Insights & Perspectives

The Catalonia Question: Investing in Spain

October’s controversial independence referendum, putting rural voting power behind Catalonia’s secessionist movement, caused end-of-year uncertainty for businesses and investors. A snapshot of what’s at stake.

Spain’s favor by astute investors has been as strong and steady as the country’s emergence from its devastating financial crisis a decade ago. Modern, solid and stable—Spain is the fastest growing economy in Europe, expanding at 3 percent for last three years. Mergers and acquisitions transactions alone surged 83 percent to 62$ billion in 2017.

Yet with a fifth of Spain’s economy centered in Catalonia, the region’s threat to secede from the larger economic structure of Spain has profoundly disrupted the confidence and continuity of local and foreign business interests.

An Industrial Powerhouse

Catalonia is Spain’s most economically productive region, accounting for 18.9 percent of its economic profile. It leads all regions in producing 25% of the country’s exports.

In addition to its domestic productivity, nearly a third of foreign companies settled in Spain choose the region’s capital, Barcelona, as their base including Volkswagen (VLKAY) and Nissan (NSANF).

The Tax Question

In the context of a distinct cultural identity and a centuries-old debate over the region, the idea of Catalonia’s independence is nothing new. Yet as its position of economic power increases, Catalonia’s secessionists denounce giving more to the Spanish government than they get in return.

The region contributes 21% of the country’s total tax revenues; independence supporters have seized on the imbalance, arguing that tax duties to Madrid could instead serve to further enrich the region.

But can Catalonia survive alone?

If Catalonia were to leave Spain, its position with the European Union and the larger global trading climate would be critically undetermined.

The European Union has expressed its support of Spain. Therefore, in the case of secession, Catalonia could continue using the Euro as currency but it would be cut off from EU market access, European Central Bank funding and membership in the World Trade Organization. This would likely raise the cost of exporting goods produced in Catalonia, resulting in stunted growth and potential job losses.

A Question of Confidence

The referendum won the separatist party a majority of seats in Catalonia’s regional parliament, leading to a declaration of unilateral independence—and sharp turn in business confidence along with it.

In just two months, over 3000 businesses and banks transferred their legal headquarters out of the region, with support from the Spanish government, including Gas Natural, Oryzon and Eurona as well as Banco Sabadell, Spain’s fourth largest banking group and Caixabank, Spain’s second largest bank by assets. Mergers and acquisitions deals also slowed significantly at this end-of-year shake-up.

What’s ahead for Catalonia’s independence is uncertain, yet this might prove to be a temporary setback in Spain’s larger trajectory for economic growth.

SOURCES: Bloomberg; Business Insider; Financial Times; Wall Street Journal; New York Times; El País.