The longer the toxic process between Catalonia and Spain drags on, the wider the gulf grows.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

During a visit yesterday to Barcelona, the organizers of the Mobile World Congress, the world’s biggest mobile event, warned the City Council that unless the political situation stabilizes in Catalonia, they will be looking for an alternative venue after 2018. Barcelona has hosted the annual event every year since 2006 and it brings a lot of money to the city each year, much of which ends up in the pockets of local taxi drivers, hoteliers, owners of bars, restaurants and brothels, Airbnb hosts and, last but not least, the thousands of professional pickpockets that flock to the city for the four day event.

John Hoffman, the chief executive of GSMA, the association that organizes the Mobile World Congress (MWC), could not have chosen a worst day to visit Barcelona. As part of a general strike to protest the incarceration of pro-independence ministers and leaders and the imposition of direct rule from Madrid, thousands of picketers had blocked dozens of roads across the region including the main freeway connecting Spain with France, causing massive traffic jams.

High-speed train links between Barcelona and France and Barcelona and Madrid were also put out of action after hundreds of protesters moved onto platforms and railway lines in Barcelona and Girona chanting ‘Freedom, Freedom.”

At midday thousands of protesters occupied Barcelona’s Sant Jaume square in front of the city’s town hall, a traditional assembly point for Catalonia’s separatist movement. The chant “Squatters, get out” rang out in allusion to the take-over by central government authorities of Catalonia’s regional government.

Madrid is unlikely to be budged, at least not until regional elections are held on December 21, which it hopes will deliver an anti-independence majority. It’s a tall order, especially given the lack of public support for the Rajoy government in Catalonia. In a recent poll by Pew Research, 91% of the Catalans surveyed said they do not trust the government in Madrid.

If the gamble doesn’t pay off and in December pro-independence parties are handed another majority, direct rule will be reinstated, Spanish government representatives have warned. In other words, the beatings will continue until morale improves. And if morale doesn’t improve, well, the beatings will continue.

Article 155 Is Not Just Alive

Activating article 155 of Spain’s constitution, which allows Spain’s central government to take direct control of a wayward region or locality, was always a high-risk move. As the rating agency Moody’s warned, triggering the law may help ensure that Catalonia remains part of Spain for the short term, but over the long haul it will make it even more difficult to resolve the constitutional conflict.

Now, two weeks on, 155 is not just alive, it’s thriving, as the central government in Madrid seeks to apply the article to other regions over which it has limited political control. “We have developed this article of law and we now know how to apply it to Catalonia or any other region that violates the constitution,” said the governing Popular Party’s spokesperson Rafael Hernando.

That was on Monday. By Tuesday the Finance Ministry had applied a 155-type procedure to take control of the finances of the Madrid city council, which is run by a leftist coalition closely aligned to the Podemos party. The central government accuses Madrid’s council of consistently breaking budgetary rules, yet during the last financial year the council achieved a budgetary surplus of €1.02 billion after slashing its debt by 32%.

A senior representative of Rajoy’s Popular Party (PP) has also threatened to apply article 155 to the Basque Country. Alfonso Alonso, a former health minister and president of the PP in the Basque Country, warned that the region has “all the ingredients” to become the next Catalonia. The responsibility of the PP is to ensure that those ingredients never come together, Alonso said.

The fact that senior members of a deeply divisive government are threatening to apply an extremely draconian piece of legislation to other parts of Spain, including a region that is home to ETA, one of Europe’s most violent separatist groups which declared a permanent ceasefire in 2011, is testament to just how volatile the situation currently is in Spain and how easily the political chaos could spread.

State of Uncertainty

The financial toll is already being felt, albeit in a slow-bleed kind of way. Since October 31, two days after the activation of article-155, Spain’s benchmark index, the IBEX-35, has not been once in the green. The country’s second biggest bank, BBVA, has cut its GDP growth forecast for 2018 by three-tenths and has warned that if the current uncertainty continues until December as much as 1.1 percentage points could be shaved off GDP.

If the instability persists long after December, growth will slow sharply as the cost of debt for Spain’s government rises, especially with the ECB paring back its purchases of European sovereign debt. If rating agencies follow through on their threats and begin downgrading the outlook for the Spanish economy or even cutting their rating for Spanish debt, servicing that debt is going to get a whole lot more difficult.

But the biggest threat is the gathering boycott of Catalan goods in the rest of Spain. According to a new survey conducted by The Reputation Institute, 23% of Spanish people have stopped buying Catalan goods altogether. Another 21% are thinking of doing the same. In other words, Catalonia’s biggest export market is shrinking fast. As former Spanish minister Josep Borell recently warned, the boycott has reached such a scale that it risks severing economic ties between Spanish and Catalan businesses — ties that have taken decades to forge.

Many of these consumers think they’re doing Spain a favor by punishing Catalan businesses, yet many of those same businesses are owned by people who are not in favor of independence. What’s more, many of their providers are based in other parts of Spain and they, too, are suffering the ill effects.

For the moment there is not the slightest sign of any reconciliation between pro-independence Catalonia and the rest of Spain. Neither side seems willing to take a step back. The longer this toxic process drags on, the wider the gulf will grow and the more difficult it will be to rebuild bridges afterwards. And both sides of the divide have shown themselves to be perfectly capable and willing to inflict economic pain on themselves in order to harm the other. That should be — but apparently isn’t — a serious cause for concern in Brussels. By Don Quijones.

Acute uncertainty is like sand in the gears of the local economy. Read…  Spain Just Lit a Fuse Under Catalonia — its Richest Region

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