The trials of keeping a country together

ON SEPTEMBER 11th 1714, at the end of the War of the Spanish Succession, the victorious Bourbon monarchy suppressed Catalonia’s medieval institutions of self-government. After home rule was restored in 1978 Catalonia’s government, the Generalitat, chose the anniversary of that 18th-century defeat as its “national” day. This year Barcelona marked the day with a huge demonstration calling for Catalan independence. The surprising size of the demonstration—1.5m out of a Catalan population of 7.5m, say nationalists; just 600,000 say their opponents—threw Spanish politics into turmoil.

Emboldened by the vast crowds, Artur Mas, who has been president of the Generalitat since 2010, called an election on November 25th, two years early. He wants a mandate to turn Catalonia into “a state within Europe” and to win it “the right to decide” on its own standing. Many balconies in Barcelona, by tradition a socialist rather than a nationalist city, are now draped with the Catalan flag of scarlet and yellow stripes, often with the addition of a white star to symbolise an independent state. In campaign rallies, Mr Mas (pictured) strikes Mosaic poses, offering his flock a promised land.

For a man whose normal manner is that of a rather grey and cautious economist it is something of a turnaround, and not entirely convincing. In his stump speech Mr Mas, leader of the Convergència i Unió (CiU) party, avoids using the word “independence”. Some aides hint that they might settle for a better deal within Spain.

The grander ambitions may thus be a negotiating position. They may also be a ploy aimed at shoring up Mr Mas’s popularity, which was dented by the cuts with which he has responded to Spain’s economic crisis—the crisis which is driving the wave of Catalan nationalism Mr Mas seeks to surf. The past four years have brought Spain’s worst recession since the 1950s. Unemployment is at 25%, according to official statistics. Enthusiasm for Catalan independence may well be simply the most dramatic manifestation of discontent at the country’s sickening fall from the ranks of Europe’s new rich to those of its new poor. By providing “the illusion that we can think for ourselves” when all other talk is of cuts and risks, says Josep Ramoneda, a philosopher from Barcelona, Mr Mas is providing “the only seemingly inspiring political project”.

A symptom among many

There are other expressions of discontent. November 14th saw this year’s second general strike. Among the demonstrators in Madrid’s Paseo del Prado were furious savers who said they were hoodwinked by their bank managers into buying preference shares which are now all but worthless. Whistle-blowing demonstrators spray-paint banks in Madrid in protest at evictions of jobless Spaniards unable to make their mortgage payments.

But the Catalan question is the trickiest test for Mariano Rajoy, Spain’s prime minister, and his conservative Popular Party (PP). Unlike other protests, this one could call into question Spain’s territorial integrity and therefore the future of the euro zone’s fourth-largest economy. And the way the politics of regional autonomy have played out since 1978 was one of the most important contributing factors to the crisis in the first place. Radical change to the settlement between Madrid and the regions would be difficult at the best of times. These are the worst.

Sit down with a group of Catalan nationalists over tapes and Priorat wine, and you are regaled with a mix of emotional grievance, frustrated dreams and one or two rational arguments. Catalonia has not been an independent country since the 12th century, when its crown was united with that of Aragon, which in turn united with Castile in 1469. Then came defeat in the War of the Spanish Succession, in which Catalonia backed the loser.

The Second Republic of the 1930s brought home rule for Catalonia and the Basque country. Franco’s victory in the Spanish civil war of 1936-39 saw them lose it and have their languages banned in public. The democratic constitution of 1978 brought back home rule, dividing Spain into 17 autonomous “communities” (see map). By 2007 these regions accounted for 38% of public spending; setting aside pensions and unemployment benefit the central government spends just 18%.

In a 1978 referendum, 91% of Catalonia’s voters backed the constitution. Installed in the Generalitat for most of the next 23 years the nationalists of CiU made Catalan the language of all schooling and government. Frustrated by opposition, the Catalan Socialist Party allied itself with small pro-independence parties to win power in 2003. Pasqual Maragall, the Socialist leader, opportunistically demanded a new statute of autonomy, formally recognising Catalonia as a nation, rather than a region or a community, and granting it more money and power. In a characteristically frivolous move, Spain’s Socialist prime minister, José Luis Rodríguez Zapatero, rammed this through the Cortes—Spain’s parliament—over the objections of the PP, only for Spain’s Constitutional Tribunal to strike out several of its most important provisions. The whole affair added to the nationalists’ sense of grievance—and to the feeling elsewhere in Spain that Catalans are selfish whingers.

Mas hysteria

Meanwhile the generation which grew up speaking Catalan and learning history from the Generalitat’s textbooks has come of political age. Many of their parents had migrated from elsewhere in Spain, or felt ties to it, having lived in the civil war’s shadow. Those historic links matter less to the young. “For me breaking with Spain has an emotional cost,” says Antoní Castells, who was the economic counsellor in Mr Maragall’s government. “For my son it doesn’t. He only thinks ‘why do we have to remain tied to people who insult us and can’t stand us?’”

Then there is money. The Generalitat complains that it transfers between 6.5% and 8.5% of Catalonia’s GDP to the rest of Spain, and that Madrid allocates public investment according to its own priorities. Catalonia wants to collect its own taxes, and have control over how they are spent.

The CiU’s opponents complain that it is brainwashing a generation of schoolchildren, using Catalonia’s expensive public-television network to whip up support for independence and buying influence over every important social institution with patronage and subsidies. Francisco Moreno, a publisher in Barcelona, compares the Generalitat’s domination of the media to that of Hugo Chávez in Venezuela.

Mr Mas is also accused of adventurism in pretending that Catalonia can unilaterally become an independent state in the EU. According to several opinions from the European Commission, an independent Catalonia would not automatically be a member of the EU, and Spain would have to approve its (re)admission. Businesspeople in Barcelona, particularly those with bigger companies, are alarmed: José Manuel Lara of Planeta, Spain’s largest publisher, has threatened to move his group’s headquarters if Mr Mas declares independence.

It remains quite an “if”. Opinion polls suggest Mr Mas’s scheme for patriotic popularity may not be bearing fruit. The CiU looks likely to get around 37% of the vote (slightly less than in 2010) on November 25th, thus falling short of an absolute majority in the Catalan parliament. Nevertheless, around 75% of the members of the new parliament are likely to vote to call a referendum on Catalonia’s status.

According to Andreu Mas-Colell, Mr Mas’s economic counsellor and a specialist in game theory, the referendum proposal represents the crossing of a Rubicon. Catalonia cannot hold the vote unilaterally. The constitution reserves such powers to the Cortes, which will almost certainly refuse to play along with Mr Mas. If Catalans legitimately demand a vote (in their eyes, at least) then the Cortes’s refusal to grant one becomes a fundamental grievance until some future Cortes changes its mind. But Mr Mas-Colell adds that Catalans will take into account Madrid’s attitude and any offers it makes them.

Seen from Madrid, 619 kilometres from Barcelona but only two-and-a-half hours away by high-speed train, Mr Mas’s gambit is an unwelcome distraction from the hard grind of dealing with the hangover from the wild property boom of the early-to-mid 2000s. This generated windfall revenues which, combined with cheap credit after Spain joined the euro, provided all tiers of government with the resources to fulfil their dreams. Mr Zapatero turned his windfall into those gleaming high-speed trains and heavily subsidised solar panels, as well as permanent commitments to more generous pensions, welfare benefits and bigger transfers to the regions.

Over the past 30 years the regions have evolved into party fiefs, providing employment for some 300,000 political nominees. Even after the completion of the handover of health care and education in 2006, regional governments added some 500,000 jobs, according to Francisco Longo, a political scientist at Esade, a business school.

Centrifugal farce

The local party machines took control of the cajas, the local savings banks. They encouraged them to lend to developers, in many cases taking a rake-off for party coffers. The cajas stumped up much of the money for the herd of white elephants that has trampled Spain’s landscape and finances—the airports with no flights, the cultural centres with no culture, the 700,000 flats with no inhabitants, many on the wrong side of motorways from the beach. Regional autonomy brought with it a perverse form of peer-group pressure in which each government wanted to build whatever the neighbours had, says Antonio Muñoz Molina, a writer who used to be a municipal official in Granada. Puffed up by their new-found autonomy, the local politicians did away with the civil-service controls that had formerly required projects to be professionally evaluated.

Mr Zapatero refused to admit that Spain was living beyond its means until pressure from Brussels forced him to change course in May 2010. When Mr Rajoy took office a year ago, with a majority in the Cortes and control of most of the regional governments, expectations were high that he would move quickly to repair a broken financial system, push through long-shirked structural reforms to make the Spanish economy more competitive, and close a yawning fiscal gap (see chart).

Disappointment set in swiftly. A property registrar by profession, Mr Rajoy is the perfect civil servant, dogged and honest. But nobody could accuse him of communicating a bold vision. His first mistake was to divide economic policy between two ministries and three men. His second was to delay the 2012 budget in the hope of winning a regional election in the socialist bastion of Andalucía in March this year. The PP both failed to win the election and took six months longer than it might have to get going.

Nevertheless, Mr Rajoy has achieved more than he is given credit for. The banking system is on the way to being fixed, at last. The government eventually nationalised four insolvent banks, including Bankia, a big one. Luis de Guindos, the economy minister, issued two decrees requiring the solvent banks—which include the three biggest, Santander, BBVA and la Caixa—to raise their capital to 10% of risk-weighted assets and to ramp up their provisions against bad loans.

Striptease and family values

In what Cristóbal Montoro, the budget minister, calls “a banking striptease of a kind done by nobody else”, the government invited international consultants, the European Commission and the IMF to go over the books of the financial system. In return, Spain has been granted up to €100 billion from the EU to recapitalise the nationalised banks (though it insists only €40 billion is needed). In December banks will start dumping their dud property assets in a “bad bank” set up under the Bank of Spain at a discount of up to 63%.

Not all the doubts about the banks have been cleared up. Half-a-dozen mid-sized ones may yet have to be nationalised. The banks may be required to compensate people who bought near-worthless preference shares. Even so, over the next year a healthy, though still shrinking, banking system will come into being, says Ángel Laborda of Funcas, a think-tank.

While the government has been sorting out the banks, the Spanish economy has gone through a searing adjustment. Between 1.5m and 2m private-sector jobs have been lost since 2009, says Mr Montoro. The current account moved into surplus in July in part because exports are growing impressively, but mainly because imports have slumped. A radical labour-market reform has made it less expensive to lay off workers, and allows firms to bypass the national unions and reach direct agreements with their staff.

The collapse of the property-induced revenue bubble left Spain with a structural fiscal deficit of 6% of GDP, according to Fernando Fernández of the Instituto de Empresa, a Madrid business school. The government raised VAT and income tax, and cut public-sector wages. The budget gave it draconian powers to control spending by regional governments, which given their parlous finances can no longer go to the markets for money. Some 230,000 fewer people work in the public sector than did in 2008, says Cesar Cantalapiedra of Afi, a Madrid consultancy.

If change continues at the same pace Spain will be close to a primary fiscal surplus (ie, before interest payments) in two years. The biggest doubt is whether investors will finance the government at an interest rate it can afford. Since mid-2011 around €350 billion has been withdrawn from Spain as foreign investors worried about a euro break-up. The pace of the outflow has slowed since July when Mario Draghi, the president of the European Central Bank (ECB), promised to do “whatever it takes” to save the euro, but the tide is still a way away from turning.

All told, the government needs to issue €270 billion of debt in 2013 to cover expiring bonds and the deficit, according to Afi. It cannot afford to pay an interest rate much more than 200 basis points over German bonds, which is the premium that the IMF reckons reflects the Spanish economy’s intrinsic risks. Keeping rates down requires a formal agreement between Spain and the ECB under which the bank would intervene in the markets when bond spreads rise.

Mr Rajoy is tiptoeing towards such an agreement. An important potential obstacle was removed in November when Olli Rehn, the EU’s economic commissioner, accepted that Spain was making sufficient fiscal effort and needed to take no further steps at present. Insiders in Madrid say the only remaining obstacle is to secure the agreement of Germany’s Angela Merkel.

Mr Rajoy promises that growth will return in 2014. Can Spaniards hold out until then? Despite the general strikes, so far Spain has seen no Greek-style riots, nor the emergence of political extremism. This is thanks, in part, to a welfare state on a scale Spain has never had before, and a large informal sector which means official unemployment is overstated (though it also means a lot of lost revenue). Strong family networks help the unemployed to survive, if only in hardship—some 300,000 workless households depend on a grandparent’s pension, according to Fundación Social La Caixa. It is also true that, while Spaniards rail against bankers and politicians, many quietly recognise that the whole society was complicit in the boom.

Federalist papering over the cracks

While this all helps hold Spain together at one level, the Catalonian question threatens to pull it apart at another. But the problems are linked. The most powerful criticism of Mr Rajoy is that he is cutting, rather than reforming, the multi-tiered public sector. Many Spaniards believe more radical change is needed—and that this might be a way to appease Catalonia.

Mr Rajoy recently set up a committee to reform all tiers of government. The Socialists, far from keen reformers in office, are in opposition proposing something more fundamental: a federalist settlement in which the regions get tax-raising powers and form the upper chamber of parliament. That is anathema to the PP. But Charles Powell, an historian at Madrid’s CEU-San Pablo university, says Mr Rajoy should convene a special committee of the Cortes to look at a broader constitutional reform which, while nodding towards such federalism, would deliver “regional autonomy 2.0”.

The problem with a constitutional process, says Jaime Pérez Renovales, who chairs Mr Rajoy’s government-reform committee, is that “you know how it starts but you don’t know how it ends”. Even so, he sees room for an agreement with Catalonia: “I think we’re condemned to understand each other”. A Catalan who was once an official in Madrid sees “a long and dirty negotiation”.

The country is fragile, and its shock absorbers show signs of wear. The savings rate is falling as people draw on their reserves. Alfredo Pérez Rubalcaba, the leader of the opposition Socialists, worries about an “anti-political” mood. Resigned pessimism “could turn to anger in an afternoon,” he says. The September 11th rally showed the power of Catalan nationalism, even if it is only the power of resentment. It will be Mr Rajoy’s hardest test.