Austerity and Secession

BERLIN/MADRID (Own report) - The escalating Catalan secessionist conflict is upsetting Spain, a country hard hit by Berlin's austerity dictate. Spain - occasionally praised in German media as a showcase for an alleged successful austerity policy - is still confronted with enormous social and economic problems, in spite of a modest economic growth. Unemployment and poverty remain at high levels. Crisis policies over the past few years have also increased the economic gap between Spain and the euro zone's centers of prosperity. One still cannot speak of debt reduction - the official objective of Germany's austerity policy within the EU. The poor economic situation, the high debt burden level and the distribution of federal and regional debts are fueling Catalonia's secessionist conflict.

Poverty as New Normalcy

Spain still has not recovered from the socio-economic one-two punch the country was delivered over the past few years by the global financial crisis followed up by Berlin's austerity dictate. The country still holds one of Europe's bottom positions, in terms of many social and economic factors, nearly a decade after the outbreak of the global economic crisis, in the course of which, the real estate sector crashed, after its speculation-fueled bubble burst. In spite of a 3.2 percent economic growth in 2016 - forecast this year to be about 2.8 percent - the official mass unemployment rate in Spain is over 18 percent, with the youth unemployment rate even twice as high. The slight decrease in unemployment, which had risen to nearly 25 percent during Spain's recession, is partially due to emigration of around 1.7 million foreign workers, who had been employed in the construction sector, at the peak of Spain's real estate boom. It is, however, particularly due to the emergence of precarious employment conditions with gross salaries at 900 euros and mainly temporary employment contracts.[1] Nearly 27 percent of the population is at risk of poverty and social marginalization. The deep economic crises, that Spain's conservative government had been trying to overcome by implementing Germany's former Finance Minister Wolfgang Schäuble's strict austerity measures, has severely exacerbated the country's social division. The income ratio of the top 20% to the bottom 20% is now at 7.5, which is the third worst in the European Union. According to the IMF, Spain will have overcome the crisis by 2019 and yet, according to its prognosis, the unemployment rate would still be at 16 percent.[2]

Falling Further Behind Germany

Structural problems in the Spanish economy are also causing the Iberian Peninsula appreciable difficulties in inner-European competition with the dominating German export economy. Spain's companies are falling further behind at the international level, currently holding last place among the countries of the Organization for Economic Cooperation and Development (OECD). The production level of Spain's economy had stagnated throughout the crisis years. Between 2008 and 2015, there was no progress in productivity, while spending for research and development in Spain's industry - comprised primarily of small enterprises - had long since fallen below the EU average. The gap in productivity between Spain and the German euro zone center is growing steadily. The past few months' modest economic recovery was generated mainly by tourism, the low wage level - which significantly slumped in the course of the crisis - as well as the massive expansion of precarious employment conditions. Moreover, the Spanish educational system, which has been gutted by years of austerity policies, is hardly capable of providing adequate training opportunities. Some 20 percent of Spain's employees under the age of 25, only completed lower secondary or secondary education, without further qualifications - a European all-time low.[3]

Smoldering Debt Crisis

At the same time, the austerity policy imposed by Berlin has not even been capable of reaching its own declared goal of reducing Spain's debt burden and consolidate its state budget.[4] Last year, Madrid registered a budget deficit of 4.7 percent of Spain's gross domestic product (GDP), whereas a 3.5 percent deficit has been forecast for this year. Both deficit levels clearly surpass the EU Commission's austerity stipulations. It is not expected that Madrid will be able to meet its austerity targets for next year either.[5] The gap between the targeted deficit and reality for this year alone, is €11 billion - in spite of Spain's introduction of a surtax on corporate profits and alcohol, at the beginning of this year. On the other hand, difficulties are still simmering in the financial sector. The state is likely to suffer additional costs for bailouts of faltering financial institutions. The planned government debt reduction appears hardly attainable. Originally, the plan was to reduce the Spanish state debt from 99.4 percent of its 2016 GDP to 97.7 percent by 2018. However, due to the slowing economy and the more hesitant than predicted drop in unemployment, the EU Commission has begun to believe that the debt will rise to 100 percent of the GDP. In fact, in July 2017, Spain's industrial production dropped for the second month in a row.[6] The recent past shows how dramatic the growth in debts has been due to the crisis and austerity measures. In 2007, on the eve of the global financial crisis, Spain's government debt was a mere 35 percent of its GDP. In only a few years, measures to stabilize Spain's financial sector, following the bursting of the real estate bubble, have led to a state debt explosion.

Debt in the Conflict over Secession

Catalan separatism has also probably been boosted by this long-standing economic crisis. The autonomous region of Catalonia, which is considered one of country's most prosperous regions, accounts for a fifth of Spain’s gross domestic product and tax income and makes a yearly net transfer of 10 billion to 15 billion euros to the central government.[7] The crisis and Berlin's austerity policy have fueled the dispute over tax revenues and access to state liquid funds raging between Madrid and Barcelona, because the financial means for the regions - 50 percent of the added value and income taxes - shrank considerably, driving also the regions into debt.[8] Catalonia has accumulated the largest debts of all of the Spanish regions - €60.4 billion, approx. 30 percent of Catalonia's GDP.[9] This sharp rise in debts, generated by austerity and the crisis, have become a separate issue in the Madrid/Barcelona dispute. Catalan politicians threaten to refuse to accept responsibility for Catalonia's share of Spain's debts, if the region secedes.[10] If Catalonia secedes, Madrid's debt-to-GDP ratio would soar to 114% from the currently 100%. US media predict that should Catalonia secede, the question of debts would be decisive. "The success of Catalonia is determined heavily on whether or not they would assume a percentage of the Spanish debt and if they would be required to pay off their own debt. Either situation could prove to be detrimental to a new Catalan nation and would damage the potential for economic expansion."[11]

[1] Thomas Urban: Generation im Nirgendwo. 25.08.2017.
[2] Spain's Economy is Growing, but Leaving Most Spaniards Behind. 25.09.2017.
[3] Sandra Louven: Schöner Schein in Spanien. 14.03.2017.
[4] "EZB kann nicht Aufgaben der Politik übernehmen". 04.10.2017.
[5] Jan Marot: Spanien bekommt Defizit nicht in den Griff. 15.02.2017.
[6] Spanien bekommt Defizit nicht in den Griff. 08.09.2017.
[7] German election result revives eurozone jitters as investors turn attention to Spain. 25.09.2017.
[8] Martin Dahms: Madrid greift finanziell durch. 18.09.2017.
[9] La ley de transitoriedad prevé que la Agencia Tributaria no recaude en Cataluña. 28.08.2017.
[10] Alfons López Tena, Elisanda Paluzie: Here are the economics of a Catalan secession from Spain. 24.02.2016.
[11] Sofia Bosch: Here's how bad economically a Spain-Catalonia split could really be. 21.09.2017.