Why Greece's Fate Helps Make Sense of Catalonia's Gamble
The lessons of economic pain
Anticipating the Spanish government’s decision to suspend Catalan autonomy, the Catalan government proceeded today to unilaterally proclaim independence. At about the same time, the Spanish Senate voted to suspend Catalan autonomy, following which Spanish prime minister Mariano Rajoy deposed Catalan premier Carles Puigdemont and other Catalan high officials, and called for elections in Catalonia to be held in December. Jointly, these actions are escalating the Catalan crisis. How are things likely to develop from now on?
Every political crisis is unique, yet sometimes analogies are useful—especially when crises are unfolding and the flow of information can be extremely confusing. Seen from this perspective, the Greek crisis of 2015 offers some useful analogies.
In 2010 Greece found itself unable to refinance its debt. Faced with the prospect of default, it accepted a massive bailout from its eurozone partners along with the IMF, in exchange for which it agreed to implement a large set of fiscally restrictive policies (“austerity”) and structural reforms. In turn, these policies led to an acute economic recession and a parallel political crisis which went through various phases and resulted in a massive political realignment. This process culminated in the January 2015 elections, which produced a victory of an anti-austerity party, Syriza.
Headed by Syriza leader, and now prime minister, Alexis Tsipras, and its flamboyant, unorthodox finance minister Yanis Varoufakis, the new Greek government set out to renegotiate its bailout deal and extract more favorable conditions from its creditors, including a steep debt reduction. Its strategy consisted in threatening to default on its debt which, in theory, could endanger the euro and shake the European Union.
Although there were good arguments in favor of a renegotiation of the bailout agreement, Greece’s goals were not really achievable. For one thing, a debt haircut was extremely unpopular among creditor eurozone countries, some of which were poorer than Greece; for another, such an outcome would have set a precedent and make the eurozone subject to blackmail by member states. In addition, most investors did not see a Greek default as posing a critical eurozone risk. Soon it became clear that the negotiations were going nowhere and the Greek government was hitting a wall.
Faced with this impasse, Tsipras called a referendum in July 2015, advocating the rejection of the bailout agreement’s austerity policies. At the same time, he assured the Greek electorate that the costs of rejection were minimal. As a result, over 60 percent of the electorate followed his recommendation. The world held its breath. Would the eurozone cave in to Greek demands? Or would Tsipras concede and lose face? We know the outcome. The eurozone did not blink, and Germany went as far as propose that Greece exit the eurozone. Faced with the risk of economic implosion, Tsipras caved in. He fired Varoufakis, purged his party from its most radical faction, and signed on the austerity measures.
The key lesson of the Greek case is that the crisis de-escalated when the Greek anti-austerity bloc split as a response to the economic cost of following through.
The Catalan crisis shares a key parallel with the Greek crisis. Setting aside arguments in its favor, the Catalan demand for independence is a very long shot, as perhaps was Greece’s demand for a debt haircut in 2015. Catalan society is divided in the middle and secession creates a precedent that most states wish to prevent. It entails enormous complications, including Catalonia’s EU and eurozone membership. The unilateral declaration of independence that the Catalan government has just voted in is an even longer shot. It goes against the wishes of a substantial part of the Catalan population and its elected representatives, the rest of Spain, the European Union, and the international community more broadly, including the United States. In many ways, the Catalan independence proclamation is reminiscent of the July 2015 Greek referendum. It is an expression of a wish rather than a real policy, a part of the bargaining process between the Catalan separatists and the Spanish government rather than its conclusion.
All of this is well known by both sides in this conflict. So, how are things going to play out? Much will depend on how the two sides deploy their weapons. On the one hand, the Spanish government has suspended Catalan autonomy and assumed direct control of the restive region. This move entails many practical concerns, not least of which is the use of force. Will Spain put the Catalan separatist leaders on trial? How will it sanction Catalan civil servants who refuse to obey Madrid’s orders? Most importantly, will it offer options to moderate Catalan separatists, and if so, what kind? On the other hand, the Catalan separatists can count on the intense commitment and mobilization of a large segment of the local population and their ability to elicit international sympathy on their behalf. They will certainly count on widespread civil disobedience and will take advantage of any repressive state actions to paint themselves as victims whose cause is worthy of international support.
Two factors will be critical as the crisis inches forward: the use of state force and the depth of economic pain.
First, how will Spain use force in Catalonia? The more repressive the Spanish response, the more likely it is to be counterproductive, reinforcing the cohesion of the separatist bloc and weakening Madrid’s position. If, on the other hand, the Spanish government offers a face-saving and credible way out to Catalan moderates, it could fracture the separatist bloc—an extremely heterogeneous coalition of pro-business center-rightists, moderate socialists, and anti-capitalist radical leftists.
Second is the extent of economic costs. Since the beginning of the crisis more than 1,300 firms, including major banks, have moved their headquarters out of Catalonia in response to political instability. Bank depositors have been equally volatile. As in Greece, the higher the economic costs for Catalonia, the more likely that the separatist bloc might fracture.