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European Debt Crisis

The Bloody Flag


Spain has been in the news recently more often than is good for any country and the news has been generally bad. The only bright point has been the easing of pressure on Spanish bonds, thanks to the ECB’s promise to defend the euro at any cost. The 10-year bond remains just under 6%[1] which, while sustainable, is high enough to impose a severe financial burden on the Spanish treasury for years to come. This reprieve from the market may nevertheless serve to give Spain time – time to organize an orderly rescue package, though the government denies it is in the process of doing so.


This bright spot is marred by the continuing deterioration of every other fundamental metric of the Spanish economy. Unemployment is still Europe’s highest at 24.5% and is expected to increase[2]; youth unemployment is at an unbelievable 53% – the future workforce of the nation is emigrating in droves;

Consumption, investment and industrial production continue to contract even as manufacturers’ indices remain mired in recessionary levels; inflation is edging upwards due to a September increase in the value-added tax as well as rising energy prices; private and public debt levels remain at historic highs for the period since the transition to democracy, with very little indication that deleveraging has commenced; artificially high housing prices continue to fall.


Meanwhile, default rates are approaching 10% of outstandings; and the government has already announced that it will miss the deficit target of 6.3% by a substantial amount.


Mr. Rajoy’s government finds itself in the unenviable position of illustrating the classic debt trap: in order to curb rapidly increasing public debt levels to satisfy markets and German taxpayers, the government has felt forced to institute both higher taxes and drastic spending cuts. These measures have led to such a reduction in GDP and consumption that the shortfall in tax revenues is actually greater than the savings from the spending cuts. Perniciously, as GDP falls, the debt-to-GDP ratio increases even if the debt remains constant (which it does not). Thus the government must run ever faster just to keep in place. In fact, it is falling ever further behind. The Spanish economy now looks like it may be spiraling out of control.

The Doleful State

“When sorrows come, they come not single spies, but in battalions.” – Hamlet, Act IV, Scene V

As if this litany of woe were not sufficient, the always latent problem of regional nationalism has raised its head. In the lead, not surprisingly, is the prickly Catalan autonomous community. The Generalitat, led by Artur Mas of the moderate center-left Convergencia i Unió (CiU), has been protesting what it considers to be Madrid’s intrusive and unconstitutional attempts to interfere in and control regional finances.

Mr. Rajoy’s government has indeed passed a Budgetary and Financial Stability Law[3] which permits and directs the central Treasury to intervene in and supervise the finances of any community that requests assistance from the central government to meet its debt obligations. Supporters of the law argue that it is a necessary measure to get a handle on the problem of regional deficits: the Spanish autonomous regions account for approximately 50% of all public spending, mostly in health care and education, and are also responsible for a significant portion of the total fiscal deficit.

Mr. Mas, as well as the Socialist government of Andalucía, accuse Mr. Rajoy of using the crisis as an excuse to impose unconstitutional controls over regions where the Partido Popular was unable to gain electoral victories. There is undoubtedly some truth in both accounts – certainly Valencia, which is a Popular stronghold and one of the most egregious violators of deficit targets, seems to be getting off more lightly than Catalonia or Andalucía.


Mr. Mas was forced to go hat in hand to Madrid to request Treasury assistance for his government, which no doubt pleased Mr. Rajoy. Catalans are no less proud than other Spaniards, however, so Mr. Mas’ visit ended up sounding rather more like an ultimatum than a request for help. Mr. Mas argued that Catalan financial woes arise from the inequities of the Spanish federal system, that Catalonia is the bankroller of the rest of the Spanish provinces. In 2011, Catalonia transferred out $10.3 billion from its budget, but received back only $4.6 billion from the Treasury[4]. Let Catalonia administer its own finances and there would be no deficit and no need for a rescue package from Madrid.

One can imagine Mr. Rajoy’s reaction to the Catalan demand for greater financial autonomy. Nor could he be happy with the picture of Spain painted for already skeptical foreign investors, who now had to calculate the possibility of 20% of Spain’s GDP and 16% of its population seceding and forming its own state. If the Basques subsequently seceded, and there is little doubt that they would, the total loss to Spain would be 25% of GDP and 21% of its population, the most productive and industrialized part of the country.[5]


Mr. Mas then upped the ante. Blaming Rajoy for squandering a “historic opportunity” to firmly establish the framework of a pluralistic Spain, his government called for early elections to be held on November 25th in anticipation of winning a majority for his party and a stronger mandate to govern. Mr. Mas has threatened to then call a referendum on independence for Catalonia. The ballot would read: “Should Catalonia become a new independent member of the European Union?” [6]

This threat provoked loud calls of protest from the government. More ominously, it provoked cries of high treason and threats of military tribunals for pro-independence leaders from elements associated with the Spanish military. Colonel Francisco Alamán, a retired infantry officer and self-proclaimed admirer of the fascist dictator Franco, called for the Spanish Army to fulfill its role as defender of the constitution and labeled the Catalan nationalists as “incorrigibles” and “vultures” who needed to be “taught a lesson”[7]. “Independence for Catalonia?” said the colonel, “Over my dead body.” The colonel went undisciplined and unreprimanded by the Spanish military, government or king, leaving one to wonder just how unpalatable his declarations actually were to the authorities.

On the contrary, conservative politicians were falling over themselves in their haste to look tough against the Catalans. The Spanish Congress immediately voted to prohibit a referendum on Catalan independence[8]. UPyD representative Rosa Díez went so far as to call on the government to suspend the Catalan’s statute of regional autonomy[9]. Alejo Vidal Quadras, a member of the Spanish and European Parliaments for the governing Partido Popular, echoed the call for dissolution of the Catalan government and suggested further that a brigadier-general of the Guardia Civil (National Police) be sent to take over the Mossos de Esquadra (Catalan Regional Police) to put a stop to the independence movement[10].

Living History

At the heart of the Catalan argument is the old animosity between Madrid and Barcelona, the political and economic capitals of Spain. This rivalry expresses itself in the two yearly “clásicos”: the match-ups between Real Madrid (“Royal Madrid”) and FC Barcelona take on a passion rarely seen outside of warfare, and the visceral dislike between the two clubs’ faithful is manifest. The “clásicos” themselves have served as an outlet for the warmer passions of the populace, but the crisis has accentuated these to the point where a meeting on the football pitch is no longer enough to calm the crowds.

Catalans point to an ancient and proud history of Catalan letters, arts, industry and science as well as the real differences in the language. They also point to the traditional rights of the Catalans under various kings of Spain and their long tradition of struggle and even warfare to defend these rights. Indeed, the Catalan National holiday is celebrated on the 11th of September in commemoration of the defeat of the last Catalan troops in Barcelona by forces of the Bourbon king during the War of the Spanish Succession.[11]


Castilians respond that Catalonia was never an independent kingdom[12]and that the union of the various Iberian territories under the crowns of Castille and Aragón is irrevocable. This is codified in the Constitution of 1978 which does not contemplate the possibility of secession. Supporters of a unified Spain also claim that an independent Catalonia makes no sense: it would have to default on its very large debt, it would ruin itself economically[13], and any valuation of the debts and public assets within Catalonia would be inconceivably complicated in the event of a divorce. And Spaniards promise to veto any petition by an independent Catalonia to join the European Union, a petition which Catalans claim would be wholly unnecessary in the first place.

All of this is beside the point: neither historic nor economic arguments carry much weight when the passions of a people are aroused in nationalistic fervor. The history of nationalism is filled with hundreds of examples of invented histories and invented languages used to justify independence along some ethnic or geographic line. Almost every state in Africa and the Balkans is an artificial creation that bears on the most tenuous relation to any sort of “historic homeland”.

Nor will economic arguments help calm the passions of nationalists. By a pure calculation of potential profits and losses, the American colonies would never have rebelled against the British Empire; the Austro-Hungarian Empire would have remained a common market of 80 million people; the Ukraine would still form part of the Russian Empire.

If the Catalans are determined to become independent, neither history, nor tradition, nor economic logic is likely to dissuade them.

The Long-Arm of El Caudillo

If we replaced “Artur Mas” and “Mariano Rajoy” with the names of any Latin American leaders, European newspapers would be full of commentary about “banana republics”, “democracy deficit” and “lack of institutional framework”. Since it is Spain, and Europeans don’t like to criticize their own, they leave out the “banana republic” references[14] – but the other two descriptions remain perfectly valid.

We should recall that Spain was ruled by a fascist dictator of a stripe similar to Benito Mussolini, Miiklós Horthy or Ion Antonescu [15]from 1939 to 1975. During his long rule, Francisco Franco “el Caudillo” abolished the statutes of regional autonomy of Catalonia, Galicia and the Basque Country, prohibited the use of Catalan, Basque and Galician as official languages in government and education, and ferociously repressed every vestige of the defeated Second Republic and all elements associated with it, such as the unions.

Catalans still remember with bitterness and distaste bordering on hatred the legacy of the Civil War. Catalonia was the heart of the Second Republic and Barcelona became Spain’s official capital when the rebels captured Madrid. The rebel air force, along with the Condor Legion, routinely bombed Barcelona and other Catalan cities[16] while the repression following the final fall of the Second Republic cost tens of thousands of lives. So when a Spanish officer talks about occupation, dissolution of the Generalitat, and military tribunals, the Catalans are unlikely to dismiss these threats as mere rhetoric.

Spain’s history as a democracy has been extremely short and rocky. The current king, Juan Carlos, was handpicked by Franco before his death. The Spanish Constitution of 1978 was challenged in 1981 by an attempted military coup. The coup failed and was later viewed as farcical, but no Spaniard alive at the time took it as anything but deadly serious. Since then, Spain has not faced any serious crisis to test the vigor of her institutions and her commitment to democracy…until now.

The immaturity of Spanish democratic institutions is amply demonstrated by the totally different approach taken by mature democracies like Canada with Quebec and Great Britain with Scotland. In both these cases, no one talks about military emergencies or drum-head courts martial. Undoubtedly, in both cases, proponents of a greater nationalism and union exert every effort to convince their fellow citizens to vote against secession: indeed, Mr. Cameron’s government is pulling out all the stops to show the Union Jack on every possible occasion, assisted by the Queen’s Diamond Jubilee and a successful Olympic Games[17]. Yet no one has considered a military or police action to stop a popular referendum. The contrast could not be greater.

The Failure of Europe

If we step back from the drama being played out in Spain and look at the bigger picture, the Catalan question can be properly viewed as symptomatic of an increasingly grave danger to Europe: the failure to create Europeans. Not only is the Scottish question alive and well in the United Kingdom, but independence noises can be heard in Northern Italy and French Corsica whilst the remarkable Belgians were unable to form a government for 541 days due to disagreement between the Flemish and Walloon inhabitants. In fact, the Flemish pro-independence NV-A party has won a resounding victory in the Flemish north in recent municipal elections, and the party leader Mr. De Wever has called for a fundamental realignment of the Belgian state, stopping just short of calling for Flemish independence.[18]

If the “Great Experiment” in European integration was truly as successful as the smug politicians in Brussels and the Nobel Committee would have us believe, then no one would care a fig about Catalan independence. Europeans living in Spain wouldn’t be in the least affected by the Europeans in Catalonia putting up a new flag and claiming the right to self-government. Nothing would change. No new border controls would go up, no new duties or tariffs would be imposed, European law would still supersede national law in those areas where it already does. Europeans living in Madrid could still travel, shop, vacation, work and live just as easily in Barcelona as in Paris or Berlin.

If European integration were truly a success, the independence of Flanders and Wallonia from Belgium would make no more difference than when New Mexico was separated from Texas upon the latter’s joining the American Union. Two more Senate seats and a proportional number of seats in the House of Representatives were added, nothing more. But this is not the case.

The “Great Experiment” is failing through a deficit of Europeans. Sixty years on, the Spanish are still Spanish, and cling to their cultural and geographic uniqueness, as do the Italians, French, Germans and others. This uniqueness is threatened by the Catalans, and so the situation becomes dangerous. But the same can be said of almost every other European nation: I cannot conceive of France letting Corsica go, or of Rome consenting to the separation of the northern half of Italy.

Europe remains a continent of jealous squabbling nationalities. Even as the fundamental flaws in the European economic model were revealed by the deepening and lengthening economic crisis now the demographic and cultural fracture lines are being laid bare. Europe simply lacks the robust institutions to handle the strain and the old loyalties to Flag and Fatherland are reasserting themselves, for lack of anything else.

Some European politicians, led by the EU President Herman Von Rompuy, are hopeful that a bold stroke in the form of a European Constitutional Convention may yet rescue the situation. It would lead to a strong federal state, a United States of Europe. But the historical parallel between Europe and America is weak.

The American states that voted for Constitution and Union had enjoyed their independence from Britain for less than a decade, whereas many of the European states that will be asked to give up their sovereignty have been around for over 1,000 years. The American people were united by a common language, a common religion and buoyed by a shared experience of struggle against Britain. Europe is an amazing patchwork of linguistic, ethnic, and religious groups each jealous of its prerogatives and rights. At the Constitutional Convention, the delegates included many of the same men who had led the colonies during the Revolution, including George Washington, and enjoyed enormous prestige. There are no European leaders of similar standing[19].

Even with all of these advantages, the debate to adopt the Constitution was vociferous, bitter and far closer than many people imagine. The Constitution was approved by popular referendum in each state, and although most approved it quickly, North Carolina and Rhode Island did not join the Union until after the Bill of Rights was approved and President Washington was inaugurated. I am extremely doubtful that a European Constitution as powerful as the American one could possibly survive popular referendums under current conditions, and any Constitution which was not submitted to the people would lack all legitimacy.

The current outlook is bleak, not only for Spain, but for Europe as a whole. Dissolution of the European Union would be a catastrophe for Europeans, as well as a strategic threat to the United States. America has invested her blood and treasure for 71 years to secure the peace, prosperity and freedom of Europe. The United States has always been the greatest supporter of the European Union and the success of Europe is the success of liberal market democracies everywhere. In a world were autocratic states like Russia and China seek any weakness to and roll-back the Western model of constitutional government, a strong Europe allied to a strong America is the last best hope of mankind.

The Bloody Flag

As an American living in Spain, I keep my opinions on the Catalan question to myself. I have many Catalan friends who speak eloquently for and believe fervently in independence for their country; on the other hand, I have Spanish friends and family who are equally passionate on the need to preserve the integrity of Spain whatever the cost.

I will venture a warning to both sides: these situations get out of hand all too quickly and easily. Tone down the rhetoric, stop the provocations and discipline your supporters. Mr. Mas may believe that he is playing a deep game to pressure the Madrid government into concessions, but he may find himself powerless to control the forces he has unleashed. Mr. Rajoy may think that he can safely call Mr. Mas’ bluff and remain in control of the situation, but this control is an illusion.

If Mr. Mas truly believes that a referendum will secure Catalans their independence, without fuss or bloodshed, he is a fool. States are created and sustained by the willingness of their people to take up arms, not by their willingness to cast ballots. If the Catalans want their independence, they had better be ready to fight for it: no one in Europe will lift a finger to help them if the Spanish military fulfills its threats to intervene. Are they ready to see Barcelona turned into Fallujah? No one thought Yugoslavia could fall apart, or that Europe could return to the barbarism of the 1940’s in the 1990’s, but they were gravely mistaken.

Yet it will now be very difficult for Mr. Mas to back down. The business has gone too far, and too many people in his party are supporters of independence. During the celebration of Catalonia’s National Day this year, Catalan authorities claim that over 2 million people came out in support of independence[20]. These claims were of course refuted by Madrid, but there can be no doubt that the crisis, the bailout, and Madrid’s attitude towards Catalan financial autonomy have angered many Catalans who might previously have been indifferent to undecided on independence.

Mr. Mas may be in over his head, but Mr. Rajoy also faces some difficult choices. On the one hand, his constitutional duty and personal convictions are clear: to preserve the integrity of the Spanish state. But how far is he really prepared to go to accomplish this? Does he want to be the first Spanish president since the transition to preside over a bloodbath, perhaps a civil war, with all the connotations it holds to Franco’s brutal regime?

Will he even have a choice? Should he be inclined to let Catalonia go, the Spanish military might decide that Mr. Rajoy should suffer a “temporary illness”, one lasting long enough for some other minister to replace him and order the “necessary measures”. No one would suggest that anything as Third World as a military coup could take place, but civilian control of the military might be less than complete. It might even be abetted by hardliners within Mr. Rajoy’s party.

The cost to Spain, and Europe, of even a successful military operation in Catalonia would be devastating. The fragile Spanish economy would collapse: Catalonia produces 20% of the country’s GDP and Barcelona is its largest port by volume of traffic. Investors would flee the country, not just financial investors but FDI as well. Spanish bonds would soar to Portuguese or Greek levels and if the situation turned bloody enough, and other Europeans were revolted enough, Spain could become a pariah or even suffer expulsion from the EU.[21]

Is this farfetched? Let’s hope so. But if leaders don’t think through all the ramifications and consequences of their actions, the farfetched becomes all too possible.

The Catalan flag, the Senyera, is sometimes called “the bloody flag.” It is a yellow jack with four horizontal crimson stripes. Legend has it that the flag originated during the 9th century re-conquest of Barcelona from the Moors, when the Frankish king Charles the Bald touched Count Wilfred the First’s war wounds and drew his bloody fingers across the Count’s golden shield in gratitude for his service. Catalans nationalists say that these are the bloody marks of the patriots and martyrs who died defending the rights of their people.  

Europe has had enough of patriots and martyrs. For everyone’s sake, this is one time that I sincerely hope to be proven wrong.

Sources and Notes

 [1] MarketWatch, extracted on 17 October 2012
[2] Bank of Spain, extracted on 17 October 2012
[3] Drafted on 27 January 2012, effective 30 June 2012
[4] Presupuestos de las Comunidades y Ciudades Autónomas, Ejercicio 2011, Cataluña, Ministerio de Hacienda y Administraciones Públicas (Spanish only)
[5] Bank of Spain, 2010 data
[6] Gardner, David, “Artur Mas – the man with Spain’s future in his hands,” Financial Times, 02 October 2012
[7] Solé, Richard, “Francisco Alamán, coronel del Ejército español: ‘La independencia de Cataluña? Por encima de mi cadáver,” Alerta Digital, 31 August 2012 (Spanish only)
[8] Aribau, Edgar and Day, Paul “Spain votes to stop Catalan independence referendum,” Reuters, 09 October 2012. The Spanish Constitution allows regional governments to call popular referendums, but only with the consent of the central Parliament. This clause was insisted upon precisely to prevent referendums on independence in Catalonia and the Basque Country.
[9] Unión, Progreso y Democracia (Union, Progress and Democracy) a Spanish center-right party.
[10] “Vidal-Quadras pide intervenir Cataluña con la Guardia Civil,” La Vanguardia, 28 September 2012 (Spanish only)
[11] September 11th, 1714
[12] Technically true. When the present territory of Catalonia was recaptured from the Moors during the 9th and 10th centuries, Barcelona and the surrounding lands were ruled by a Count, and formed part of the Frankish Carolingian Empire. By the end of the 11th century, the Count of Barcelona ruled all the other Catalan counties and was nominally independent, but by the middle of the 12th century, the marriage of Ramón Berenguer IV and Petronilla of Aragón united the territories of Barcelona and “Catalonia” with the Kingdom of Aragón. Since that time, with the exception of a rebellion from 1640 to 1652, the Catalans have never formed an independent state.
[13] “La independencia de Cataluña arruinaría a los catalanes,” La Gaceta, 16 October 2012 (Spanish only)
[14] It should be noted that Spain does cultivate a large banana crop on the Canary Islands and levies substantial import duties on bananas from wealthy nations like Honduras, Costa Rica and Ecuador.
[15] These were the fascist dictators of Italy, Hungary and Romania respectively.
[16] I don’t mean to imply that Catalonia was singled out for special treatment; the rebel forces applied the policy of terror bombing and “cleansing” of civilian populations broadly as a deliberate strategy of the insurrection. See “The Spanish Holocaust: Inquisition and Extermination in Twentieth Century Spain,” Paul Preston, 2012, New York, W.W. Norton & Company. ISBN 0-393-06476-X.
[17] Volkery, Carsten, “Cameron lets Scots Agonize over Independence,” Spiegel Online, 16 October 2012
[18] Hawley, Charles, “Belgian Separatists  Threaten ‘Renewed Instability’”, Spiegel Online, 16 October 2012
[19][19] See “The Glorious Cause: The American Revolution, 1763-1789,” Robert Middlekauff, Oxford History of the United States, Oxford University Press, 2nd Edition, 2005, ISBN 978-0195162479.
[20] The organizers of the rallies claimed 2 million people participated, the local police estimated 1.5 million participants, and the newspaper El País calculates 600,000 participants. Piñol, Angels, “El independentísmo catalán logra una histórica exhibición de fuerza,” El País, 11 September 2012 (Spanish only)
[21] There is no legal mechanism by which a member state can be expelled from the Union, but if the situation deteriorated into a Yugoslavia-style civil war, who knows what measures Brussels might take? It is no more inconceivable than the possibility of civil war in Spain in 2013.

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