Catalans scramble to build their own state
Breakaway region plans to set up parallel currency as Fintech experts work on a blockchain system
THE self-styled Republic of Catalonia is scrambling to put together the economic machinery of a sovereign state after the momentous vote for independence in the Catalan parliament, but the quixotic venture faces a devastating counter-attack from the Spanish state within days.
Large global banks and funds are no longer convinced that premier Mariano Rajoy can contain the crisis. It is one thing to invoke Article 155 under the Spanish constitution: it is quite another to subdue the breakaway region.
Antonio Montilla from Citigroup said Catalonia’s leaders are now in “open rebellion against the Spanish state”, precipitating a drastic response that risks spinning out of control.
“Violent confrontations and widespread civil unrest could possibly follow. We do not believe the current impasse will escalate into a civil war, even if we cannot rule out this scenario any more,” he said.
Catalan separatists in the regional assembly voted for their republic with stone-faced, funereal expressions, aware of the enormous dangers. The Spanish judicial authorities (Fiscalia) plan to launch criminal prosecutions for “rebellion and sedition” as soon as Monday, with a prison tariff of 30 years. This is not like Brexit. Nobody talks lightly of “having their cake and eating it”.
Fintech experts in Barcelona are working feverishly behind the scenes to create a blockchain currency beyond the control of the Spanish state and the European Central Bank, relying on advice from pioneers in Estonia and from Etherium founder Vitalik Buterin.
The desperate initiative is akin to Syriza’s contingency “Plan B” for a parallel currency at the height of the Greek drama in 2015, which was never activated in the end.
George Danezis, an expert on crypto-currencies at University College London, says such a scheme could create a ring-fenced infrastructure that Madrid could not easily shut down. But blockchain has inherent problems of scale. It is hard to see how it could replace the euro-based transactions overnight and service a sophisticated economy.
The Catalan rebels say Spain’s fateful decision last week to imprison two grass-roots leaders – “Los Jordis” – indefinitely for peaceful resistance poisoned the political waters irreparably. Mr Rajoy’s Partido Popular has stated from the outset that there can be no dialogue with “golpistas” (putschists). The chasm seems unbridgeable. Investors are struggling to keep up with the fast-moving events on the ground. The euro fell to $1.1578 against the dollar yesterday after the sharpest two-day drop this year. But this is hard to separate from reactions to the ECB’S openended plan to stretch bond purchases until September 2018.
The IBEX index of equities in Madrid fell 1.45pc, headed by Catalan lenders Sabadell and Caixabank, as well as BBVA, which holds a quarter of the Catalan market. Risk spreads on Spain’s 10year bonds jumped seven points to 120 but there is no sign of serious alarm.
It is a muted response to a declaration of independence by the country’s most dynamic region, commanding a fifth of GDP. Yet the crisis is already inflicting economic damage. Spain’s Target2 deficit in the ECB’S internal payments system has risen to a record €384bn, a sign of underlying capital flight.
The national fiscal body has halved its growth forecast to 1.5pc next year and warned of recession in Catalonia, which has already seen 1,700 Catalan companies switching their legal headquarters to other parts of Spain.
Mr Rajoy’s minority government is on borrowed time. The budget has been delayed. He needs Basque votes but regional leader Inigo Urkullu says he is “radically opposed” to the use of Article 155. The Basque PNV party has denounced what it calls an assault on Catalonia’s “legitimate institutions”.
The Spanish finance minister warned before the referendum that Catalonia would be thrown out of the euro and face “brutal pauperisation”, with a devaluation of up to 50pc. GDP would collapse by 25pc to 30pc. The new state would be a pariah, without trade access to the EU single market or to Spain.
The trouble with this scenario is that it would entail a break-up of the euro, setting off systemic panic. It would be a traumatic shock to the Spanish economy. The acrimonious split would push Spain’s public debt to 120pc of GDP and cause the fiscal deficit to explode.
It is clearly impossible to separate a Catalan crash from a Spanish crash. Bond purchases by the ECB are for now keeping a lid on Spanish yields but trouble may start once the pace of purchases is halved in January. IHS Markit warns that Spain may need an EU bailout, if the political drama festers.
Active mediation by the EU might have defused the crisis earlier. Brussels has instead backed Madrid at every step of the way, even describing the treatment of Catalan voters by the Guardia Civil as “proportionate” use of force.
It is has fallen to the non-eu Council of Europe to call for restraint and subtler statecraft. This has been noticed by dissident movements across Europe. It will have consequences.