Europe, Oh Europe

The big question surrounding the debate on Catalonia’s independence is the following: What are the economic consequences of having one’s own state?

If we are to be intellectually honest, the truth is that the answer is not at all clear. And it is not clear because, to answer it properly, we would have to compare what would happen if Catalonia secedes with what would happen if it does not. And both scenarios are full of uncertainties. For example, staying might have disastrous consequences if Spain collapses even further into the financial crisis or if the Spanish government continues to implement the policies of interterritorial redistribution and public investments that have ended up strangling the Catalan economy. On the other hand, the benefits of separation in the short, medium, and long term might be positive or negative depending on the institutions, laws, regulations, and policies instituted by its government once Catalonia becomes its own state.

One of the aspects creating particular uncertainty is whether or not Catalonia will continue to form part of Europe. A big part of the uncertainty is gratuitous and has been generated by the reaction of the Spanish authorities when they realized that the Catalan people were seriously considering leaving. Ministers, economists, analysts, politicians and various authorities have announced that, if Catalonia decides to separate from Spain, it will be thrown out of Europe and subsequently, Catalans will have to use a passport when they travel to Saragossa, Catalan businesses will have to pay duties that will bankrupt them, and everyone will have to stop using the euro. All that, they add, would lead to financial ruin for everyone automatically. If that’s not enough, they’ve also told Catalonia that its expulsion from Europe would be immediate and that, in order to be readmitted, it would have to go to the end of the accession line, and that readmission would require the unanimous vote of all of the members of the Union --  with the implicit threat that Spain would vote against it. Since a single vote would be enough to block entry, they say, Catalonia would have to remain outside Europe for three generations.

All of these threats have a single objective: to scare people (often with preposterous scenarios that include imaginary borders and a hypothetical attempt of an independent Catalan state to forbid certain surnames). But they only end up demonstrating Spain’s weakness in its attempt to win the referendum by keeping it from being held: Spanish leaders believe that if people are afraid, Catalonia will get nervous and then the referendum will never see the light of day. And even though we know these threats are just part of a fear campaign, the members of the Wilson Initiative think that it is not very responsible to utter certain things or to make certain assertions. It’s for that reason that we have decided to publish an analysis of the possibility that Catalonia might remain “out of Europe.” Despite the fact that in the history of the European Union there has never been a process similar to what has begun in Scotland or Catalonia, we can still carefully assess the situation. When we do, we arrive at the conclusion that the catastrophic scenarios described by Madrid are false, even if (as some authorities have threatened), Spain resists the will of the Catalan people with all its might.

The first thing that must be understood is that “leaving Europe” is a pretty meaningless phrase, since Europe is made up of a multitude of treaties, groups, and institutions. To make it more clear, the figure shows the numerous groups, areas, and agreements that there are in Europe along with the members of each: the Council of Europe, the European Union, the Eurozone, the Schengen Area, the European Economic Area, and the European Free Trade Association. The different groups, agreements, and areas represent compromises on different economic and political issues. For example, the members of the Schengen Area have committed to allowing the free movement of people throughout their territories (so that tourists who travel from one country to another within the Schengen Area—like from Spain to France—do not have to worry about borders or border police who ask for passports). The European Union, for its part, is an association of states with a single common market and currency, and, at the same time, has shared political institutions. But, once again, the Union is just one of the multiple solutions that are used in Europe to ensure economic integration throughout the continent.

Note that not all European countries are members of each and every group. Spain, for example, is part of the European Union, the Eurozone, and the Council. Switzerland is part of EFTA and the Schengen Area, but not of the Eurozone or the European Union. The United Kingdom is part of the European Union, but not of the Eurozone or the Schengen Area. Therefore, the first thing that must be cleared up is exactly what Spanish leaders mean when they would veto Catalonia’s incorporation into “Europe.” Do they mean the European Union? The Euro? The Schengen Area? The European Economic Area?

We assume that the threat refers to the European Union, even though, don’t forget, the treaties of the EU don’t say a single word about internal expansion. That is, they don’t say anything about adding members that become independent by separating from existing member countries: the treaties neither regulate nor prohibit such expansion. But let’s imagine a worst-case scenario and suppose that if it became independent, Catalonia would no longer be a member of the European Union. Would that mean that the day after the referendum, borders would be erected between Catalonia and the rest of the EU? Would it mean that if the Yes vote is victorious, that Catalans would lose the right to travel without a passport throughout Europe, that its merchandise would be assessed duties in order to be exported to the EU and that capital would stop circulating freely between Catalonia and the rest of the EU? And would it mean that to re-enter and thus benefit from all of these rights and freedoms of circulation, Catalans would have to wait until Spain stopped vetoing Catalonia’s membership in the EU? The answer to all of these questions is NO. Definitely, NOT.

In the first place, the hypothetical celebration of a referendum would not lead to Catalonia’s exclusion from the EU. This would take place, if indeed it did take place, with a formal and public declaration of independence. Therefore, once the referendum was held and as long as it were successful, nothing could stand in the way of a process of negotiation within the EU about Catalonia’s as well as Spain’s status. And there is no clause in the European Union Treaties that states that (just as a British Parliamentary report recommends for Scotland) that the date of the definitive declaration of independence couldn’t be negotiated so that it would coincide with the starting date of Catalonia’s membership in the European institutions.

In the second place, if Catalonia were forced to exit the European Union, it is true that it would need Spain’s vote in order to be readmitted. An extensive (though not direct) application of Article 49 of the Treaty of the European Union stipulates that the admittance of a new member of the EU requires the unanimous approval of all of its members, including that of Spain(1). Therefore, our destiny in Europe would be in the hands of Spaniards. Pro-independence Catalans need to contemplate a scenario in which, at least in the short term, they would cease to be part of the EU if Spain stubbornly insisted on voting No on its inclusion into the European Union. However, from the point of view of the Wilson Initiative, we believe that the Spanish threats are not particularly credible for two reasons. First, Spain’s ability to exercise this veto will depend a great deal on whether it has been bailed out economically (the changes to the constitution that the Popular Party and the PSOE fast-tracked through at the petition of the European authorities demonstrate that the capacity of the Spanish authorities to do certain things is not as large as they make out). Second, when the time comes, it may not be in Spain’s interest to veto Catalonia’s inclusion in the EU. Spain suffers from a problem that economists call “dynamic inconsistency.” At first glance, it might be in Spain’s interest to veto, but once the referendum has been held, it may be in its interest to do the opposite, since in order to export to Europe, Spaniards will have to pass through Catalonia and because they will want Catalonia to take on a proportional part of the Spanish debt.

But let us stick to a pessimistic scenario and imagine that an angry and vengeful Spain decides to punish Catalonia and vetoes any Catalan attempt to gain re-accession into the EU, and that the EU permits such a thing. Does this imply that Catalan businesses will not be able to sell in Europe, that Catalan citizens will have to go through customs and immigration, and that you’ll need a passport to go to Saragossa? The answer is NO.

The EU treaties require the use of a unanimity principle to approve the accession of new members (TEU, art. 49) and to make “association agreements,” that is, those agreements that establish institutions shared by EU and extra-EU countries (we’ll explain shortly why the association agreements are important).

However, to continue in the common market and to maintain the free movement of goods (that is, to avoid paying duties), Catalonia doesn’t have to form part of the EU. It just has to sign bilateral agreements like Switzerland has done. And the treaties say that bilateral agreements without shared institutions require not a unanimous vote but only a qualified majority (TFUE, art. 207 and 218). Therefore, if Spain tried to use its vote to veto the incorporation of Catalonia into the common market and the free movement of goods, it would be unsuccessful because Catalonia could sign a bilateral agreement with the EU, and that agreement doesn’t need a unanimous vote, but only a qualified majority. This agreement, therefore, could not be vetoed unilaterally by Spain. In fact, being outside the EU while enjoying free trade within the EU is what Switzerland does, a country that decided not to enter the European Economic Area, but which maintains one of these bilateral agreements with the EU, approved by a qualified majority. (2)

It goes without saying that it would be to the EU’s interest to sign such a bilateral agreement with Catalonia. After all is said and done, there are important European companies in Catalonia that would ostensibly be harmed by the introduction of commercial barriers threatened by the Spanish authorities. It’s obvious that it is in the interest of the entire EU (including Spain!) to continue as it is. What incentive would European firms have to buy the more expensive Catalan products that were imported? Or to sell products that they export from Catalonia at a higher price?(3) Given these incentives and the fact that Catalonia, as a current member of the Union, satisfies all requirements imposed by the UE in terms of regulations, institutions and so on, one would expect such a bilateral agreement to come into effect immediately upon independence.
To sum up: even if Spain stubbornly insists on expelling Catalonia from the European Union, it would not be able to keep Catalonia from signing free trade agreements with the EU, and, therefore, Catalan businesses would  be able to export to Europe with the same freedom, rights, and obligations that they do now.

What about the people? Would people be able to continue traveling freely? The answer is yes, but not because the Schengen treaty would be applied automatically. If Catalonia chose to join the Schengen Area without being part of the EU, it would have to sign an association agreement like Switzerland did. However, since it is an association agreement, it would require a unanimous vote from the Council, and therefore, could be vetoed by Spain. However, if Spain vetoed Catalonia’s entry into the Schengen Area, Catalans would continue to have access because they would still be Spanish citizens. We just have to go back to Article 11.2 of the Spanish Constitution to see that no Spanish citizen can be deprived of their nationality. Therefore, since the Spanish government, no matter how furious it is, could not take Spanish nationality away from the people of Catalonia, they would be able to travel from Catalonia to any country in the Schengen Area (for example, to cross the Spanish or French borders) with complete freedom and the only thing they would have to do would be to keep their Spanish citizenship (together with their Catalan citizenship) and carry their Spanish passport or ID card when they were going to cross the border. In this case, we would have the paradox that the free movement of the citizens of Catalonia throughout Europe would be guaranteed by the very same Spanish Constitution.

Finally, the euro: will Catalonia have to stop using them? Here we need to correct a fundamental yet common misunderstanding. It is true that when a country is independent it can use its own currency… but it does not mean it has an obligation to do so. Actually, the world is full of countries that use other countries’ currencies. Ecuador, Panama and The Bahamas, among many others, use the United States dollar without the United States being able to do anything to stop them. In Europe, Andorra, Monaco and Montenegro are all examples of countries that use the Euro without being part of the Eurozone or even the EU. Since there is no way to keep a country from using the currency that is most beneficial or convenient, the threats that Catalonia would have to stop using the euro currency make no sense at all. Catalonia could use the euro without asking for permission from the Union or from the Central European Bank. Obviously, this would be a temporary situation until common sense led to full integration, with the possibility of being represented in the Eurosystem’s institutions and to participate in their decisions.

In conclusion, the members of the Wilson Initiative believe that the fact that the Spanish authorities are threatening Catalonia with potential  economic catastrophes in the event that Catalans vote in favor of having their own state only demonstrates the weakness of  the Spaniards attempt to win a referendum simply by keeping it from being held; this has led Spain to adopt a strategy of spreading fear about impending economic misfortune.

We are convinced that, if the day arrives, the Spanish authorities will not put obstacles in Catalonia’s path toward inclusion in the European Union. And that is because Spain will act in its own economic self-interest: it would not be wise to have a bad relationship with the country that it will inexorably have to cross in order to export to Europe.  In addition, Spain will want to negotiate with Catalonia so that the Catalans take on a proportional part of the public debt (which, at the end of the day, really belongs to the Kingdom of Spain). Of course, if Spain elects to hold true to its threats, it might be able to keep Catalonia from forming part of the European Union because re-accession might require the unanimous vote of its members. But Spain will not be able to veto Catalonia’s bilateral free trade agreements with the EU or keep it from forming part of the common market from the very first day, since, in order to sign those bilateral agreements, only a qualified majority, and not unanimity, is necessary. And it won’t be able to keep the people of Catalonia from moving freely throughout the Schengen Area or keep Catalan businesses and citizens from using the Euro as their form of payment.

Put differently, if the leaders of Catalonia do their job, Catalan citizens and businesses will continue to enjoy the free movement of goods, services, workers, and capital. These are precisely the same freedoms of movement that we enjoy right now and which have allowed Switzerland to be one of the richest and most competitive countries in the world. Catalonia, therefore, will remain a part of Europe.

Notes (1) Naturally, this would only be in the case that Spain recognizes Catalonia, because if it doesnít, the citizens and businesses of Catalonia would still be considered part of Spain, and therefore, would continue to enjoy the same rights of free movement that they enjoy now. (2) As a matter of fact, it is worth reminding that the EU may sign these bilateral agreements even with states that have not been recognized by all of the member states (see, for example, the final European Commission Communication (COM 2012) 602 from October 10, 2012). (3) That said, and in an attempt at complete transparence and objectivity, Spain could veto a bilateral agreement by claiming a national security interest. This option, however, would be exceedingly far-fetched, since the Spanish Constitution (article 11.2) says "No native Spaniard can be deprived of their nationality." Therefore, in the case of independence, Catalans would maintain their Spanish citizenship unless and until Spain changes it legislation in order to punish them.

Translation: Liz Castro, Catalonia Press ( Twitter: @lizcastro

Col·lectiu Wilson

Pol Antràs (Ph.D., MIT) Professor at Harvard University
Carles Boix (Ph.D., Harvard) Professor at Princeton University
Jordi Galí (Ph.D., MIT) Senior Researcher at the Center for Research in International Economics (CREI)
Gerard Padró i Miquel (Ph.D., MIT) Professor at the London School of Economics
Xavier Sala i Martín (Ph.D., Harvard) Professor at Columbia University
Jaume Ventura (Ph.D., Harvard), Senior Researcher at the Center for Research in International Economics (CREI)

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