Spain has good reasons for wanting the best possible Brexit deal as the Spain-UK relation has become increasingly significant in terms of trade, direct investment, tourism, fisheries and the number of Britons living in Spain, by far the largest group of British expats in any European country.

As a result of the magnitude of relation, Spain can be said to be in the soft and not hard camp, though this makes it sound as if Brexit is like a boiled egg, which it may well be as it is proving hard to crack. We should not forget, however, that all the EU countries have to agree to the terms of any deal. Spain cannot go out on a limb.

Except for the contentious issue of Gibraltar, the UK overseas territory long claimed by Madrid since it was ceded to Great Britain in 1713, the relationship between Spain and the UK, since Spain joined the EU in 1986, has blossomed, underscored by the state visit of King Felipe and Queen Letizia in July.

Felipe González, a former prime minister, calls Gibraltar the ‘grit in the shoe’ in the Spain-UK relationship, while British ambassadors in Madrid liken being summoned to the Spanish Foreign Ministry on Gibraltarian issues to ‘going to the dentist’.

A ‘hard’ Brexit would be particularly damaging for Spain. A report written for the Spanish government’s Brexit commission earlier this year said it could cost the economy up to €1 billion in lost exports, while the UK’s departure from the EU could result in Spain having to increase its EU budgetary contributions by €888 million and some regions in losing their European funding. This would not be welcome news for a government that only last year finally managed to meet the budget deficit target set by the European Commission for the first time since the onset of Spain’s economic crisis in 2007.

The repercussions of a hard Brexit on the 800,000 Britons which the report said were living in Spain and the 300,000 Spaniards in the UK would be significant.

I should clarify these figures: the 800,000 one is based on 300,000 Brits registered in town halls, known as empadronados, and 500,000 estimated to own properties in Spain and who spend part of the year there. The UK’s Office for National Statistics puts the number of registered Spaniards at around 130,000. In fact, there are fewer than 300,000 Brits in Spain, as we shall see, as they are already leaving.

Close to 11,000 Spaniards are at British universities (few British undergraduates, by comparison, are at Spanish universities). EU citizens are entitled to study in other EU member states, pay domestic fees (in some cases less than a third of the international fees) and sometimes get student loans. When Britain leaves the EU a new arrangement with European countries regarding the rights of students will be needed.

I will now look at some of the Brexit aspects.

The trade relation

Two-way trade of goods between Spain and the UK rose from €12.3 billion in 1995 to €30.2 billion in 2016, and continues to grow. Spain has enjoyed a trade surplus with the UK almost every year since 2002 (close to €8 billion in 2016).

The surge in sales to the UK has helped Spain notch record exports records every year since 2009, a factor that played an important role in the economy’s recovery from a deep recession.

Spain’s exports to the UK last year accounted for 7.5% of the total, the third largest amount after France and Germany. The sector whose exports to the UK have increased the most is the motor industry (from €1.6 billion in 1995 to €5.4 billion in 2016). Spain is home to many of the major car producers including VW. It also has a thriving auto components sector.

Spain’s imports from the UK were 4.1% of the total in 2016, making Spain the sixth largest supplier.

As the UK will, it seems, though nothing at this stage is certain, come out of the EU single market and the Customs Union, another trade arrangement will have to be made. Options range from ‘doing a Norway’ and retaining membership of the European Economic Area, which would allow unfettered access to the single market but would require a large contribution to the EU budget and would not allow the UK to impose restrictions on immigration, to ‘doing a Switzerland’ and negotiating bilateral deals with the EU. But the Swiss have no agreement with the EU on free trade in services, a major area for the UK. A further option would be to go it alone as a member of the World Trade Organisation, the falling off the cliff option if there is no Brexit deal. The UK government wants a bespoke deal with the EU. Trade talks don’t look like beginning before December.

Direct investment

The UK was the preferred destiny of gross Spanish direct investment in 2016, when it totalled €8.60 billion, 37% of the total and more than double that in 2015.

Two Spanish banks are part of the UK banking system. Banco Santander, the euro zone’s largest bank by market capitalisation and one of the global systemically important banks (meaning it is too big to fail), is the UK’s third-largest mortgage lender. Santander UK generates around 20% of Santander’s total profit.

The much smaller Banco Sabadell took over TSB and its network of 614 branches in 2015. Sabadell makes around a quarter of its profit in the UK.

At the moment the so-called ‘passporting’ rights for members of the Single Market allow UK-based banks to offer financial services to companies and individuals across the EU unimpeded.

Santander says it is ‘totally committed’ to keeping its operations in the UK and does not plan to relocate any of its employees. As part of a global group, Santander UK has more options available to it than its peers when considering how to address the uncertainties over the UK’s exit from the EU.

Telefónica began operating in Britain in 2006 after buying O2, which operates in the UK, Ireland and Germany. It tried to sell O2 in the UK to Hutchison Whampoa, but the European Commission blocked the sale on the grounds that it would create a monopoly.

The British market is also crucial to Iberdrola since it acquired Scottish Power in 2007.

Santander, Telefónica and Iberdrola represent a whopping one-third of the Ibex-35, the benchmark index of the Madrid stock market, so if Brexit dents their share prices in a big way when the UK’s departure from the EU kicks in the index would feel it intensely.

Infrastructure and construction companies, such as Ferrovial and FCC, also have significant interests in the UK. Ferrovial holds large stakes in four airports and has won two big contracts for the high-speed rail.

Hotel chains such as Melia and NH also operate in the UK and last, but not least, Inditex, the world’s biggest fashion retailer, whose flagship store is Zara, has more than 100 stores across the UK.

Corporate UK interests in Spain, in comparison, are much smaller than those of Spanish companies in the UK. The stock of Spanish direct investment in the UK stood at €82.5 billion at the end of 2015 (latest figure), considerably higher than the UK’s stock in Spain of €44.7 billion, according to Spanish figures.

The Brexit impact on foreign direct investment will obviously depend, like so much else, on the type of agreement the UK reaches with the EU. By no longer being in the Single Market, the UK would be a less attractive export platform for multinationals as they would bear potentially large costs from tariff and non-tariff barriers when exporting to the rest of the EU.

Another factor is that it would be more difficult for multinationals to manage supply chains and co-ordination costs between their headquarters and local branches, and intra-firm staff transfers would be more difficult with tougher migration controls.

Citizens

We Brits love Spain. Close to 18 million British tourists came to Spain last year, almost one-quarter of the total, and close to 237,000 Britons are officially registered in town halls as living in the country at the latest count, the largest group of British ex-pats in Europe and the third largest number of foreigners in Spain after Rumanians and Moroccans.

Brits play a major role in some local economies, particularly during the low tourism season. There are, for example, 74,000 Britons who live in the province of Alicante all the year round and 50,000 in Malaga.

The legacy rights for what we call the stock of British citizens in Spain (i.e. those already in the country like myself) and by extension of Spanish citizens in the UK have become a burning issue.

Where are we now?

Progress has been made on most aspects of social security payments and healthcare coverage. At the moment, healthcare is covered by reciprocal agreements under the EU’s aegis. The current situation in these areas looks as if it will be maintained under bilateral agreements, including the S1 scheme for pensioners living outside the country where they worked plus the aggregation, export and uprating of pensions.

Key issues, however, are outstanding, perhaps the most important of which is that the EU might limit “further movement rights” after Brexit. Brits in Spain, and of course in all EU countries, would have their rights guaranteed in one country, but be unable to travel and work freely in the other 27 EU countries. Other areas are restrictions on recognition of professional qualifications plus family reunification, the lifetime right to return and voting rights. Michel Barnier’s words that “Brexit should not alter the nature of people’s lives” has yet to be realised.

In the event of a bad deal for Brits already in EU countries, or falling off the cliff and no deal at all, there is always the option of taking out Spanish nationality. The playing field in this area, however, is not level. Britons in Spain need to prove 10 years of residency in their application (five years for Spaniards in the UK) and have to renounce their British citizenship (Spaniards do not have to do the same in the UK). A Briton granted Spanish nationality has to sign a form declaring he has no other nationality, although this has no effect on British citizenship itself. There are no known cases of a passport being subsequently taken away, but with data sharing becoming ever more sophisticated it is harder to keep the second passports secret from the Spanish authorities.

A petition which I helped to launch asking, among other things, for the same right to be granted for long-term UK residents in Spain as a 2015 law that allowed the descendants of Jews expelled from Spain in the 15th century to claim a second Spanish passport has attracted 21,000 signatures.

The Daily Star, that most reliable of newspapers, suggested that the aftershocks from Brexit could even trigger Spain’s exit from the EU – in, what it termed ‘a desperate bid to maintain boozy Costa holidays’. This, of course, is nonsense.

Spain remains predominantly pro-EU –membership is supported across a broad political spectrum– and a Sprexit is definitely not on the cards. All the parties represented in parliament support Spain’s continued EU membership. A poll by the Pew Research Centre earlier this year showed 65% of respondents in favour of holding a referendum on the issue but only 13% supported leaving the EU.

The country has all the ingredients –massive unemployment, growing inequality, an influx of immigrants and the loss of trust in established political parties– to produce a right-wing populist anti-EU presence in politics, but remarkably has not done so, unlike other countries, notably France, the UK and most recently Germany.

Among the reasons are: the prevalent and persistent pro-European sentiment, which is higher than average; Spaniards are the least inclined of any European people to support returning power from the EU to the member states; they hold favourable attitudes to globalisation compared with other EU countries; and anti-immigration sentiment is also well below the European average.

Other factors are the relative weakness of Spanish national identity, partly explained by the strong nationalist movements in regions such as Catalonia and the Basque Country, and the association of the extreme right with the Franco dictatorship.

Populism in Spain has gained a foothold in the far-left Podemos, but even that party is not calling for Spain to leave the EU.

Gibraltar

Gibraltar voted 96% in favour of remaining in the EU: 19,300 to stay and just 800 to leave. The UK’s exit from the EU will make the Rock’s border with Spain an external and not an internal EU frontier (which as, at present, has to be kept open under EU rules). As such, Spain could close it and a legal challenge by the UK/Gibraltar would be more difficult. Some 12,000 workers, mainly Spanish, cross the border every day.

The Spanish government has made it clear that the Rock’s post-Brexit relationship with the EU must have the backing of Spain. This position was included in the EU’s guidelines for the Brexit negotiations.‘Gibraltar leaves the European Union when the UK leaves, not because it is part of the UK, but because the UK is responsible for its foreign affairs’, Prime Minister Mariano Rajoy said. ‘From then on, all relations between the EU and the UK or those that affect Gibraltar must take into account Spain’s opinion and have its favourable vote’.

The Sun’s response to that was “Up Yours Senors,” recalling its famous headline in 1990 “Up yours Delors” over concerns about a common European currency.

For the Rock’s Chief Minister, Fabian Picardo, the most important voice in any dialogue between London and Madrid is Gibraltar’s.

Gibraltar and Spain have toned down the rhetoric since the departure of Margallo, the previous foreign minister. Both sides maintain their well known red lines on sovereignty but without making a big song and dance about it. There is no formal communication between the two governments but plenty of contact at the local level between Gibraltar and the Spanish area near the Rock.

The more pragmatic Alfonso Dastis, the current foreign minister, has said he will not make an agreement between the EU and the UK on Brexit conditional on recovering sovereignty over Gibraltar. Last month he said “we don’t talk about a border, we talk about a fence, and we are certainly going to keep it open.”

The key issue for Gibraltar is not the Single Market, as 90% of business is done with the UK itself, but the fence. Some 7,000 Spanish workers and around 5,000 more skilled workers from other countries cross every day and without them the Gibraltarian economy, largely based on tourism, financial services and online gambling companies, would suffer and in an extreme scenario could be crippled.

The regional government of Andalusia has voiced its concerns over possible restrictions on crossing the border. The area known as El Campo de Gibraltar, where most Spanish workers who cross the border live, has an unemployment rate of close to 40% compared to flourishing Gibraltar which has full employment (its jobless rate is less than 1%). Studies show that Gibraltar accounts for around 25% of the GDP and jobs of the Spanish region around the Rock.

Gibraltar is a small economy and it is very easy to reshape it. According to Picardo, “If a storm comes and you are a small cork, you might get wet, but you will not sink. A large vessel has more serious problems. Gibraltar is like a small cork.”
When King Felipe addressed the UN General Assembly last year, he called Gibraltar ‘the only colony in European territory’ – supported by UN resolution 1514 (XV) on territorial integrity – and invited the UK to ‘comply with the UN mandate and put an end to this anachronism with a solution agreed between the two countries that re-establishes Spain’s territorial integrity’.

London argues that the principle of territorial integrity does not override the principle of self-determination. Not only that, the UK Government stresses at every opportunity that it will neither change or discuss Gibraltar’s sovereignty against the wishes of the Gibraltarians (the so-called double-lock).

Madrid is offering Gibraltar co-sovereignty as a way for the Rock to continue to be part of the EU, but this has been roundly rejected. ‘We have made a very generous co-sovereignty offer, but two can’t dance if one doesn’t want to’, said Dastis. ‘And if the UK doesn’t want to negotiate and the population of Gibraltar prefers to make its own way outside the union, then that’s up to them. But if they want, in some way, to maintain a relationship with the EU, Spain will make good on its interests’.

Other challenges

The economy

The economy has recovered from a deep crisis and is growing at more than 3% for the third year running, but the unemployment rate remains stubbornly high at 17%, though well down on the peak of 27% in 2013. 3.9 million people are still without jobs. Even in 2007, at the height of the boom, Spain’s jobless rate was 8%, a disastrous level by the standards of other developed countries such as Germany and the UK. Companies complained during the boom they could not find qualified workers to fill posts, which led some economists to put Spain’s structural unemployment at 8%, regardless of the economic cycle.

The government is trumpeting the growth rate, one of the highest in the EU, but we should bear in mind that the pre-crisis GDP was not recovered in real terms until the second quarter of this year.

Spain has been helped by tailwinds in the form of low oil prices (Spain is a big importer of energy) and very low interest rates, thanks to the European Central Bank’s monetary policy accommodation, that are easing the country’s heavy debt burden (public debt has tripled in the last decade to 100% of GDP).

Today’s growth, furthermore, is more balanced than it was during the boom period, which, among other things, generated a huge current account deficit of 10% of GDP.

The current account has been in surplus for the last four years, greatly helped by bumper tourism, and inflation is low. This year will see yet another tourism record: the forecast for the year is 84 million tourists, 10 million more than in 2016.

The budget deficit reached 4.5 percent of GDP in 2016, and is on track to slide under the 3-percent threshold set by the European Union by 2018. Once that threshold is reached, the country can exit the excessive deficit procedure of the European Union it has been under since 2009.

Some 1.5 million more jobs, however, are still needed to recover the pre-crisis employment level. The government’s 2012 labour market reforms made the firing end more flexible and lowered the economic growth threshold for job creation. But most new jobs are on temporary not permanent contracts, and there is still a gulf between outsiders (those on permanent contracts) and insiders (those on temporary contracts).

Jobs are being created at a faster pace than before. Nearly one quarter of all euro area jobs created over the past year are in Spain, primarily in the service sector where almost 80% of people now work. Yet, just over half of the new jobs are temporary ones.

One-quarter of total workers are on temporary contracts, some 10 points higher than the EU average. Last year, 12.5% of the total contracts of almost 20 million signed were for waiters, just over half of which were for less than seven days. As contracts are for shorter and shorter periods, many more are being signed.

Greater job precariousness or flexibility, depending on how you view the situation, were graphically underscored on 30 June when a record 313,141 jobs were lost as contracts were not rolled over, while on 3 July a record 520,301 contracts were signed, mostly for the tourism industry.

The situation is especially dire for low-skilled youths and for those out of work for longer than a year. More than 40% of those under 25 are unemployed, down from a peak of 53% in 2014, and close to 10% of those without work have been jobless for more than a year (in 2007, this rate in Spain was almost the lowest in the EU).

Part of the unemployment problem lies in the Spanish economic model, disproportionately based on tourism (a seasonal industry) and construction (an unsustainable sector), though the latter to a much lesser extent than during the debt-fuelled property boom which collapsed in 2008. In 2006, the number of housing starts was a staggering 856,000, compared to an estimated 76,000 this year. There are today 1.6 million fewer workers in the construction sector than in 2007

The Canary Islands is an extreme example of the economic model: more than 13 million tourists went there in 2016 (more than six times the population) and yet the unemployment rate was 25%.

The education system is also at fault: at one end, the early school leaving rate for 18-24 year olds is still high at 22.7% (36.7% in 2006), which has created a large pool of poorly qualified workers, and at the other end more than two-thirds of graduates say they are overqualified for the jobs they find.

Unemployment will remain an albatross for governments.

Last, but far from least, is the follón in Catalonia, the most serious constitutional crisis since the failed coup in 1981. Unlike that crisis, this one has no easy solution. We are living through sad times. All the stereotypes that Spaniards are inacapable of living together are being reinforced.

I am going to try to be dispassionate in the very heated debate over Catalonia. A colleague in Madrid suggested that before talking about the crisis I should take a deep breath and stick my head in a bucket of ice.

There is no doubt that the referendum was illegal. Something very different is whether it was legitimate.

It violated Spanish law, UN resolutions on the right to self-determination, the recommendations of the Council of Europe’s Venice Commission, an agency of reference on constitutional matters and referendums, Catalonia’s own regional charter, the Estatut. Even the Catalan parliament’s lawyers questioned the validity of the fast-track procedure for approving the bill for the referendum.

Only Spain’s national parliament and the central government have the power to call referendums.

What we are witnessing is collision between self-determination and Spanish state sovereignty, between the supremacy of Spanish law and laws passed by the Catalan parliament.
Perhaps nothing captures how far off the rails we have reached today than the divergent treatment given to two people, Arnaldo Otegi, a condemned former member of the Basque terrorist group ETA, who continues to press for an independent Basque Country, and Joan Manuel Serrat, the Catalan singer-songwriter, an iconic figure censored by the Franco regime. While Otegi was guest of honour at the Catalan national day on September 11, Serrat was labeled a traitor and fascist for questioning the illegal referendum held on October 1. The film director Isabel Coixet cannot leave her house in Barcelona to take her dogs for a walk without being insulted, and has moved to Madrid.

How did we get here? Very simplistically. The turning point came in 2010 when Constitutional Court ruled there was no legal basis to recognise Catalonia as a nation and that the Catalan language should not take precedence over Castilian Spanish, among other things. This followed a challenge by the Popular Party, then in the opposition, to the new Catalan autonomy statute which was approved in 2006 in a referendum in the region and ratified in the Congress and Senate in Madrid. The court’s ruling, in my view a big mistake, took a staggering four years and inflamed nationalists who until then were not pushing very hard for independence.

This situation was aggravated during Spain’s long and harsh recession as it fed the grievance that Catalonia was paying a disproportionate amount to the Spanish coffers and not receiving enough in return.

Tensions came to a head in June 2011 when protesters over the economic crisis surrounded the Catalan parliament, forcing ministers to reach the building by helicopter. As of then, the cause of independence took off and led to today’s situation where conservative nationalists and more rabidly pro-independence parties such as Republican Left of Catalonia, grouped in Junts pel Sí, rely for their support in parliament and hence continuation as the regional government on an unholy alliance with the anti-capitalist CUP, a party that is leading at the grass roots level the independence movement. Junts pel Sí and CUP between them have 72 of the 135 seats in the Catalan parliament (47.8% of the votes cast).

Not only was the referendum illegal, but it came after a series of claims made by separatists that are demonstrably false. For instance, it is not true – and European treaties reflect this and endless assertions by the European Commission – that an independent Catalonia would automatically stay in the EU and the euro zone. Nor it is true that voting is an exercise in democracy in all cases (dictatorships also organise referendums, as happened during the Franco regime). Nor is it true that Catalonia would be more wealthy on its own, which is not the same as saying that it could be economically viable as an independent state. Nor are comparisons with Scotland viable. Scotland’s referendum was an agreed process and Catalonia’s unilateralist.

More than 1,300 Catalonia-based companies and banks, including some big names such as CaixaBank, Spain’s third largest bank, and the cava producer Codorníu have voted with their feet so to speak and moved their legal headquarters, and in some case tax domicile, because of the uncertainty. Even the lottery business in Sort, which has an uncanny record for producing winning tickets (not for nothing does Sort mean luck in Catalan), has moved its domicile and changed its name to La Suerte.

The move will deal a heavy blow over time to the tax base of one of Spain’s richest regions and is already denting Catalonia’s much-vaunted image as a place open for business and a magnet for foreign investment. Tourism there is down.

Catalonia plays a key role in the Spanish economy. The region’s population of 7.5 million (16% of the total) generates around one-fifth of Spain’s GDP, one quarter of total exports and received 18 million of the 75.3 million tourists last year. Its GDP is larger than Portugal’s.

Was Madrid’s heavy-handed response to the referendum justified? Human Rights Watch has condemned the excessive use of force by the police. We were all shocked by the images of riot police beating old ladies over the head with batons in order to stop them voting. Slogans saying “Franco ha vuelto” have appeared on Catalan walls.

2.3 million people voted (43% of the electorate), 90% of them in favour of independence, although these figures have not been independently identified.

Should the central government have allowed the referendum and then ignored its result? I have no clear cut answer.

While the Civil Guard behaved in a much more disciplined way, the national police lashed out. The orders were to prevent the referendum taking place, which is what the Civil Guard did successfully in some areas and generally without resorting to violence, while the police took indiscriminate aim at voters and even threw some people down stairs. There is no doubt that the police violence was a major propaganda coup for the secessionists.

By the way, of the 900 injured only four were hospitalised. Secessionists exaggerated the scale of the injured and of the injuries, which is not to belittle the violence used.

The secessionists’ communication with the foreign press, part of their attempt to internationalise the conflict, has also been successful.

The referendum has put King Felipe in an awkward position. As head of state it is his duty to oppose a break up of that state. But the tone he struck in his televised address to the nation after the referendum, in my view, was more that of spokesman of the central government than head of state, rising above the political establishment and offering a vision for the future. He had a great opportunity to speak of the enriching nature of unity and diversity, and missed it. And he could have ended by speaking in Catalan. I say this as an ardent admirer of him and as someone who knows him. He is the honorary president of the think tank I work for.

That said his speeches do have to be approved by the Moncloa, the prime minister’s office.

Today and tomorrow will determine a lot, as the Senate, where the Popular Party has a majority, is meeting to decide whether to activate Article 155 of the Constitution, the so-called nuclear option and impose direct rule in an unprecedented move. The centrist Ciudadanos, a party that started in Catalonia, backs the government and also the Socialists, though they are wavering a bit. Carles Puigdemont turned down an invitation to address the Senate.

What next?

A recent poll shows that the Catalans supporting a solution of Spanish constitutional reform and better self-government is around 70% (even on the secessionist side 49.1% agree while 45.5% oppose a compromise.

Clearly the problem can no longer be left to the courts. Some kind of political compromise will be required to encourage the significant proportion of the Catalan population in favour of independence to be comfortable within the Spanish state.
But the two sides are at the moment so entrenched that a dialogue is a non-starter; furthermore, there are divisions in the ranks of the secessionists. The language on both sides is aggressive.

Imposing Article 155 could well lead to civil disobedience.

An early Catalan election could also be called, either by the central government or by the Catalan government, which might halt activation of 155. The central government hopes the unionist parties, representing the so-called silent majority which has become less silent, would reverse the current situation and win more seats in the regional parliament than the parties in favour of independence. What happens if they don’t? I leave you with that thought.