Tying ourselves in knots

On 30 November 2009, Saint Andrew’s Day, the Patron Saint of Scotland, former First Minister Alex Salmond presented the government’s white paper, representing the conclusion of two years of public debate as to the country's political future. Referring to Catalonia, the paper highlighted the success of its public broadcasting model, while the Basque Country’s crowning achievement was seen to be its financial agreement with the Spanish state. The Scots are not the only ones who have a liking for the Basque funding model, so too do the Catalans. Now that 1 October has been named as the date of the referendum, some rather old-sounding alternative suggestions have started to crop up: “find an alternative, middle way", "try to negotiate like the Basques" or "adopt the German federal model". Are they real alternatives or are they just trying to tie us up in knots? Let’s take a closer look.

The Basque confederal model. In short, the three Basque provincial governments are responsible for "executing, managing, settling, collecting and inspecting all taxes, except those arising from customs and fiscal monopolies". The so-called “quota” is the amount the Basque Country agrees to pay for expenses managed exclusively by the Spanish state (defence, museums, the Crown, embassies, etc.); with a small percentage devoted to the territorial compensation fund.

Let’s take a look at the past. The Catalan political parties that prepared the draft Statute of Autonomy of 1979 were criticised for failing to call for a financial agreement like the Basques (and Navarrese) have with Spain. Of the twenty MPs and senators of the Spanish Cortes [as its bicameral parliament is known] who served on the drafting commission of the Statute of Sau —the so-called "Parents of the Statute”--, four suggested including the possibility of some sort of a financial agreement (CDC and ERC), while the rest were opposed to it or argued it was not the right time to ask for one (the PSC, the PSUC, UCD and AP). A moderate nationalist coalition (CiU) won the 1980 election, forming a minority government. However, the government’s precarious position led them to drop their demands for the Basque system.

In spite of the doubts, fears and the shortsightedness of the Catalan politicians, the transitional regime approved by Adolfo Suárez’s government, with the PSOE leading the opposition, already determined who would have to collaborate in filling the nation’s coffers: Catalonia and the Basque Country.

How come the Basque Country managed to get off so lightly when it came to paying its way? Because it fought long and hard for such an outcome, before, during and after the drafting of the Statute of Autonomy of the Basque Country. Nevertheless, there are also economic reasons that explain what happened. In 1980 the Basque Country accounted for 7.45% of Spain’s GDP, according to data from Spain’s National Institute of Statistics: one percent more than Galicia and Castile and León. Catalonia, which accounted for 19.12%, was the most industrialised region and the economic workhorse of a Spain that was still under construction. Therefore, there was no way that Catalonia would have been able to enjoy the same financial agreement as the Basques. Giving up the Basque Country was a luxury; Giving up the Catalan contribution was unthinkable. Madrid was perfectly aware of this at the time, as it is now.

German fiscal federalism and ordinality. The President of the PSOE, Cristina Narbona, believes that the solution to Catalonia’s position is to make Spain a federal state, like Belgium or Germany. Let's take a look at Germany’s fiscal federalism.

The Federal Republic of Germany is a single-nation country, not a plurinational one like Spain. The federated states (Länder) have the power to collect taxes but cannot legislate to adjust their fiscal policy. However, each Länder is, or was, free to manage its tax revenues and expenditure. To level the playing field between the richest and the poorest federal states, especially those from the former German Democratic Republic, transfers are made at three levels: from the federation (Bund) to the Länder and between the Länder and, where necessary, this is complemented by a programme of investments and federal aid to those states with fewer resources. Such an arrangement is known as vertical and horizontal equalisation.

Nevertheless, the system had an unfortunate aspect: the high degree of redistribution punished the wealthiest Länder such as Bavaria, Baden-Württemberg and Hessen, who saw that their fiscal contributions, above the average for the other Länder, was not reflected in their budgets. As a result, in 1998 they challenged the law of financial compensation in the Constitutional Court. The following year, the court handed its ruling: "The budgetary differences between the federal states ought to be reduced, but not eliminated, and it is not possible to alter the order determined by their wealth and fiscal capacity". In other words: the court rejected the "equalization of resources” and upheld the "principle of ordinality".

In 2013, Bavaria and Hessen once again appealed against financial compensation in order to prompt a global reform of the system. In reality, the Bund received more money than it spent, while the Länder were unable to adequately fund all their regional powers. Bavaria and Hessen’s argument can be summed up in a sentence: "In favour of solidarity and against unjust and disproportionate contributions". Last October, the federal government and the Länder reached an initial agreement: more cash transfers from the federation to the federated states but fewer transfers between the Länder. The downside is greater control by the federal government of regional expenditure. Fiscal federalism is becoming re-centralised.

Four decades have passed and Catalonia’s economy continues to be in the lead in terms of GDP, industrialisation, exports and fiscal effort, with a 21.2% contribution (2015) to the state’s coffers. If the principle of ordinality were to be applied, Catalonia would take third place both before and after the redistribution established in the Spanish financing model of its autonomous communities. Instead, for now, Catalonia is in tenth place in terms of the funding it receives.

If achieving an financial system similar to the Basque Country’s is almost impossible within the framework of Spanish regional funding system, calling for a "middle way" means returning to the old policies of "a bird in the hand". Jordi Pujol’s [president of Catalonia from 1980 to 2003] tactic of negotiating with Madrid, reviled at the time, seems to be staging a comeback. If this is not the case, at least, let someone explain what this middle path involves exactly. As for German fiscal federalism, always under tension, the president of the PSOE is forgetting an important fact. There is no need to reform the constitution or have a federal system to achieve what the German Länder have achieved by appealing to the Constitutional Court: respecting ordinality. This principle could have been implemented many years ago, if there existed the political will to reform the system. But, as the old Castilian saying goes: "What can’t be done, can’t be done. And it’s also impossible".