By Nimra Noor, International Business Writer
The referendum on secession held in the wealthy region of Catalonia, Spain, on October 1, caused the International Monetary Fund to signal a warning to the country that the ongoing political crisis can have a huge weight on Spanish economy if not settled. Foreshadowing uncertainty and disillusionment, the central government in Madrid, itself trimmed the previously anticipated economic growth from 2.6% to 2.3%.
According to the Financial Times, this reconsideration by the Spanish Ministry of Economy was primarily due to reduced consumer spending, resulting from the persistent political deadlock in Catalonia. Catalan president, Carles Puigdemont left the decision of secession hanging and has called for a dialogue that the central government has refused to have regarding referendum, which it considers illegal. This uncertainty, thus, is a disrupting factor for the country’s economy.
Cautioning the Catalan representatives about the economic impact of the controversial poll, Spain’s Prime minister, Mariano Rajoy, wrote in his letter to Puigdemont, “The latest steps taken by you and your government are causing a major divide in Catalan society, as well as enormous economic uncertainty that threatens people’s well-being.”
Rajoy’s foreshadowing certainly stands undeniable according to the Financial Times, shares of two banks in Catalonia, Caixabank and Banco Sabadell, fell more than 5%, along with Spain’s largest stock market index falling 3%. However, as the city’s streets are swarmed with both separatists and loyalists, and the images of police use of violence in trying to stop the referendum spread viral around the world, the visitors do not feel enthusiastic to visit the troubled region any longer.
Additionally, rating agency Standard and Poor’s has warned of a probable recession in Catalonia if the crisis lingers on.
The Spanish Ministry of Economy claims that if Catalonia breaks away, the region would have to leave the European Union, damaging the country’s recently rescued economic situation. It is predicted that its GDP would fall by more than a quarter with a simultaneous rise in unemployment, plunging Spain into another sovereign debt crisis.
Catalonia, however, would be in a worse situation, as per the prediction of the central government: banks and major firms have already begin to shift their headquarters from Catalonia, wanting to maintain their legal protection under the European Union, which might not include Catalonia after secession. With Madrid taking steps to make this transition easier, the Catalan uncertainty to break away from the center increases further.
However, based on the fact that Catalonia is the richest region in Spain, with the highest exports, and a home to industrial, research, and tourism sectors, Puigdemont’s government claims to stay a part of the EU in case of secession, with no longer having to suffer a fiscal deficit, as Catalonia pays more in taxes that is returned to the region as an investment in services such as schools and health institutes.
As Madrid sees the Spanish IBEX 35 index tumble and the stock market experiences the worst days since the UK’s decision to divorce the European Union, the economic analysts wait to see the next move by the central and Catalonian government, hopeful of a settling dialogue between the two parties. The continent can clearly not afford another Brexit.
A version of this article appeared in the Tuesday, October 24th print edition.
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