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Brussels economic forecast cites Catalonia as a risk to Spain’s growth

European Commission “cannot anticipate at this stage” the impact of a protracted crisis

Spanish economy minister Luis de Guindos (l) in Brussels.
Spanish economy minister Luis de Guindos (l) in Brussels. REUTERS

Spain is headed for its fifth straight year of growth. Thanks to help from the European Central Bank (ECB) and a banking bailout worth over €40 billion, the Spanish economy managed to emerge from a protracted recession and is now expanding at twice the euro zone rate.

The old risks are still there in the form of high debt and deficit levels, and an extremely high jobless rate. But now there is a new political uncertainty to contend with. Brussels has echoed an earlier warning from the International Monetary Fund (IMF) by saying that the Catalan crisis will have a negative impact on the Spanish economy.

Strong, balanced growth is set to continue in Spain

EC Autumn Economic Forecast 2017

Private analysts figure that the separatist push will cost between €2 billion and €12 billion, according to BBVA Research. The Spanish government places this figure at around €5 billion, but notes that if the crisis drags out the impact could be much bigger.

Meanwhile, the European Commission (EC)’s Autumn 2017 Economic Forecast admits that there will be an impact, although no figures are being provided.

“Market reactions to recent events in Catalonia have remained contained. The risk exists that future developments could have an impact on growth, the size of which cannot be anticipated at this stage,” reads the report. The overall conclusion, however, is that “strong, balanced growth is set to continue.”

The study is dated October 22, when companies had already begun transferring their registered headquarters out of Catalonia, including leading lenders LaCaixa and Sabadell, while the tourism industry had begun noticing a drop in bookings.

Private analysts figure the separatist push will cost between €2 billion and €12 billion

Spanish Economy Minister Luis de Guindos believes that Spanish GDP will grow 2.3% in 2018, five tenths of a point less than the previous government forecast. Brussels is slightly more optimistic, according to sources familiar with the situation. Spain is no longer considered a risk to the euro zone, although it needs to work on reducing a public deficit that has been missing its EU targets for years. Brussels expects Spain to bring this figure down to 3.1% of GDP this year.

In the meantime, the EC is also waiting for Madrid to come up with a blueprint of the 2018 budget. With the Catalan crisis in full swing, the Spanish executive decided to extend the existing budget as it was unable to secure enough legislative support for the new spending plan. But Brussels has noted that the provisional figures relayed by Madrid will not guarantee compliance with 2018 deficit targets.

If the Catalan crisis is resolved quickly, growth will suffer the less for it, and it will be easier for Spain to comply with EU fiscal regulations. But if the situation endures beyond the regional election scheduled for December 21, there could be economic consequences ranging from higher borrowing costs on the debt market, increased business flight from Catalonia, a sustained fall in tourism, and a continued freeze on investment in the region. And the impact on the Catalan economy would affect the Spanish economy as a whole, as Catalonia contributes around a fifth of Spain’s GDP.

 English version by Susana Urra.

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