Col·lectiu Emma - Explaining Catalonia

Saturday, 19 october 2013

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Recommended: "Catalonia: Cooperation or Confrontation" (Prof. Jordi Galí, El País)

A friendly divorce with minimal costs to both parties is not an idle dream

The following article is a translation of an article by Jordi Galí, published in the Spanish daily El País on 12 October 2013.


"Catalonia: Cooperation or Confrontation"

One of the main uncertainties surrounding the eventual creation of a Catalan state is how exactly this new state would fit within Europe. Many Catalans wonder whether this new scenario would allow them to continue to enjoy the economic benefits that come with belonging to the European Union (EU) and the euro area. Although statehood, by definition, would open the door to numerous alternatives, in Catalonia’s case there seems to be a broad social and political consensus about the desirability of staying within the EU and keeping the euro as a currency. How could an independent Catalonia go about achieving these objectives? In my opinion, the answer to this question depends on the kind of scenario the eventual founding of the Catalan state takes place in. Broadly speaking, we could distinguish between two possible scenarios: one of cooperation and one of confrontation.

In a scenario of cooperation, Spain would accept an outcome favorable to independence in an eventual consultation of the Catalan people, thus initiating a process in which both governments would work out the terms of a “friendly divorce.” This is precisely the framework provided in the accord between the Governments of Scotland and the United Kingdom, which commits both parties “to continue to work together constructively in light of the outcome [of the referendum], whatever it is, in the best interests of the people of Scotland and the rest of the United Kingdom.” In a scenario of this nature, whether or not Catalonia gained automatic admission to the EU (and, as a result, to the euro area) would be a mere formality, only important on a symbolic level. In the worst of cases, Catalonia would be admitted to the EU after a negotiation process that, given the extraordinary circumstances mentioned above, should end up being simplified and relatively quick. What would be most important would be to ensure, during the transition period, the continuity of the rights and obligations that govern the economic relations between Catalonia and the rest of the EU, and in particular, those regarding the free movement of goods, persons, and capital. This “extension” of the current regime should also naturally include all monetary aspects. Therefore, although Catalonia would not be a formal member of the euro area, the euro would continue to be its official currency, and the Catalan financial institutions would have access to the Eurosystem financing mechanisms and European payments infrastructure. At the end of the transition period, and after Catalonia is formally admitted to the EU, the new State’s central bank would take up its duties as a national central bank within the Eurosystem.

From a practical standpoint, the only difference between this scenario and that of an automatic EU entry would be that Catalonia would not be formally represented in the EU governing organs and institutions (including the ECB Governing Council) during the transition period until it officially became a member. Given the large number of EU member countries and the consequent little influence each one has on collective decision-making, no one can unblushingly claim that this absence would be a significant detriment to the Catalan economy.

Even without joining the EU, Catalonia could have the euro as its official currency.

In exchange, an eventual scenario of confrontation would be defined by Spain’s refusal to acknowledge the new State and, as a result, its decision to (indefinitely) block Catalonia’s admission to the EU (which requires the unanimous approval of all EU member states). But as long as the three main pillars mentioned above are maintained (free movement of goods, workers and capital), this scenario should not have adverse consequences for the Catalan economy. In contrast to widespread opinion, these rights are not restricted to the EU and there are different ways of articulating them (Switzerland’s case is, perhaps, the best example in this regard). Moreover, the EU would have every interest in maintaining the reciprocity of these rights, given the quantitative and qualitative importance of the Catalan market and the presence of a great number of European companies based in Catalonia (and keeping in mind that it also sends a net contribution to the Community’s coffers).

On the monetary side, if Catalonia were denied entry to the EU, this would also mean that it wouldn’t be a member of the euro area. But Catalonia could keep the euro as its official currency, if it so wished. A “monetary agreement” with the EU, similar to those already in place in other non-EU countries that use the euro, could act as a stamp of approval for its use in Catalonia and facilitate continuity in monetary and financial relations. In the worst case scenario, the financial institutions based in Catalonia could access ECB liquidity through subsidiaries or branches established within the euro area, as many non-EU banks regularly do in accordance with what is set out in the corresponding ECB regulation (the so-called “General Documentation”).

Which of the scenarios analyzed is more desirable for all parties involved? In a scenario of cooperation, in which no side deliberately aims to harm the other, the possibility of a friendly divorce with minimal costs to all parties should not have to be an idle dream. Beyond the legal formalities, nothing should be able to prevent the full continuity, at least a de facto one, of the current framework of economic and financial relations, and of the rights and obligations that are associated with it. Moreover, it’s hard to imagine Spain adopting an intransigent attitude when faced with the fait accompli of an independent Catalonia, as this would be economically costly for Spain and would provide no advantage except the (possible) satisfaction of punishing Catalonia and its citizens for having chosen a new political framework. Among other issues, it is safe to assume that a hostile attitude would also close the door to any negotiation in good faith about the distribution of the debt incurred by the Kingdom of Spain.

Given the highly probable adverse consequences for Spain if there is a scenario of confrontation once the Catalan people have made the decision to create their own State, the Spanish Government’s current intimidation offensive is hardly credible, as the only explanation for it is the desire to crush the will of a vast majority of Catalans to freely decide their future.

Jordi Galí is the Director of the Center for Research in International Economics (CREI) and Professor at the Universitat Pompeu Fabra.

Translation by Margaret Luppino

Link to original article here


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Col·lectiu Emma - Explaining Catalonia