By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street
As the countdown begins to Catalonia’s plebiscite-style elections, scheduled for September 27, cracks are already beginning to show in Spain’s most important economic region (at least pound for pound).
A few days ago, a study by Axesor showed that since the region’s pro-independence premier, Artur Mas, took office in 2011, 3,800 companies have upped sticks and left Catalonia for other regions of Spain. By contrast, just 2,547 companies have relocated from other regions to Catalonia during the same period.
Of the 3,839 companies that abandoned Catalonia, almost half ended up relocating to Madrid. Indeed, during the same period Madrid has seen a net inflow of 1,766 companies while Spain’s third largest city Valencia registered a net influx of 361 companies.
While some of those companies were lured away from Catalonia by the prospect of lower taxes – Catalonia is currently the highest-taxed region of Spain – fears are growing that more and more local companies are voting with their feet against Catalonian independence. These fears were compounded by recent tweaks Rajoy’s government made in Spain’s corporate governance law to make it much easier for the country’s biggest publicly listed companies to move the location of their headquarters.
It’s not just local companies that are getting the jitters. In March of this year Spain’s Ministry of Economy released data showing that in 2014 foreign direct investment in Catalonia plunged 16%, while in Spain as a whole it increased 9.2%. In Catalonia’s neighboring province, Valencia, overseas investment grew by a staggering 300% in the space of just one year.
“With foreign investment falling in Catalonia by 15% and surging in Valencia by more than 300%, it’s pretty obvious that foreign investors are beginning to have serious doubts about the political and economic future of Catalonia,” said the president of Catalonia’s Business Association Josep Bou:
It’s clear that the so-called independence process is in the interest of neither Catalans as a whole nor Catalan businesses in particular, given that it creates economic and political instability and limits our economic growth and job-creation potential. The regional government needs to join forces and pursue synergies with the rest of Spain and not seek to divide it. That is the best way of getting out of the crisis.
To a certain extent, Mr. Bou is right: most businesses, whether local or international, abhor political or economic instability or uncertainty. Some will inevitably try to relocate, although some international companies (Volkswagen, Nestle, Nissan) seem quite happy to expand their operations in Catalonia.
However, what Bou seemingly fails to realize is that it’s already too late in the game to appeal for reason in Catalonia’s simmering war of words and gestures with Madrid. The issue of Catalan independence is no longer one based on pragmatic realities; as tensions have festered, it has become an almost purely emotionally driven issue, not just in Catalonia but throughout Spain. Instead of a reasoned national debate, all that now exists is one almighty shouting match between diametrically opposed nationalists who refuse to listen to one another.
And now that the wrecking ball is in motion, stopping it will be a tough task, especially with neither side willing to give an inch. Today Catalonia’s coalition government gave the ball a powerful kick by officially announcing plebiscite-style elections.
If pro-independence parties win a majority of the seats in parliament, they have promised to declare unilateral independence from Spain. Rajoy’s government hit back by modifying Spain’s system of regional governance to enable the central government (i.e. itself) to take full control of a region’s governance institutions in the event of an emergency.
It is against this emotionally charged backdrop that Catalan citizens will go to the polls on September 27. Who they vote for will depend almost exclusively on their feelings regarding national independence. Whether Catalonia will benefit economically from separating from Spain is just part of the equation. Whether or not businesses will pack their bags (or even fail) is a secondary issue. For fervent pro-independence Catalans so, too, is the question of whether or not a nascent Catalonian nation-state would be allowed to remain in the EU; or, for that matter, whether its banks will continue qualifying for ECB credit.
Nothing to Lose
As I noted in The Mother of All Storms Builds over Catalonia’s Independence, Rajoy is more than happy to perpetuate this dynamic: by adopting a belligerent line against Spain’s internal enemy (Catalonia), Rajoy keeps his party’s core constituency of fervent Spanish nationalists on board while making other parties that favor dialogue appear weak. The twin blowbacks of rising regional tensions and economic instability are a price worth paying to bolster his embattled political party’s electoral prospects.
This is a government that lied on just about every one of its election manifestos to get into power (including its infamous pledge that it would not give a cent to the banks before awarding them the biggest bailout in Spanish history). Imagine what it is willing to do to hold onto power?
In the last few months alone it has passed a law that effectively criminalizes most forms of political protest; it has announced its budget for 2016 half a year before 2016 has even begun, just so that it can entice gullible voters with the promise of guaranteed tax cuts and spending rises, despite the fact that the IMF has already said that Spain will probably have to tighten the austerity screw after the elections; it has even created a new electoral law just months before the general elections to make it easier for the People’s Party to take control of hung parliaments in future local elections.
Its latest move was to pass control of the party’s apparatus in Catalonia to Xavier Garcia Albiol, a xenophobic, anti-immigrant, anti-separatist former mayor of a satellite city on the edge of Barcelona. The party believes that his populist appeal has the best chance of taking votes from the rising anti-independence party Ciutadans. In putting its faith in Albiol, Rajoy’s government sends a clear message to the people of Catalonia: it is not interested in healing any wounds or bridging any gaps. All it wants is votes – and at any price. If that means throwing even more gasoline on the fire of Catalonian independence, so be it. By Don Quijones, Raging Bull-Shit.
And the repercussions of this strategy go far beyond Spanish borders. Read… The Mother of All Storms Builds Over Catalonia’s Independence