Asymmetrical Information - Megan McArdle

12.19.12

Homage to Catalonia

Catalonian secession grows more plausible. That's bad news for the Spanish government.

There have been fitful mutterings about Catalonia, the region of Spain where Barcelona is, seceding from Spain.  Walter Russell Mead sums up the latest developments:  

Madrid did its best to spin the results of the Catalonia election as a defeat for the secessionists, but as we predicted, the new Catalan coalition has united behind the demand for an independence referendum that Madrid says is illegal.

This won’t help Spain, and it won’t help the euro. It is, however, good for the coalition partners in Catalonia, who have shrewdly set a far-away date for the referendum. This will allow Catalonia to extract the maximum level of concessions from both Madrid and Brussels as Europe’s power brokers struggle to avoid a destabilizing crisis in a major EU economy.

Blackmail Madrid as long as possible, and keep the referendum threat real: This is a smart strategy and one that will be hard to beat. Madrid is now backed into a corner: If it squeezes Catalonia, the prospect of secession increases, investors flee all of Spain, and the euro itself comes under pressure.  

Catalonia is the richest part of Spain.  If it goes, Spain's tax base shrinks dramatically.  If it doesn't go, but merely uses the threat to get lower taxes and more help with its own very large debts, Spain's fiscal picture still looks a great deal bleaker.  Which means, in turn, that Germany is going to have to pony up a lot more money.  

Europe's fiscal crisis keeps developing in completely unexpected ways.  The only thing that's really predictible is that the solutions will cost more, and work less well, then even the pessimists project.