NEWS Focus

Catalonian tug of war

Catalan President Carles Puigdemont made a speech yesterday in which he almost declared independence, saying he had the “mandate for Catalonia to become an independent state in the form of a republic”, but withdrew it almost immediately, saying he was willing to put the referendum results on hold in order to try to have a dialogue with the Spanish government. In other words, it looks as if he is willing to negotiate but is keeping the option of unilaterally declaring independence open as a possible tool to put pressure on the Spanish government to negotiate and/or to use if the negotiations do not go according to his plan.

Puigdemont’s speech suggested that his position and goal were unclear. Puigdemont knows that the Spanish government will not negotiate if he does not call off independence, which he does not appear to have done.

So is it a real call for dialogue? It is difficult to say. Puigdemont is facing mounting pressures from businesses, people in Catalonia, the EU, his own political party and the Spanish government. He will not be able to please everyone and may well find it difficult to solve this crisis. His speech yesterday most likely bought him time and allowed him to maintain his political majority by defying the Spanish government, but the longer-term outlook seems very uncertain.

Who is going to blink first? This morning, in a public speech, Spain’s Prime Minister Mariano Rajoy replied to Puigdemont’s speech and asked him to clarify his position on independence, so that he could act accordingly. Seemingly mirroring Puigdemont’s tactics, Rajoy said the procedure for triggering Article 155 was ready, but had been put on “pause” until Puigdemont clarified his position on independence. Rajoy thus sent the ball back into Puigdemont’s court.

Would the Spanish government actually use Article 155 and suspend the autonomy of the region? It probably depends on Puigdemont’s reply ‒ Rajoy has reiterated many times that he is not willing to start talks with the Catalonian government if it does not call off independence, but Puigdemont only just put it on hold. The Spanish government will now be sending a formal demand for clarification to the Catalan parliament, moving a step closer to possibly triggering Article 155.
In our view, depending on how Puigdemont reacts, the Spanish government could:

  • Use Article 155 to suspend the autonomy of the region and arrest senior officials, if Puigdemont does not clarify or call off independence. Using this option might not be welcomed by the sections of the public and even to a certain extent the international community, as it could show Spain’s unwillingness to have a dialogue with Catalonia. Thus, using Article 155 could create more tensions and escalate the crisis between Madrid and Barcelona. Nonetheless, this option could also have a positive impact, forcing local elections to see if there is indeed support in Catalonia for such a move, and starting negotiations with a government that has the legal mandate to do so.
  • Agree to negotiate, if Puigdemont confirms he has not declared independence and/or calls it off. The Spanish government could say that it is accepting Puigdemont’s offer to negotiate, but only if he stops pursuing independence, or else it would trigger Article 155.
  • Call directly for a new election to reassess Puigdemont’s mandate. Indeed, calling for a local vote in Catalonia would bring the independence discussion back into a broader electoral and political context, with all Catalans voters expressing their views, legally, on the topics that matter for the region. This option could also come from the Catalonian parliament, in our view.

Ultimately, regardless of the turn of events, we continue to believe Catalonia will not become independent. The key question for us is how the parties will solve this conflict politically, without creating more divisions. The challenge for Rajoy and Puigdemont is to find the least disruptive solution to this crisis, while they each try to convince the public they are doing the right thing for the country relative to the other, with neither of them wanting to blink first.

Finally, we do not expect the conflict to be resolved very quickly. Given the latest developments, we believe political uncertainty will not wane anytime soon in Spain. However, as we explained in a previous note, this crisis is not systemic. Indeed, Spain’s problems appear to have little potential to create fundamental uncertainties in the euro area. To be clear, there is no significant support for leaving the euro area or the EU in Spain or in Catalonia. Spain is a very pro-European country, with no anti-EU political party.

Will businesses wait to make a move? We doubt it. Given the political uncertainty, we would not be surprised if more businesses and banks announce they are moving from Catalonia. The dispute could negatively affect Spain’s economy, and have an impact on our 2017 GDP growth estimate of 3.2%. However, we see no reason to change it for now – with broader economic data, including the latest PMIs, out last week, actually pointing to a reacceleration of growth going into Q4.

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