Spain returned to the spotlight Tuesday, when Catalonia became its latest autonomous region to request funding help, renewing jitters over Madrid’s ability to cope with high regional debt. Yet yields fell and demand was strong at Tuesday’s auction of three- and six-month bills—markets, it seems, realize Spain’s regional bailout facilities seem sufficient thus far. In addition to Catalonia’s requested €5 billion, Valencia’s requested €3.5 billion and tiny Murcia has said it needs €300 million. Should other regions speak for the remaining half of the €18 billion Regional Liquidity Fund, the Instituto de Credito Oficial also remains available—and it has a banking license, allowing it to tap the ECB at will.
It would be tempting to leave this story there, had Catalan government spokesman Francesco Homs not made this pointed pronouncement: Catalonia will accept aid from Madrid “without accepting political conditions … because this money is Catalan money.” This story, you see, isn’t just about an indebted region—it’s about the very fabric of Spain itself.
Spain as we know it is very, very young—it was born in 1980, when it held the first democratic election after the death of fascist dictator Francisco Franco. Catalonia, with its regional seat at Barcelona, has long been part of Spain, but it has a centuries-old tradition of independence—political, cultural and linguistic. Under Spain’s Second Republic, Catalonia (and the Basque Country) enjoyed full autonomy, which made the region one of Franco’s primary targets as he sought to overthrow the republic, crush regional separatism and impose Spanish nationalism. Catalonia was one of the main theaters of the 1936-1939 Spanish Civil War and happens to be where George Orwell fought with the republican-supporting international brigades—an experience he chronicled in the book sharing this article’s title. When Franco won control, he outlawed the Catalan language and fully subjected the region to his fascist regime, and Catalonia remained culturally and politically repressed until his death in 1975.
In 1978, members of Spain’s transitional government drafted a new constitution reestablishing a parliamentary monarchy. To satisfy Catalan and Basque demands for devolution—and prevent them from declaring independence—the Spanish Constitution established 17 autonomous regions, granting them control over education, health care, social welfare and transportation, among other things. Regions were also granted some fiscal autonomy: They could issue debt and spend as they see fit. But except for the Basque Country and Navarre, none control their own taxes. Regions set income, corporate, VAT and stamp duty rates, levy special taxes and collect revenue—but they send all revenue directly to Madrid, which uses most of the money to fund the national budget and redistributes the rest to the regions.
Per Section 158 of the constitution, each region receives state funds “in proportion to the amount of State services and activities for which they have assumed responsibility.” But each state must also contribute to the Inter-regional Compensation Fund, which aims to correct “inter-territorial economic imbalances.” Thus, the amount each region receives from Madrid isn’t proportional to its contributions or budget—an anathema to the Catalan government, which has long complained high transfers to Madrid place an undue burden on the regional economy. Were it not for the €18 billion surrendered annually—the “Catalan money” Mr. Homs referred to—they argue, Catalonia wouldn’t be forced to issue as much debt and, therefore, wouldn’t need €5 billion from Madrid to repay the rest of 2012’s maturing debt. (Of course, Catalonia likely also wouldn’t be in this predicament if it didn’t have a huge, constitutionally guaranteed social safety net, but that’s a story for another time.)
In 2006, Catalonia’s then-Socialist government revised the region’s Statute of Autonomy, which sought to establish a tax office and grant the region full fiscal autonomy. But these provisions were struck down in 2010 by Spain’s Constitutional Court, which ruled they violated the country’s Principle of Solidarity. But this didn’t end the tug of war between Catalonia and Madrid. In January, Catalonia was the only region to reject the Spanish government’s new regional budget controls, which gave Madrid veto power over all regional budgets. Catalonia’s July boycott of a Madrid meeting to set regional spending limits further fueled tensions. And now, it seems, there may be renewed calls for Catalan tax autonomy. If a new system were modeled after the 2006 plan, Catalonia would automatically keep half of its tax revenue—a big boost from the roughly 30% it gets back from Madrid under the current system.
What happens from here remains to be seen. Prime Minister Mariano Rajoy didn’t mention aid conditions when he responded to Catalonia’s request, simply saying, “We will help Catalonia as we help the rest of the regions.” Notably, Catalonia’s 2012 budget aims to reduce the deficit to 1.3% of GDP, and the region has already heavily cut education, healthcare, agriculture and administrative spending. It’s entirely possible Rajoy decides Catalonia already meets whichever conditions he’d impose (like the EU did when Spain asked for bank bailout funds), rather than force the autonomy issue at a time when over half of Catalans support independence—Madrid no doubt doesn’t want to lose the source of one-fifth of Spain’s output.
The situation certainly bears watching, though overall, it seems unlikely Catalonia’s bailout needs change things for Spain much—they simply give us a new window through which to view a fascinating piece of history.