Global Daily – Rajoy takes tough line on Catalonia

by: Aline Schuiling , Nick Kounis , Philip Bokeloh , Nico Klene , Kim Liu

Euro Politics I: Rajoy threatens to take control of Catalonia – Spanish Prime Minister Mariano Rajoy responded to Catalan President Puigdemont’s flirtation with a call for independence for the region in an uncompromising style. He said that the Spanish government would ask the Catalan government officially whether indeed it had declared independence. He then seemed to threaten that the Spanish government would invoke Article 155 in case it confirms it has, which could eventually allow it to suspend the regional government and to take direct control. Mr Rajoy said that it would wait for the Catalan government’s response before it could trigger Article 155. On Tuesday, the Catalan President suggested that the referendum result gave the mandate for independence but first wanted to have talks with the Spanish government. Despite Rajoy’s tough stance, Spanish government bonds rallied on Wednesday. Although we think that Catalan independence would lead to a serious deterioration in Spain’s credit quality (with both the debt ratio and deficit rising significantly) the chances of such an outcome still look low. (Aline Schuiling & Nick Kounis)

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Euro Politics II: Dutch government announces fiscal stimulus – After almost seven months, four parties reached an agreement to form a new government. The new government will implement new measures to the tune of EUR 14.5 bn (1.8% of GDP) by 2021. Expenditures will be raised by EUR 7.9 bn (1% GDP). Social security, defence and education will benefit most from the spending impulse. Total taxes will be cut by on balance EUR 6.4 bn. This is mainly due to lower taxes on labour and income. Taxes on profits and wealth will be cut as well, but the low VAT rate will be raised. Meanwhile, both corporate tax rates will be cut by 4 percentage points. Finally, the maximum tax rate against which mortgage-interest payments can be deducted from taxes will be lowered more quickly. The proposed measures will boost average economic growth in 2018-2021 by 0.2% points per year, according to the CPB. The budget surplus will not improve any further but will remain on balance roughly stable between 2017 and 2021. EMU debt will continue to drop, but less than initially expected. In 2018, the government’s funding need will be slightly higher than we initially had calculated. For more see our note here. (Philip Bokeloh, Nico Klene & Kim Liu)