it is becoming less and less logical to speak about the Catalonian or Spanish economy. Today, Catalonian companies are not moving to another country. They leave because the Catalonian leaders are not offering them security and because they are welcomed with open arms in other Autonomous Regions. The leaders of these regions are aware that the arrival of companies will result in wealth and employment.


MARIANO RAJOY SHOULD EXPLAIN HIMSELF


The tragic phenomenon of the flight of companies, with its consequences on employment, could have been a sufficient reason for the promoters of the independence process to stop it. The speed with which politics has polluted the economy and the social climate has been remarkable. The available indicators indicate quite negative perspectives for certain sectors, such as tourism and consumption. The creation of new companies and investment are already suffering the effects of the problem.


The political tension in Catalonia is directly attributable to the promoters of independence, who have not taken into account the risks that their decisions entailed, or at least minimized them, considering that these were simply necessary transition costs, which would be compensated by profits in the medium or long term. However, it is clear that in the original cause that has exacerbated the malaise in Catalonia is the behaviour of the central government, led by the Popular Party. This government has not fulfilled its obligations regarding public investment and reform of the regional financing system. 


The Popular Party permanently cites the Constitution, but does not respect its spirit, which requires a consensus among the parties and institutions of the country on fundamental issues. Mariano Rajoy's inflexible and authoritarian policy is principally responsible for in the increase and the depth of the independence feeling. The economic collapse of Catalonia will end up seriously affecting the entirety of Spain. and it will reach Europe. At some point, the head of government should explain himself.



https://www.alternatives-economiques.fr/

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THE ECONOMY JOURNAL

Ronda Universitat 12, 7ª Planta -08007 Barcelona
Tlf (34) 93 301 05 12
Inscrita en el Registro Mercantil de Barcelona al tomo 39.480,
folio 12, hoja B347324, Inscripcion 1

THE ECONOMY JOURNAL ALL RIGHTS RESERVED