Following the 1 October referendum on the independence of Catalonia and the national police’s actions to prevent the referendum—which many viewed as both disproportionate and ineffective—the president of the Generalitat of Catalonia, Carles Puigdemont, further increased tensions between Madrid and Barcelona by announcing plans for a unilateral declaration of independence on Tuesday, 10 October. Such a declaration would create a political crisis in Spain and impact business and the economy.

Events could happen very quickly over the next several days and should be closely monitored by companies that have a presence or market in Catalonia.

What Has Led Us to This Point?

This situation is the result of years of tension between the Catalan government and Spain’s central government in Madrid. Catalans have been asking for greater self-governance, especially on tax issues, similar to that enjoyed by the Basque region. However, the Constitutional Court and the central government (the conservative Popular Party of Prime Minister Mariano Rajoy) have refused to consider any changes that would be contrary to the 1978 constitution.

The absence of a dialogue between both administrations and their political representatives during the past years and the radicalization of both positions in civil society have increased social divisions between Catalans seeking independence and Spain, divisions that will be difficult to remedy in the short and medium term—a situation that was further aggravated by the police actions on 1 October.

What Could Happen?

At an economic level, the consequences have already begun to be seen. Reacting to the political uncertainty and the threat of a unilateral declaration of independence, Spain’s risk premium soared to 125 basis points and the Spanish stock market index Ibex 35 dropped significantly after the referendum, although it has since recovered. Catalan companies and banking entities have begun to move their headquarters to other Spanish cities, concerned about the economic impact of Catalonia essentially “crashing out” of the EU. Catalans are opening bank accounts outside of the region in the event an independent government imposes bank controls to prevent capital flight.

Given Rajoy’s refusal to consider an international mediator, as proposed by the Generalitat, the latter has suggested a plan where the Catalan government would abandon the declaration of independence and the central government would withdraw the national police forces deployed in Catalonia. Nevertheless, there are serious doubts that Puigdemont can avoid the declaration of independence due to pressure from radical parties and pro-independence Catalan parliamentary groups.

Should Puigdemont declare independence, most observers believe the Spanish government would invoke Article 155 of the country’s constitution, which allows it to take over the running of an autonomous region should it declare independence, to suspend Catalan autonomy, disband the Catalan government, and arrest its leaders. This extreme option could lead to a confrontation that may result in violence. Tensions are high and there is little indication of a softening in position by either side. While the Spanish government will no doubt prevail, it will come at a high political and economic cost.

Recommended Actions

Companies that have a presence in Catalonia should do the following:

• Closely monitor the situation in the media.
• Update employee safety and security guidance. Travel disruption is a possibility due to strikes, road blockages, and demonstrations.
• Review and update business continuity and contingency plans so that all will know how to proceed in the event of disruption.
• Consider moving your company’s legal domicile out of Catalonia and drawing down cash accounts in Catalonian banks.
• Update communication plans and solidify the company’s position vis-à-vis the crisis in Catalonia.