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October 3, 2017

Forecasting Eye – Catalan independence will reduce EU growth in short term

As an expatriate Scot I look upon what is happening in Catalonia with some worry. Even more so as I have been a fan of Spain’s fight back from a tough economic situation post financial crisis where the country has managed to survive 8 consecutive years of falling property prices and a total fall on the official house price index of over 40% (many private sector measures suggest an even larger fall).

 

But the scenes on TV over the weekend make Catalan independence highly likely, whether it is a good idea or not. This is bad news for the Spanish and European economies.

 

The latest data (for Q2) shows both Spain and the rest of the EU currently doing rather well with Spanish GDP up 3.1% over a year earlier and Eurozone GDP up 2.2% over the same period.

 

An independent Cataluña is set to be a prosperous part of Europe in principle with a high level of industrialisation and a sophisticated economy. How much this will change if Spain and the rest of the EU (presumably excluding the UK) decide to discriminate against the potential country is unclear but Spanish officials point to a potential fall in Catalan GDP of as much as 10%. The experience of Brexit so far suggests that this fear might be exaggerated but investment in the region is clearly likely to be affected until the position clarifies.

 

On budgetary matters the key issue is the division of Spanish debt. If the Catalan share is based on the Catalan share of population (16%) then the ratio of debt to GDP for the rest of Spain rises from 99.4% to 116.4%. Similarly the Budget deficit rises from 4.5% of GDP to 7.8%. Meanwhile, Cataluña will initially run a surplus of 9% of GDP though Cebr’s modelling of Scottish independence suggested a start up cost of setting up an independent country of about 10% of GDP. So macro policy might suggest a budget cut of about 3-4% of Spanish GDP in non Catalan Spain, a budgetary expansion of c10% of GDP in Cataluña and some deadweight loss – perhaps 1-2% of GDP in total initially – from the uncertainty effects on both regions. Net this would take nearly 3% of GDP out of the economy of the whole of Spain over the next 18 months which would reduce EU GDP by about 0.25%.

 

But all this assumes a fairly peaceful separation, no attempt to punish Cataluña and no contagion effects on other regions either in Spain or elsewhere in Europe. It could be much worse….

 

Source: Instituto Nacional de Estadistica

Figures mainly for 2016

 

Douglas McWilliams, Deputy Chairman dmcwilliams@cebr.com 07710 083 652

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