Kamikaze Economics: Spain Threatens to Cut Financial Supply Lines to Its Richest Region

Political Expedience, Economic Madness

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

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%.

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 its 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.

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. Read…  Barcelona Threatens to Print Parallel Currency, Madrid Seethes.

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  11 comments for “Kamikaze Economics: Spain Threatens to Cut Financial Supply Lines to Its Richest Region

  1. Nick Kelly says:

    Perhaps the EU should offer to mediate. It looks like a situation for an external influence. And I have been told that the real reason for the EU is to end European wars. Is Spain already a federation?

  2. jan frank says:

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

    After having lived 35 years in Spain, I wouldn’t be too sure of that. Allowing really stupid politicians to run (or ruin? only one extra letter) the country seems to be a habit.

    As for the Catalans, why indeed should they allow themselves to be taxed, send the taxes to Madrid, get some (but not all) of the taxes back – or not if their lords and masters so decree. Why indeed?

  3. Pedro says:

    Why do the blogger compares Catalonia with Madrid only? The central government defends country’s accounts. If you give all Catalalonian’s tax to Catalonians, what happen with Extremadura’s people? Why not they do the same in Madrid (they pay much more than Catalonians). Lets go!, Our tax for us, also! It’s impossible. Or not serious, at least…

    • Don Quijones says:

      Hi Pedro,

      I did not use the article to compare Barcelona with Madrid. In fact, I did not compare the two at any point. I used the term “Madrid” on a number of occasions as a general proxy for Spain or the Spanish government, just as journalists worldwide use “London” or “Westminster” as a proxy for the British government.

      I didn’t draw any comparisons between Madrid and Catalonia or Catalonia’s contribution to the central government coffers and the contribution of other regions. I don’t want to be drawn into the eternal, deeply politicized argument about who pays for what in Spain. Suffice to say that Catalonia is an important net contributor to Spain’s budget. I hope you at least agree on this basic point.

      My main purpose in writing the article was to make two important points very clear (or at least I thought they were clear):

      1) Madrid’s threat to cut off Catalonia’s regional government from the funds it needs to keep the region’s economy going is absurd and would almost certainly backfire, especially given the relative size and importance of Catalonia’s economy. The English expression “to cut off your nose to spite your face” springs to mind. In the worst case scenario it might even encourage Catalans to stop paying taxes to Madrid.

      2) The fact that there are still no signs of negotiation between Madrid (i.e. the Spanish government) and Catalonia’s regional government, even at this late stage in proceedings, should be cause for serious concern for all Spaniards, whatever their feelings about Catalan independence. The divisions, both between Spain and Catalonia and within Catalans themselves, are deepening and widening by the day.

      This wholly unnecessary crisis will only be defused when key figures on both sides of the divide swallow their pride and sit down at the same table and begin talking. But that does not look like it’s going to happen any time soon — at least not until after December’s elections.

      • Bb says:

        One of the parts already sat down at the table, the Catalan part, many times.The Spanish part never did.

      • Iban says:

        A real lack of democratic culture in Spain is what keeps them from sitting and negotiating with Catalonia. Or the fear of losing something very important to maintain their status and welfare…

  4. Kenneth Alonso says:

    The stability of post-Franco Spain has relied in part on richer areas of Spain subsidizing poorer areas. This understanding has been rejected in Catalonia. Catalonia has never been able to finance itself without support of the central government (even as one takes into consideration solidarity contributions). Bonds issued by Catalonia have an implicit guarantee by the Spanish government. Catalonia’s major “trading partner” is the rest of Spain. The EU is not available for rescue.

    The major support for independence in Catalonia lies with the Leninist parties. That invokes the memories of “autonomous” Catalonia of the Second Republic. That ideology poses a greater threat to Catalonia and is likely the major roadblock to negotiation of Constitutional reform.

    The Socialists speak of a “federal” Spain without the slightest idea of what that entails (one only has to read their proposals). Will they, now likely the third party in multiparty Spain, agree to officially remove Navarre from any potential union with the Basques, a position being promoted by the Conservatives (the first and second parties in multiparty Spain). As to the Basques, can the conservative nationalist party survive or will it too cede to the Leninist parties?

    If Banco Sabadell translates to Madrid as expected, and LaCaixa to Mallorca, (and portfolios quickly adjusted), a good first step by the central government to pressure Catalonia is explicitly denying backing of Catalonian bonds. The control of all funds from Catalonia is a reasonable measure to not punish those residing in Catalonia while not invoking the full measures of Article 150 of the Constitution to suspend the government of Catalonia.

    Negotiation is imperative. This is a “national security” issue for NATO as well.

    • Brian McLean says:

      Balls! What a load of uninformed crap!

    • Ricard Solé says:

      Have you followed some disinformation course? Are these ideas that come to your mind without knowing ANYTHING about Catalonia? Is either shear ignorance or (worse) the same strategy followed by politicians, bankers and cardinals (we have all) opposing independence: inventing whatever is needed to discredit the popular process. Shame on you.

    • Bb says:

      So many words to tell so many lies, Ken.

    • Iban says:

      I think you are mixing the new James Bond’s movie “Spectre” with what is actually going on… or may be you’re trying to misinform and confuse people on purpose?

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