Errors, falsehoods and half-truths about the economy of an independent Catalonia

Oriol Junqueras, Catalonia’s deputy premier and head of the economy department for the region, published a report on October 15 titled La situació de l’economia en un Estat català (The situation of the economy in a Catalan state). This document listed the reasons why an independent Catalonia is a viable, desirable project. Yet the 13 pages are filled with erroneous statistics – such as claims that the Catalan gross domestic product (GDP) is like Denmark’s. There are also half-truths, like the assertion that the business flight from the region will not have any effects on the economy. And there are entirely false statements, such as the claim that an independent Catalan state would have guaranteed access to the European Single Market. The following is an EL PAÍS analysis of the report’s more questionable passages.

1. THE FALSEHOODS

Self-government

“It is misleading to say that Catalonia enjoys a very high degree of self-government,” reads the text

Catalonia’s degree of self-government is among the highest in the world. In its classification of the fiscal autonomy of sub-central governments, the OECD attributes 23.1% of tax revenue to Spain’s autonomous regions, higher than Germany’s länder (21.3%) or US states (20.9%). The only country where regional authorities get more taxes than Spain is Switzerland, with a difference of one percentage point. “It is evident that Catalonia and the other autonomous regions enjoy a degree of decentralization that is absolutely comparable with the world’s main federal models. From that starting point, you can argue whether a German Land has more or fewer devolved powers than a Spanish region, because each one will have jurisdiction in different areas. What’s true is that in the last 15 or 20 years the decisions coming out of the Constitutional Court have favored the central government over the regional governments,” says Eduardo Vírgala, chair of constitutional law at Valencia Polytechnic University (UPV).

Fit within the EU

“Catalonia is a competitive economy that is open to the world and this situation is not going to change. [...] The economic and political interests of the Union make it evident that the will is there to ensure that Catalonia will continue to be a member of the EU and the euro zone.”

The EU treaties do not expressly state what would happen if there was a secession process within a member state. But in 2004 Romano Prodi, who was then president of the European Commission, said: “If a territory stops being a part of that state in order to become an independent state, the Treaties can no longer be applied to that part of the territory. And the new independent region becomes a third country.” Ever since then, the Prodi Doctrine has remained unchanged. In recent days, there has been a succession of statements by European leaders suggesting that there would be a collective back-turning to an independent Catalonia.

Fit within the EFTA

“[An exit from the EU and the euro zone] will not happen. But if it did, there are mechanisms in place to ensure that Catalonia could remain in the common market through a bilateral agreement with the EU or with the European Free Trade Association (EFTA). [...] Continuity in the European Economic Area (EEA) can be guaranteed through EFTA.”

The EFTA is a free trade association that includes Iceland, Liechtenstein, Norway and Switzerland, and through which the first three are part of the EEA. But the EFTA spokesman has noted that in order to join the EEA, it is necessary to have a unanimous vote by all 28 EU members. So Spain or any other EU member could veto Catalan membership, as per Article 128 of the agreement. An independent Catalonia could join EFTA if its members agreed, but could only trade freely with Iceland, Liechtenstein, Norway and Switzerland.

CaixaBank’s weight

“70% of la Caixa’s profit comes from Catalonia.”

Around 39% of CaixaBank’s credit and 37.8% of its deposits are in Catalonia. This makes it very difficult for 70% of profit to be generated in Catalonia. In fact, the other major Catalan bank, Sabadell, has explained that only 15% of its turnover corresponds to Catalan territory. Queried by EL PAÍS, the Catalan economy department admitted that this figure is wrong, and said it has been corrected in a later version of the report.

2. HALF-TRUTHS

Wealth

“Catalonia’s GDP is similar to Finland’s, Denmark’s or Ireland’s, and its per capita GDP surpasses the European average by 14.5%.”

The Catalan GDP, which Eurostat placed at €204.2 billion in 2015, lags significantly behind Denmark’s (€271.8 billion) and Ireland (€255.8 billion), although it does resemble Finland’s (€209.5 billion). It actually comes closer to the GDP of countries like Greece (€175.7 billion) or Portugal (€179.5 billion). And according to Eurostat, Catalonia’s per capita GDP is 7% higher than the EU average, not 14.5%. Sources at the Catalan government said that their figure is taken from Idescat, the Catalan statistics bureau, and that it means per capita GDP at purchasing power parity.

Exports

“Catalan exports increasingly aim abroad. In 2016, they represented 62.7% of total exports.”

The Catalan government omits the fact that imports of foreign goods far exceed exports, to the extent that Catalonia had a foreign trade deficit of €12.6 billion in 2016. This deficit is only balanced out thanks to Catalonia’s trade with the rest of Spain, leading to a €4.9 billion surplus.

The report further states that Catalonia has a goods and services surplus of 12.1% of GDP thanks to its strong services sector, including tourism. But there are no data to support this claim – it is merely an estimate by Idescat.

Business flight

“There is no reason for businesses to leave Catalonia. […] The change of registered address will have practically no effects on the economy.”

Bypassing the fact that over 1,300 companies have changed their registered address in recent days – including some of Catalonia’s biggest names – it is true that this move does not, in itself, entail any major changes to workforce numbers or tax revenue in the short run. Although some companies have also changed their tax address, this does not immediately affect corporate tax, which is collected by the central government. But company flight does affect the economy: first, there is the matter of reputation, which will likely affect foreign investment levels. And once a business leaves, it is very unlikely that it will return, as evidenced by a similar trend that took place in Quebec in the 1980s. Sabadell Bank has already announced that it will transfer some of its executives to Madrid. This type of move generally heralds a move of operating HQ.

3. MISREPRESENTATIONS

Debt sustainability

“A study by Morgan Stanley estimates that a Catalan state would improve its rating by between three and six notches.”

This report exists, and it does say that. But it was written in 2014, and assumed a scenario in which Catalonia would achieve fiscal autonomy, not outright independence. In other words, the other conditions in the scenario did not change – not in the markets, not in debt, not in pensions, among other things. So this report would only be applicable in the event that Catalonia achieved a tax deal similar to the Basque Country’s. All recent assessments by ratings agencies have ranked Catalonia at junk-bond level, and made it clear that it could get even worse.

Legal security

“The transition to independence will be conducted in a gradual and orderly manner, with full legal security.”

The trouble with this statement lies in the fact that the Catalan government cannot even guarantee Catalonia’s permanence in the euro zone. And companies are leaving precisely because of this lack of legal security. “Businesses and institutions with ample exposure to Catalonia would be directly affected by the risk of legal uncertainly and greater regulation,” said S&P. Many experts agree that there is no greater legal insecurity than having two tax agencies fighting over the same revenue.

Tax framework

“The Republic’s treasury would collect €24 billion more [...], far above the approximately €10.5 billion of excess spending involved in carrying out this new role.”

This assertion does not take into account the costs of creating a new state out of the blue, or the benefits of economies of scale. Nor does it contemplate the loss of revenue that would result from the economic crisis triggered by independence. Looking at the figures of the fiscal balance accounts, it seems like the new state’s outlays would be greater than €10.5 billion. Just sending out pension and unemployment checks could cost around €7 billion. The new costs entailed by defense, foreign relations, infrastructure, subsidies, general services and more would raise the price tag significantly.

“Savings are guaranteed”

The document explains that banks moved out because they need to guarantee their customers’ deposits. The Spanish fund has a little over €1 billion, of which the Catalan government attributes €270 million to itself. The latter has also announced the creation of its own Catalan Deposit Guarantee Fund, and is contemplating the possibility of sharing this fund with Spain. During the transitional period, Spain might not recognize Catalonia’s independence, the report admits. “Thus, with or without a declaration (of independence), Catalonia and its banks remain under the umbrella of European financial regulations and deposits are guaranteed. There is no risk of losing one’s savings.”

But Spanish legislation only covers Spanish deposits. Any use in Catalonia of the Deposit Guarantee Fund would have to be negotiated. A new Catalan state would have no access to European Central Bank (ECB) liquidity and would therefore have trouble financing a bailout or guaranteeing deposits.

English version by Susana Urra.