LONDON (Reuters Breakingviews) - On paper, Catalonia looks viable as an independent state. The region which accounts for around a fifth of Spain’s economy has gross domestic product roughly comparable to Finland’s. Its residents are on average richer and more likely to have a job than other Spaniards. Nevertheless, the economic odds are stacked against the secessionists.
First, Catalonia may become much less wealthy if it breaks away. Some large companies are taking steps to transfer their registered headquarters out of the region following the Oct. 1 independence referendum that was branded unconstitutional by the central government. They include Banco Sabadell, Spain’s fifth-largest lender, which decided on Thursday to move its legal base to Alicante. The more likely independence becomes, the greater the chances that jobs and actual activity shift elsewhere.
Second, breaking away would trigger harmful disputes over tax and debt with Madrid, which trenchantly opposes a divorce. Granted, Catalonia pays more in taxes to the central government than it receives in spending. But unilaterally declaring independence would not necessarily allow the region to stand on its own. Citizens and businesses might face duplicate tax demands from Barcelona and Madrid. In the event of a standoff, companies with branch offices in Spain could be presented with bills for the whole business.
There’s also the thorny issue of how to smooth out Catalan debt obligations, which it currently does with the help of state liquidity. Net borrowing from the central government surpassed 50 billion euros at the end of 2016, equivalent to three-quarters of Catalonia’s total debt, according to Fitch. The credit rating firm also points out that more than a quarter of debt outstanding at the end of 2016 comes due over the next three years. And that’s assuming Catalonia can escape without taking on any of Spain’s sovereign debt, currently equivalent to around 100 percent of national GDP.
A final problem is what currency Catalonia would use. Even if independence were recognised by other countries, the region is unlikely to remain a part of the euro zone. Granted, it could always create a currency that is pegged to the euro. But a newly-created Catalan central bank would need access to foreign exchange reserves that the central government has no interest in handing over. Politics are not the only bar to independence.