Why Catalonia wants to go it alone

The Catalan president is on the verge of declaring independence from Spain following a disputed and bloody referendum last week. What happens next? Simon Wilson reports.

What's driving Catalan separatism?

The same mix of economic and cultural forces that have been driving it for centuries. Since the unification of Spain in the 15th century, a Catalan Republic has been declared on four previous occasions (in 1641, 1873, 1931 and 1934). On each occasion, the experiment proved short-lived. By the mid-19th century, Catalonia was already the richest, most industrialised part of Spain, and was enjoying a "Renaixena" a renaissance in Catalan culture, language and identity. The 20th century saw that reborn identity harden into political movements, especially as a result of Franco-era repression.

And that has continued recently?

Yes. The region's sense of a separate identity has surged in recent years, and Catalan nationalist parties (not all of whom favour full independence) dominate Catalan politics. In part, that's been driven by economics. Catalonia is significantly richer than Spain as a whole: it has 16% of the population, but accounts for 20% of GDP and 25% of exports.

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The region has more industry, higher foreign investment, a better education system, lower inequality and better-quality jobs (though, notably, an above average level of debt). Thus, Catalonia makes a disproportionately big contribution to the central government's coffers, and gets back about €10bn less a year from Madrid than it contributes. That sense of unfairness was dramatically sharpened by the financial crash of 2008 and ensuing recession: many Catalans blame Madrid for the crisis, and resented having their taxes spent on bailing out Spain's banks.

How has Spain reacted?

Badly. What really gave a boost to Catalan separatism was the coincidence of financial turmoil with what many saw as a political betrayal. Back in 2006, Spain's then-government (under socialist prime minister Jos Zapetero) agreed a grand new accord (known as the Estatut) granting new tax powers to the Catalans, and recognising their long-contested status as a "nation" within Spain.

But the (conservative) People's Party (now in power under Mariano Rajoy) appealed to the Constitutional Court, where conservative judges finally ruled against the Estatut in 2010. This led to a succession of million-strong protest marches in Barcelona, and to the Catalan government staging a referendum on self-determination in 2014.

Did that change anything?

Not at the time. Madrid, in effect, turned a blind eye to that vote, because the Catalans didn't claim that a Yes vote would result in a unilateral declaration of independence. Three years later, though, the Catalans upped the stakes. They went to the polls in defiance of the law and Rajoy decided to play hard ball people trying to vote were batoned by riot police. On Tuesday, Catalan president Carles Puigdemont addressed the parliament, saying Catalonia had won the right to independence. He and other leaders then signed a declaration of independence, but said it would be suspended for several weeks to allow for talks with the Spanish government.

Could talks find a solution?

It will not be easy. That's not because the result is an overwhelming mandate for Catalan independence. The referendum was extra-constitutional (the unity of the Spanish state is "indissoluble" under its 1978 constitution). And while 90% voted Yes to an independent republic, that was on a claimed turnout of around 42%. Many millions of Catalans opposed to independence (who are still a majority, according to polls) simply didn't vote. Another problem is whether Madrid would be willing to negotiate with Catalan leaders.

The government has refused to enter into discussions before and is still talking tough, condemning Puigdemont's latest actions. In addition, the police crackdown and violence that accompanied the vote has undoubtedly added to the pressure on both sides and made it harder to compromise.

Could the Catalans just push ahead?

Even if the Catalan government presses ahead with a unilateral decalaration of independence, that won't make Catalonia a sovereign nation, since other sovereign nations will give it very short shrift. Instead, it would inflame tensions not just with Madrid, but within Catalonia. What's more, Rajoy has made it clear that the option of taking back direct control of the region under Article 155 of the constitution is on the table. At the time this article was published, the government was reportedly preparing special forces to arrest Puigdemont if he formally declares independence.

What could it mean for investors?

Spanish stocks have fallen, bond yields have edged up, and several big Spanish banks and firms have announced plans to shift their HQs out of Catalonia. Even so, investors have an "expensive habit" of downplaying unquantifiable political risk, says Lex in the Financial Times and should be worried that tensions could prove "destructive". In the build-up to the Spanish Civil War, asset prices surged, before collapsing.

"Today it is Spain's public debt stock, equivalent to a year of economic output", that has investors worried, rather than fears of expropriation or a new state repudiating the debts of the old. Investors should expect greater bond price volatility, and prepare for more turbulence to come.