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Spain is threatening to cut off its richest economic region

Wolf Richter, Wolf Street


Reuters/Albert Gea
Catalan pro-independence supporters hold a giant "estelada" (Catalan separatist flag) during a demonstration called "Via Lliure a la Republica Catalana" (Way of Freedom for the Republic of Catalonia) on the "Diada de Catalunya" (Catalunya's National Day) in Barcelona, Spain.

After winning a majority of seats (but not quite a majority of the vote) in September’s plebiscite-style regional elections, Catalonia’s pro-independence parties seem determined to untie the knot with Spain. Last week they announced a road map to independence, offering a declaration in the regional parliament to split Catalonia from Spain.

The all-too-predictable reaction of Madrid’s central government has been to raise the stakes to lofty new heights by threatening to cut off the financial supply lines between Madrid and Catalonia. As El Mundo reports, Spanish Premier Mariano Rajoy has threatened to centralize all financial decisions affecting the autonomous region; and if needed, it may even turn off the tap altogether.

A Dangerous Game

Madrid’s latest cunning plan is not without risks. 

In fact, it’s riddled with them. Like all of Spain’s provinces, Catalonia has grown increasingly dependent on the zero-interest (for this year only) Fondo de Liquidez Autonomico (FLA) offered by Madrid’s central government to cover its financing needs, as Spain’s finance minister, Cristobal Montoro, conceded yesterday.

“Until now, the public services of Catalonia and other parts of Spain in this fiscal crisis have not been able to finance themselves without the State, which is precisely there for that reason: to finance public services,” Montoro said. 

“What it is not there for is to finance the separatist designs of any regional government.”

In other words, you want our money, show some respect!

The problem is that the money that Madrid lends to Catalonia, at 0% interest, is money that the Catalans themselves, as big net creditors of Spain’s central government, have effectively already earned (or will earn) and paid out (or will pay out) in income and business taxes. In other words, it’s their money.

And it is money that is desperately needed, as Catalonian public sector institutions and local providers are starved of public funding. Catalonia’s pharmacies alone are owed €300 million for subsidized medicines they have sold but not yet been reimbursed for.

According to Catalonia’s Economic Councilor, Andreu Mas-Colell, Madrid’s financial siege of Spain’s richest province is nothing new; it began a long time ago. 

The FLA is no “gift,” he told La Vanguardia.

 Spain’s Finance Ministry already has complete control over payments and executes direct transfers to providers without the Catalan regional government even touching the money.

What’s more, in the last three years Catalonia has paid €1.9 billion in interest on the FLA. This election year, the interest on loans may be zero (quelle coincidence!), but Spain’s Finance Ministry has already announced that next year the interest rate will be 0.83%. 

Thomson ReutersSpain's Prime Minister Mariano Rajoy ponts while delivering a statement to the media at the Moncloa Palace in Madrid

Political Expedience, Economic Madness

From a purely political perspective, deliberately undermining the health of Catalonia’s already troubled finances may be an attractive short-term proposition for Madrid’s scandal-tarnished government, especially with general elections looming. 

It’s certainly preferable to sending in troops or Spain’s Civil Guard to “pacify” the region. 

To paraphrase Spain’s Ministry of Interior, “not even we are stupid enough to do that.”

From an economic perspective, however, it’s madness. Catalonia’s economy accounts for 20% of Spain’s GDP.

Deliberately undermining the health of 20% of your national economy is not going to endear you to the international investment community. If roughly one-fifth of Spain’s economy was to suddenly plunge into a deep, prolonged recession or become ungovernable, some investors might begin to question the ability of the Spanish government to continue servicing it's over €1 trillion (and rising) in debt.

More serious still, Madrid’s latest move could be met by an equal and opposite reaction. 

Intentionally depriving the Catalonian economy of funds it desperately needs to keep things ticking over — including keeping the cycle of bribes to local politicians in motion — could prompt independence-minded Catalans to begin asking themselves, “why bother paying taxes to Madrid at all if they’re not going to send the money they owe us?”

Four More Years of Bitter Conflict?

Two years ago, I warned in Fear, Loathing and Collective Amnesia in Crisis-Ridden Spain that if Madrid and Catalonia were playing a real rather than figurative game of Russian Roulette, the revolver would now be loaded with at least two or three bullets. 

Since then that number has risen to four or five, especially now that Basque separatists have thrown their hat into the ring by submitting  a bill to the local parliament aimed at allowing citizens to decide on the region’s “future,” which could include independence.

Thomson ReutersCatalan President Artur Mas attends a news conference assessing the results after Catalans voted in a symbolic independence vote in Barcelona

The only way of stopping one of the figurative bullets from going off, unleashing discord and mayhem in a nation that is already deeply scarred by events from its not so distant past, is through negotiation and conciliation. 

As long as the Rajoy government is in power, however, that is out of the question. 

As for Catalonia’s pro-independence parties, they have already indicated that it’s too late in the game for negotiation, though it’s safe to assume that the more moderate parties would probably be tempted by a genuine offer of improved conditions of self-governance.

Such an offer is not in the cards, however — not for now. And perhaps not ever. If the governing Popular Party receives enough votes in December’s general election to form a coalition with the new center-right, pro-business, staunchly unionist Cuidadanos party, Spain will have to endure another four years of bitter conflict between Madrid and Catalonia, and perhaps even between Madrid and the Basque Country. And the odds of the nation’s fast unraveling social fabric and weak economy surviving such an ordeal are rice-paper slim. By Don Quijones, Raging Bull-Shit.

And now, Barcelona’s city council is already entertaining the possibility of launching its own currency. 

Copyright 2015. Follow Wolf Street on Twitter.

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