independence

Breaking Away

Over many years, cultural, language and political differences have led citizenries of various countries to seek independence from their ruling governments. But could these new states survive economically?

By Dina Marto

Separatist movements are largely motivated by the politics of identity, heritage and recognition as opposed to economics; and often, cultural pride or geographic separation sets these regions apart from their governments. However, as evident in recent years, the movement has not always come to fruition.

As such, we take a look at the most recent cases of official and unofficial independence referendums of Catalonia, Scotland and Quebec, whereby their failed pursuits for independence have led to questions of whether or not secession can come with significant economic benefits.

 

 

 

 

 

 

 

 

 

 

 

 

 

Catalonia:

Catalonia has talked about separation from Spain since the founding of the political movement of Estat Català in 1922. The appearance of the pro-secession movement over the past few years has been Spain’s biggest political crisis since democracy was restored in 1975, after the death of military dictator Gen Francisco Franco. The strive for independence is largely due to Catalonia’s own cultural identity, Spain’s economic woes, a 2010 constitutional court decision to reduce Catalonia’s sovereignty, and a distrust of the centralized Spanish government of Catalonia.

The drive for Catalan independence has been encouraged by the separatists’ triumph in a snap regional election in October 2017, with as many as 90 percent voting to split from Spain. The region won 70 seats in the 135-seat Catalan parliament and the result backfired on Spanish Prime Minister Mariano Rajoy, who he declared the referendum illegal. Spain’s national court ordered the imprisonment of Jordi Sanchez and Jordi Cuixart, two leading separtist poiticians. Catalonia’s refusal to backtrack from its independence threats triggered Article 155 of the Spanish Constitution, which allows central authorities to take control of any of Spain’s seventeen regions.

Overall, Catalonia has many of the trappings of a state; a flag, a parliament of extensive devolved powers, and even its own police force (the Mossos d’Esquadra). The region boasts its own broadcast regulator, and even a series of small foreign embassies that promote trade and investment in Catalonia around the world. The region also delivers public services such as schools and healthcare. In the event of independence, several other costly trappings would need to be set up including border control, customs, defence, a central bank and air traffic control—all of which are currently run by the Spanish government.

Economically-speaking, Catalonia represents more than a quarter of Spain’s foreign exports and makes a contribution of 223.6 billion euros a year to the Spanish economy, which is approximately 20 percent of GDP. Spanish Economy Minister Luis de Guindos claimed that Catalonia could see its economy shrink by around 25 to 30 percent and its unemployment rate, which already sits at 15.3 percent, double if it splits to form a separate state. More than 3,100 domestic businesses, major banks and energy firms have already moved their headquarters out of the region following the recent events of the snap election to avoid negative and costly economic consequences.

Overall, Catalans pay more in taxes than is spent on their region. In 2014, the last year the Spanish government has figures for, Catalans paid around 10 billion euros more in taxes than what reached their region in public spending. If independency is restored in Catalonia, some have argued that even a tax boost might be absorbed through the creation of new public institutions. Running these institutions would be of low and inefficient economies of scale.

Catalonia’s public debt can be argued to be of concern should indepenedence be granted. At year-end 2016, the Catalan government owed 77 billion euros, which represents 35.4 percent of Catalonia’s GDP. Of that, 52 billion euros is owed to the Spanish government. In 2012, during the European financial crisis, the Spanish government set up a special fund to provide cash to regions that were unable to borrow money on the international markets. Catalonia has been by far the biggest beneficiary of this system, using up 67 billion euros since then. With independency, not only would Catalonia lose access to this scheme, but it would also raise the question of how much debt would it be willing to repay as a  self-governing system.

As for the EU, it has treated the crisis as an internal matter for Spain, with no intervention, and Catalonia has not gained much international support either. In fact, the region will need to reapply to become a member of the EU, which will require the approval of all EU members—including Spain, which is highly unlikely. Positively however, Catalonia’s best option would be to benefit from a single market membership without joining the EU.

There is also the question of currency; in 2015, the governor of the Bank of Spain warned Catalans that independence would cause the region to drop out of the euro automatically, losing access to the European Central Bank. Analyst also expect that it could also cause the euro to decline by as much as five percent.

Going forward, investors view Catalonia’s strive for independency as uncertain. As with Brexit, independence could plummet the region into a long period of uncertainty and would most probably be an undesirable market for the private sector.

 

 

 

 

 

 

 

 

 

 

 

 

Quebec:

Quebec is one of Canada’s largest provinces. Its total population is close to 9 million, representing approximately 25 percent of Canada’s total population of 30 million. Eighty percent of Quebec’s population is French-speaking, while 9 percent are English-speaking.

Canada was originally colonized by the British, but remains part of the Commonwealth. In contrast, Quebec was a colony of France until its defeat by England in 1763. During this time, the emergence of French Canadian nationalism arose to preserve the French heritage. What followed was the creation of Quebec’s pro-sovereignty movement, Parti Quebecois, which is based on the need to defend the French language and promote the culture of Quebec.

In the 1960s, cultural differences sparked several political movements, which eventually led to secession plans in 1980 and 1995. Despite hightened tensions, the results in both polls delivered majority votes in favor of remaining part of Canada. The secession plan of 1980 had 59 percent of federalists wanting Quebec to remain part of Canada, while the 1995 plebiscite had a narrow margin of 51 percent of federalists voting for the Remain party.

The main arguments for the majority’s dissuasion from voting for succession is due to the hightened economic risks ensuing independence. To many, it was not a promising solution. The arguments mainly focused on the impact and uncertainty of a future currency, a decline in or withdrawal of investment, and the possible complications regarding trade.

Quebec’s net debt in March 2017 was $203 billion, which is equivalent to 52.7 percent of provincial GDP. Before separating, Quebec would need to negotiate with the Canadian federal government about assuming its share of federal debt and assets, which is expected to be approximately $154 billion. This would increase its debt-to-GDP ratio to about 92 percent from 51.9 percent as of March 2017. Many of Quebec’s assets (such as national parks and infrastructure) will not generate much revenue; however, the acquired debt will naturally require annual interest payments. With a current average interest rate on federal debt of about 4 percent, Quebec would need to increase its annual debt-service payments by about $6 billion.

When it comes to monetary policy, Quebec would have to choose between two (rather poor) alternatives. One option would be to continue using the Canadian dollar, but the catch would be that it would then have no monetary policy with which to stabilize its economy. Having no monetary policy can be especially risky in the absence of fiscal transfers from the central bank, as they usually tend to moderate Quebec’s business-cycle downturns. The other option would be to create a Quebec central bank and a new currency. The downside of this option, especially at the outset, would be the market’s reaction. If Quebec introduced a new currency to be at par with the Canadian dollar, uncertainty and market pessimism would likely create a large depreciation in the currency, thus increasing the price of all imports. Furthermore, the cost of servicing private and public debts denominated in the Canadian dollar would rise steeply.

However, it should be noted that while the pro-sovereignty movement has not yet achieved its ultimate objective, its drive for independence has given it more autonomy over education, taxation, immigration, and making French the official language. Moreover, Quebec has its own delegations in the Unites States, Latin America, Asia, Europe and Africa. It is a member of international organizations, including UNESCO. As with all Canadian provinces, Quebec was given the power to levy provincial taxes and receive transfer payments from the federal government. Moreover, the province is allowed to control its own laws concerning provincial matters, although it is still bound by federal government regulations.

So far, Quebec remains motivated by recent events in Catalonia and Scotland to plan another succession vote. Ultimately, an independent Quebec will not necessarily be a poor country, but its independence will certainly make it poorer than it is now. As mentioned earlier, although separatist movements are largely motivated by identity rather than economics, it will all come down to what price the Quebec population is categorically prepared to pay should they strive for sovereignty.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scotland:

While Brexit currently preoccupies the political spectrum of the United Kingdom and Europe, Scotland remains under a bubbling constitutional issue. Its strive for independence has been inundated with the ongoing political, economic and social issues subsiding in the United Kingdom. Its 300-year union with England is currently stained by pro-independece seekers who, like Catalonia and Quebec, are seeking independece from its greater region.

Although one could argue that the United Kingdom is a model of liberal democracy, and that Scotland is sufficiently represented in the United Kingdom Parliament, whereby they have a great deal of control over day-to-day governance within their borders, it is the question of modern state versus country subset that comes into play.

Like Catalonia and Quebec, Scotland has its own heritage and identity; it has its own flag, language (Scots and Scottish Gaelic), and although the Bank of Scotland does issue money, it prints the British pound on behalf of the central government. The country also has its own international soccer team.

Scotland has an organized economy, but does not regulate foreign or domestic trade. The Scottish Parliament is able to pass laws on a range of devolved issues such as agriculture, health, local government, and social work, while the United Kingdom Parliament is able to act on reserved issues focusing on the fiscal, economic and monetary systems, energy, and common markets. Moreover, the Parliament is able to control education, training and social work.

Although Scotland does not have external recognition nor does it have its own embassies in other countries, it does have government offices in Brussels, Washington, Toronto and Beijing to promote its regional interests.

A referendum on Scottish Independence from the United Kingdom took place in September 2014. About 55 percent of the population voted against independence, with the remaining 44.7 percent voting in favour. The main reason for this was largely economic driven; by retaining free and unhindered access to the rest of the United Kingdom, while also remaining part of the EU single market.

While Scotland has some economic strengths such as a thriving financial and tourism sector, an independent Scotland will not necessarily satisfy the same results, especially in regards to its currency, oil sector, and budget deficit.

An independent Scotland will either have its own currency, shadow the pound or join the euro—should it become a member of the EU. Having its own currency and setting its own interest rates would make it easier for Scotland to adjust to movements in the price of oil and manage its budget deficit. A crash in commodity prices could cut borrowing costs, causing the currency to fall in value. Therefore, exports would become cheaper and foreign investors would be encouraged to purchase assets more cheaply. But as with the post-Brexit vote drop in the sterling, this flexibility will come at a cost of higher inflation and tighter living standards.

Scotland’s economy and government revenues depend heavily on the North Sea’s oil output, and closely follows the Brent crude price. According to analysts, Scottish independence from the United Kingdom could lead to economic instability, leading to fewer Scottish oil and gas jobs. Moreover, turning Scotland, which sells two thirds of its oil exports to the United Kingdom, into a strong international oil trader would be challenging. This is due to the drop in oil prices from $110 to $50 between 2011-2014 that hit its economy quite hard.

Official figures found that oil production increased by 2.9 percent in 2016 following a recovery in oil price. However, capital expenditure dropped by around 20 percent and there were 650,000 job losses between 2016 and 2017. This resulted in North Sea oil only contributing 59 million pounds of tax in 2016, compared to the 9.6 billion pounds raised in 2012.

In fact, not only is the North Sea becoming one of the most expensive places to extract oil in the world, but it is also entering its final decade of production, with only 10 percent of the offshore fields remaining untapped. As such, Scotland will soon have to import all the oil and gas it needs.

One of the target metrics to join the EU is administering its members to aim for a budget deficit of no more than three percent of GDP. Scotland currently has a deficit of almost 10 percent of GDP, making it comfortably one of the worst EU performers.

Approximately 62 percent of the Scottish population voted against Brexit, which is why Scotland’s First Minister and SNP leader Nicola Sturgeon has put pressure for a second referendum vote in autumn 2018 or spring 2019. She argues that seeking independence can offer Scotland the opportunity to remain in the EU bloc, or even the single market, after Britain exits the EU. However, British Prime Minister Theresa May will have to sign off on any binding referendum, which is expected to be highly unlinkely with Brexit.

Although employment levels and wage growth in Scotland are slightly lower than the UK average, Scotland’s economy is not exactly performing poorly, but nor is it excelling to the extent where independence is nothing but an extremely risky proposition.

The economic and geopolitical advantages of being a larger independent sovereign state offer some advantages that a small country cannot match. However, as we have seen in all three cases, leaving behind an already feeble economy through independence is generally a very risky effort. Whether or not secession produces an independence dividend remains to a larger extent uncertain.