you're reading...
Catalonia, debt crisis, financial crisis, independence referendum, Ireland, SNP.

Catalonia. Bankrupt. Scotland next?

    Scottish nationalists could be forgiven for cursing fate this week. Both Ireland and the autonomous Spanish region of Catalonia, the two most admired constitutional role models for a post-union Scotland, are sinking under the weight of their debts. Today, Ireland’s voters are expected to vote reluctantly for an EU financial austerity package that could condemn them to economic depression for a decade or more. Meanwhile, the Catalonian President, Artur Mas, says Catalonia may “not be able to pay its bills at the end of the month”. The region has already restored prescription charges, introduced tourism and fuel taxes and cut spending on infrastructure projects.
There but for the grace of god goes Scotland say unionists. What price independence if it means going cap in hand either to Madrid or the ECB for bailouts? Scotland’s much safer in the UK which is big enough to withstand these economic shocks. Well, maybe. The troubles in these once prosperous corners of Europe are undoubtedly a problem for Alex Salmond, who has just launched the SNP’s Yes Campaign for the 2014 independence referendum. The negative headlines from Dublin and Barcelona will discourage many Scottish voters from signing the pledge.
However they are not necessarily arguments against independence as such. Catalonia and Ireland have been plunged into crisis, not by their constitutions, but by their banks and by Europe’s relentless sovereign debt crisis, now morphing into an economic depression. Neither Catalonia nor Ireland see relinquishing independence as a solution to their financial difficulties – though they are beginning to see Europe as part of the problem

Ireland first: the country votes today on the austerity programme imposed by last year’s IMF/ECB bailout. Opinion polls suggest voters will endorse it despite 14% unemployment, a 15% collapse in GDP and emigration running at 70,000 a year. The terms of the fiscal compact are onerous going forward. Ireland must cut its structural deficit to 0.5% when it has been running deficits of 10% and more. This is clearly fantasy economics in a country where tax revenues have collapsed along with the productive economy. But it looks as if the voters have bought the argument of Taoiseach Enda Kenny that their bankrupt country needs guaranteed access to ECB/IMF loans and must bite the austerity bullet yet again.
The Irish people now question why their government nationalised the nation’s insolvent banks so willingly after the property bubble burst in 2008. Well, they thought it was the right thing to do. The Irish government wanted to show how responsible, how European it was. Rather than do a Rangers and wipe out creditors – many of them German banks – it sought to honour Ireland’s debts, public and private. But now, unable to devalue and print money, there seems no way out for Ireland other than debt-deflation. There is a growing feeling that the nation has lost its autonomy. According to the Irish Examiner, today’s referendum is “an effort to appease the people who jealously guard the pursestrings of Europe, the Germans. Nothing more; nothing less”
Meanwhile in Catalonia, things are heading in a decidedly Irish direction, even though it is not an independent country but a region of Spain. Catalonia has debts of e13 bn to finance this year.  Catalonia cannot borrow money from the private markets anymore because interest rates are too high, and has been kept alive by a e2bn a year credit line from Madrid. But Madrid is now facing the collapse of its own finances as it tries to find some e19bn to bail out Bankia, a zombie institution created out of a mega merger of Spain’s busted regional banks. It’s a bitter reversal of fortune for once-prosperous Catalonia, which always claimed to be subsidising the rest of Spain through a kind of Barnett formula in reverse. Now, like neighbouring Valencia, it is holding its creditors at bay by delaying payments to street cleaners and medical equipment suppliers.
What does this tell us about Scotland? Well, not as much as you might think. Clearly, if the Scottish parliament were given extensive borrowing powers it could theoretically find itself in the same position as Catalonia. Excluding oil, Scotland has a “deficit” with the UK, in that it receives more in public spending than it contributes in tax revenues. But that doesn’t mean Scotland could not be viable as an autonomous region or an independent country, any more than Great Britain would be non-viable. The irony is that in recent years, the UK has been running higher deficits than Spain. Were it not for devaluation, and the the deficit reduction programme introduced by the Coalition, the cost of borrowing would have crushed the life out of the British economy. The crises in Catalonia and Ireland have a lot to do with the austerity policies being pursued by the EU. Spain and Ireland are in a deficit trap: the more they cut to meet the fiscal bailout terms, the faster the economy shrinks, increasing the deficit.
Of course, Ireland’s original problem, like Spain’s, was a property bubble created by irresponsible bank lending. Dublin house prices rose 500% between 1994 and 2007, a year in which Spain built 800,000 houses. Scottish banks RBS and HBOS were even more delinquent than their Irish counterparts, but the difference is that Scotland’s biggest banks are also England’s biggest banks. The Bank of England could not have allowed them to go bust because that would have taken the entire UK financial system down with it.  The nationalisation of RBS wasn’t out of kindness to Scots, but in the economic self interest of the City of London.
So it would be unfair to blame independence as such for the death of the Irish tiger. It remains the case that many of the small nations of Europe – Norway, Finland, Denmark etc – have been doing as well as or better than the larger nations. There are signs that Iceland too, which allowed is banks to go bust, is on the mend. But of course, politics isn’t fair, and I suspect that Ireland and Catalonia could be enough to sink the referendum hopes of the SNP come 2014, unless there is a dramatic change of policy in the EU. The SNP’s success was built on the slogan “Independence in Europe”; it could be brought down by it too.

About @iainmacwhirter

I'm a columnist for the Herald. Author of "Road to Referendum" and "Disunited Kingdom". Was a BBC TV and radio presenter for 25 years - "Westminster Live" and "Holyrood Live" mainly. Spent time as columnist for The Observer, Guardian, New Statesman. Former Rector of Edinburgh University. Live in Edinburgh and spend a lot of time in the French Pyrenees. Will that do?


Comments are closed.

Twitter Updates

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 57,081 other followers

Follow Iain Macwhirter on WordPress.com



%d bloggers like this: