What is the price tag of Spain-Catalonia split?

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Europe

The EU Commission called last Sunday’s independence vote in Catalonia “illegal” and asked all sides to move from confrontation to dialogue.

More than 90 percent of voters said "yes" to independence.

The President of the European Parliament Antonio Tajani tweeted on Monday that he had spoken to Spanish PM Mariano Rajoy to inform the debate on the Constitution, rule of law and fundamental rights in Spain. EU parliamentarians may not be so tongue-tied, but it remains to be seen if this debate will have any effect on Spain.

Screenshot of the President of the European Parliament Antonio Tajani's tweet.

The vote has brought a major political shake-up in the country. But if taking focus away, the split would have significant consequences on the economy of both sides.

Catalonia is the most prosperous region in Spain. The region only accounts for about 16 percent of Spain's population but makes a significant contribution to the overall Spanish economy, thanks to its prosperous tourism, exports, and manufacturing.

Based on data from the Statistical Institute of Catalonia (Idescat), Catalonia generated almost 224 billion euros (263 billion US dollars) in 2016, 20 percent of Spain's GDP. That's larger than the contribution that California makes to the US economy.

Economists say the split comes with a big price tag for both parties.

"If Catalonia now declares independence and the central government continues on its current course and imposes direct rule, the consequences could be really severe," said Willem Buiter, global chief economist at Citigroup.

As to Spain, tax loss and public finance would be the main concerns.

Spain would suffer an annual loss of about two percent to its GDP if Catalonia would no longer pay taxes to the country, based on statistics by the Spanish central bank (BDE).

Public finance is another concern. Spain's debt reached 1.2 trillion US dollars last year while Catalonia owed 87 billion US dollars, according to BDE.

A woman wrapped in a Catalan pro-independence 'Estelada' flag in Barcelona on October 3, 2017. /VCG Photo

Catalonia's debt was more than 16 percent of Spain's total and one of the largest in Spain's regions. This aspect, combined with the loss of Catalonia's tax revenues, would be a blow to the Spanish economy.

Moreover, since Catalonia is playing a big role in Spanish economy, economic gains taken away by Catalonia would all dampen the country’s economy.

For Catalonia, transition of export, establishment of its own “state structures” and turmoil of separation would add economic cost inevitably.

Catalonia does not have an automatic right to membership in the EU. Therefore, in order to become a part of the EU, Catalonia must receive a unanimous "yes" from EU members. And that includes Spain, which is unlikely to vote for Catalonia's addition to the union.

Once denied entrance or in case of difficulty joining the EU, the Catalan economy would face large transition costs, as the EU accounted for 65.8 percent of Catalan exports in 2016, according to data from the government of Catalonia.

People raise arms and shout during a demonstration two days after the banned independence referendum in Barcelona, Spain, on October 3, 2017. /VCG Photo

Catalonia would also pay to create such “state structures” as embassies and central banks. Furthermore, the region may also face a trade boycott from the rest of Spain, as well as economic turmoil due to its separation from the European single currency, and increased tariffs on its goods and services.

Rating agencies have also given Catalonia a low credit score. Last year, S&P downgraded Catalan debt from double B minus to single B plus on “weakening financial management.” It also cited “political tensions” as contributing to its negative outlook on the region.

In a report published at the end of 2016, the rating agency said it considered the region’s financial management to be “very weak”, and pointed to a “weak budgetary performance and very high debt burden.”

Another rating agency Moody has also warned the tension of Catalonia would hit the economy. That means the region isn't able to borrow directly on financial markets and must depend on loans from the Spanish government.

Earlier this month, Spanish Economy Minister Luis de Guindos claimed that Catalonia could see its economy shrink by 25 to 30 percent and its unemployment double if it splits to form a separate state.