Can Scotland and Catalonia afford independence?

Can Scotland and Catalonia afford independence?

Scotland will hold a referendum in 2014 to allow its people to choose whether they wish to stay in the United Kingdom or become an independent nation. If the majority of Scotland were to vote yes, a complex set of negotiations with the UK on the single market and other issues such as defense would ensue.

Catalonia’s referendum on the other hand would be framed within the Spanish constitutional structure, which does not allow for secession. If the Catalans were to choose to become independent, a second referendum would probably be required at the national level, which in all likelihood would result in a majority vote against Catalan independence. Another possibility would be to try to change the Spanish constitution.

Either way, Catalans might be willing to exert pressure on the process through social unrest. Both Scotland and Catalonia have a visceral attachment to their independent identities. With the prospect of their independence in mind, it is worth exploring the economic effects this would have on both hypothetical states and their regions.

In a report published by the UK House of Lords in April, the select committee on economic affairs examined the economic implications of Scottish independence for the UK. In the short term, one of the report’s major concerns was the transfer of public debt. In the Scottish case, independence would mean Scotland assuming its share of the UK’s public debt, which the report suggested could be as high as 123 percent of its GDP. The same problem applies to Catalonia, since experts have highlighted that its public debt could be as high as 120 percent of its GDP.

In the long term, breaking away from the single market and establishing a new currency are both issues that cause great concern. The European Union has warned both countries that their independence would mean becoming ‘third countries,’ effectively obliging them to comply with certain requirements (including large investment into defense) before applying for membership.

In the case of Scotland, breaking away from the British single market could weaken said market. Not only would it damage the UK, but it would also place a great financial burden on Scotland, since it would have to develop its own financial institutions. Establishing its own currency would involve dealing with the “uncertainty of a variable exchange rate.” John Cridland, Director-General of the CBI, said, “Any uncertainty over the future EU status of Scotland or the whole United Kingdom has obvious economic implications, not least for business confidence.” The report suggests pegging the Scottish pound to sterling, but this would entail following the Bank of England’s policy, which would undermine the very root of the independence cause.

For Catalonia, the issue of establishing a new currency is even more problematic, since upon achieving its independence it would not be able to use the euro in the same way that the Scottish might use sterling. Similarly, while the UK devolved certain powers to Scotland in 1997, the political system in Spain is more hierarchical and Catalan independence would imply the devolution of many political and financial powers that would require time and money to develop into adequate institutions. Neither hypothetical state would be able to benefit from the treaties on trade that the EU has developed with other global regions.

In spite of all these potential problems, it is worth looking at the other side of the coin. Once the transfers of debt and of economic and political institutions are carried out, both Scotland and Catalonia could get on with their self-rule. Scotland could have a gradual breakaway from the UK, which would allow both players to patch up the short term uncertainty caused by all the changes. The ability to adjust the Scottish welfare system to its own needs could allow for an improvement of the current one—as the Institute of Fiscal Studies argues in its latest study on benefits and pensions in Scotland—which would require an increase in expenditure.

Catalonia has historically been the proud (often too proud) economic engine of Spain. The leader of Madrid’s Conservatives Party, Esperanza Aguirre, recently called for a “catalanisation of Spain” as a way of creating a more dynamic economy. Some argue that losing Catalonia would force Spain to copy much of Catalonia’s economic model to make up for the loss of 20 percent of the national GDP that Catalonia currently contributes. In the same way, Spain would also stop investing a substantial part of its regional funds to Catalonia, and the secessionist region’s petition for a €5000 million bailout from the Spanish state would have to be re-evaluated.

The Catalan government should then consider adjusting its welfare state and would no longer be able to use its high levels of poverty (26.7 percent in 2012, with some of its peripheral and less cosmopolitan regions reaching 36.8 percent) to harass the Spanish state. Catalonia would have to be much more responsible with its social policies, some of which have in the past been used for political gain and lacked much planning. The Renda Mínima d’Inserció is the perfect example, having crumbled last year due to a lack of funds, thereby leaving at least 7,000 people without these benefits from one month to the other.

It is conceivable that the 2014 referendum will deliver Scottish independence, and if the process is carried out cautiously and with the support of the rest of the UK, the economic uncertainty caused by the secession could be minimized. Catalonia is much less likely to achieve independence, and the consequences of seceding would certainly be harmful to its region and the Spanish economy, particularly in the short term. In any case, the respective governments of Catalonia and Scotland should move away from their visceral discourses about identity and start displaying a greater degree of awareness of the economic intricacies of their respective projects.

Categories: Economics, Europe

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