Catalonia, Out of Business 2.0

Recent developments in Catalonia have created turmoil in the Spanish economy. Following the 1st October referendum – considered illegal by both the Spanish government and the EU – and the Catalan intention to move ahead with a unilateral declaration of independence, the foundations of the fastest growing economy in the Eurozone are starting to shake. Equally, the independence challenge is likely to have huge consequences in the Catalan economy, which represents 19% of Spain’s GDP. We explore the potential implications and different scenarios below.

Economic implications

As previously reported in our snapshot “Catalonia, out of business 1.0”, Catalonia is an important contributor to the Spanish economy, making up nearly 19% of Spain’s GDP. It also hosts 22.5% of Spain’s hi-tech firms, a far greater share than other regions.

However in less than two weeks, things have changed drastically due to developments triggered by the referendum of October 1st. The IBEX 35, Spain’s principal stock exchange (and the benchmark stock market index of the Bolsa de Madrid),  lost 2.85% on October 2nd. This is the biggest drop in the Spanish stock exchange since Brexit.

The bond yield situation is also not improving. In fact, as reported by Bloomberg on Friday October 6th, the difference between the yield on a key 10-year Catalonian bond maturing in 2020 and Germany’s benchmark 10-year issue has increased 0.5% in a matter of days.

Business exodus/drain

Businesses are now acting. Banco Sabadell and CaixaBank, together holding assets larger than Catalonia’s economic output, have both moved their headquarters outside Catalonia as they would otherwise risk losing the support of the ECB.

Last week, the biotechnology company Oryzon Genomics was the first to change its registered office from Catalonia to Madrid and many more are reported to follow suit including: Albertis, Gas Natural, Grifols, Cellnex, Fluidra, Service Point, Ercros, DogiDerby Hotels, Unico Hotels, WPP o Schibsted, and Indukern o Almirall. Every day the list grows bigger.

The Spanish Government is trying to be pragmatic and is acknowledging the tough and complex situation for companies. So last week, Rajoy approved a new regulatory change through a decree law that would allow companies to change headquarters quickly.

What could happen next?

According to the President of Catalonia, it is very likely that his government will declare independence unilaterally today. The majority of the Catalan Government claims that the referendum has given them the mandate to go ahead, since 2 million voters representing 38% of the citizens in Catalonia voted to leave Spain. Nevertheless, part of his government is concerned that declaring independence will lead to a suspension of self-governance and will push companies out of Catalonia.

  1. Government of Catalonia Declares unilateral independence.

The government of Spain invokes Art. 155 of the Spanish Constitution, preventing all institutions from assuming power and suspending the autonomous Government of Catalonia (cutting the rope). It is important to note that Rajoy has absolute majority in the senate; hence, he would get the necessary support for this option. He would also get the support from the Spanish liberal party, Ciudadanos, which is pushing Rajoy to take this route as soon as possible.

If necessary, Spanish police could enforce the measures. In the best case scenario, it would take several weeks to re-establish normality and both parties could use the time to reset the debate. However this option could also go into the opposite direction.

The President of Catalonia could be arrested with most of the members from his political party, which would risk triggering violent protests and increasing the power of radical parties in Catalonia. The Spanish Government would then also call for early elections in Catalonia, and the Catalan separatist parties would campaign for a legal and binding referendum. Citizens would be divided and tensions would increase in the region. Hardliners from the far left Popular Unity Candidacy (CUP) would demand a quick break from Spain, which would strongly increase the pressure on the moderates.

The government of Spain invokes Art 116 of the Spanish Constitution. According to this article, the Spanish government can invoke the state of alarm, emergency or even siege for a limited period of time and under specific conditions. The difference between article 116 and 155 is that the latter has to be approved by the Senate where the Spanish Prime Minister has the majority, while the former needs to be approved by the Parliament, where the government has a minority. Nevertheless, the Spanish Government will get the support from the Liberals, but it is unclear if he will get the support from most of the Socialist party. The implications for invoking Art 116 are worse than invoking Art 155 and the Government of Rajoy will likely lose the support from the international community.

  1. Compromise between the Spanish Government and the Government of Catalonia. Although this option is not very likely, both parties would need to cease action and start talking, possibly with the help of an international mediator. The President of Catalonia has requested help and support from the European Commission, which refused to get involved, arguing that the rival parties need to solve this internal issue together. In fact, the European Commission said last week that it is the duty of any government to uphold the rule of law, and this sometimes requires the proportionate use of force. Nevertheless, support for this option is increasing in the streets as illustrated by the large demonstrations across Spain over the weekend calling on politicians to establish dialogue between the parties.
  1. As we have mentioned in “Catalonia, out of business 1.0”, the most likely scenario moving forward are new elections in Catalonia. This would help the Catalan Government to campaign explicitly for a legally binding referendum, and would put pressure on the Spanish Government to reform the constitution.

However, this scenario won’t be easy. On the one hand, a section of the current Spanish Government believes that Rajoy is not managing the current crisis with Catalonia well. The so-called “hard liners” within his party believe that Rajoy should be tougher with Mr Puigdemont. Aznar, former Spanish PM, asked Rajoy for early elections in Spain if he is incapable of solving the current crisis in Catalonia. But the central Government is trying to prevent another early election. Bearing in mind the political deadlock that Spain suffered a year ago, Spain needs to prove to the EU and the world that it can bring economic reform, as well as constitutional stability, to the country. On the other hand, hardliners from Mr Puigdemont government believe they already have the mandate to declare independence unilaterally.

  1. Another possibility is that political parties may call for a reform of the Spanish Constitution in order to reform the legal status of Spain’s autonomous regions. This won’t be easy either as the current central government lacks the majority or support needed to go through significant structural changes. In addition, PSOE and United We Can have enough deputies to block reform initiatives and demand a referendum on the constitutional reform, which means that Rajoy’s Government will have to make important concessions to at least the socialist parties.

In conclusion, although the best outcome for Spain would be to accommodate some of Catalonia’s demands (particularly on taxes), and for the Catalans to ultimately reject independence, it is unclear how both sides can go back to a starting negotiating position without having new elections either in Catalonia or Spain.

If you are a company operating in Catalonia, what would we recommend you do?

  • Ensure to have communication plans in place for critical political change, including a sound narrative and convincing spokespeople, to explain the actions and the various stages to all stakeholders.
  • Check costs and procedures for establishing a legal entity outside Catalonia.
  • It might be a good idea to set up a PMO-War Room including legal, security, operations and communications.
  • Agree on the best time to make a decision (to remain or to leave), but be aware of all the effects, and be aware of the sensitivities of your stakeholders and the highly emotional nature of the debate.
  • In the mid- to long term, look at the surrounding effects in border tariffs, taxes, labour regulations and costs.


Juan Rivera is Managing Director at FTI Consulting in Madrid and Carlos Ochoa is Senior Director at FTI Consulting in Brussels.

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