The Economic Relations between Spain and Catalunya

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A Marriage of Convenience or an Impending Divorce?

Spain’s economic crisis has given added impetus to the growing sentiment for Catalan independence within this region, as evidenced by the emergence of new independence parties and increasing voices demanding independence, as seen in the massive march of July 10, 2010 in Barcelona. The economic crisis has not started this movement.  But by making the economic problems in Spain more immediate and deeper and hitting more people and by making the economic relations between the autonomic governments and the central government more visible, it has mightily contributed to it, along with recently adverse rulings on the Catalan Constitution, or the “Estatut” (not the subject of this article).

The main economic issues between Spain and Catalonia are Spain’s internal policies of redistribution, lack of transparency and political patronage detrimentally applied to Catalonia. This is reflected in the regional distribution of budget and tax monies, the so-called “fiscal balances” between the different autonomies: which autonomy “pays” and which autonomy “receives” additional money and services beyond their tax contributions. This income redistribution system, given the monopoly role of Spain’s central administration in deciding the allocation of the resources, is increasingly perceived in Catalonia as political patronage.  Spain has never had any incentive to make these regional fiscal balances public.  The latest available “official” figures were issued in 2008 and calculated the balances over the period 2002-2005.  They showed a large and increasing (in absolute terms) transfer of resources to Spain from Catalonia. The deficits ranged from 12,700 million Euros in 2002 to 16,7000 million Euros in 2005, averaging about 9% of the Catalan GDP. 

More recent “unofficial” figures of 2008/09 published by the Centre Català de Negocis show the net transfers for all the autonomic (regional) entities.   There are those that “pay”, in some cases quite handsomely in net terms (Catalonia, Valencia, the Balearic Islands and Madrid), those that only pay the central government for services received (the Basque Country and Navarre), and the rest of the regions that are net “receivers.”   The data shows that Catalonia is by far the largest net contributor to the central government. It paid about 22,000 million Euros more than it received in 2008/09 (some 40% of the Catalan annual budget and over 10% of the Catalan GDP).  The economic crisis has made these “imbalances” more visible and has brought more attention to the relatively low level of infrastructure and social investment received by Catalonia, with the likely negative effects on productivity, the quality of social services both present and future, as well as the relative loss of income, welfare and well-being in this autonomic entity.

However, the economic issues in Spain are very deep and structural in nature. Over the past 20 years, Spain enjoyed a rising level of economic growth, evidenced by a high level of both private and public consumption and expenditure. This growth was based, in great part, on the country’s ability to attract private foreign investment based on low salaries and adequate infrastructure, on the country having been the largest recipient of European aid (estimated at about 120,000 million Euros over the past 20 years) and on an abundant supply of easy credit, which encouraged consumption. These flows, together with an initial level of domestic protection that allowed Catalonia to be the engine of production and supply to Spain, masked the unequal inter-regional allocation of public monies. In addition,  they masked the inability of past and present Catalan governments to address the fiscal deficit issues, as this discussion might have made for a politically uncomfortable debate with the central government.  As the external resource flows slowed down, the economic structure that developed in Spain (low savings ratios, a relatively low level of exports versus imports, high public sector deficits and particularly low labor productivity) has proven unsustainable.    

Under demands from the international banking community, Spain has begun the process of addressing some of these structural economic issues, albeit at high political cost (witness the general strike of September 29, 2010). Since Spain cannot address these structural problems through the traditional methods of currency devaluation and monetary restraint, and external flows from foreign investment and from the EU are slowing down, “tightening the domestic belt” by reducing the public budget and relying on internal resources is the only solution to increase productivity and competitiveness and restore growth. It is not sure that the government will have the required political fortitude and if so, Spain’s long-term economic prospects are uncertain at best. 

More importantly, if Spain’s economic growth slows down, the country may find it difficult to meaningfully reduce the level of consumption in the “receiving” autonomies without affecting the regional political patronage system.  Without additional external resources, the present policy of regional income redistribution through the budget could only be maintained by hardening the subsidy from Catalonia and the other “paying” autonomies.

Is it surprising that Catalonia’s independence movement is gaining ground?

 

Vicenç Ferrer

Consultant of the World Bank

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