Catalonia's separatist parties won a snap election and will use their popular mandate to try to hold a referendum on independence, adding more economic and political stress to Spain, a country on the verge of a sovereign bailout.
Exit polls Sunday night showed that the liberal nationalist Convergence and Union party (CIU), led by Catalan president Artur Mas, won a majority of the votes, allowing him to form the next coalition government. He will probably join forces with a smaller, pro-sovereignty party called ERC, the Catalan Republic Left.
The People's Party of Spanish prime minister Mariano Rajoy won only 16 to 18 seats in the 135-seat Catalan regional assembly, according to the exit polls, compared to 18 seats in the last election in 2010.
Mr. Rajoy's poor showing is an indication that the Catalan separatist movement is gaining momentum as the Spanish recession deepens and unemployment soars, creating tensions between the national government and the country's semi-autonomous regions.
Polls show that about 50 per cent of Catalans support independence.
Before the election, Mr. Mas vowed to hold a referendum on independence within four years if he were to win. He and his economics minister, Andreu Mas-Colell, have been stoking separatist fervor by arguing that Catalonia is suffering unnecessarily because it has as a lopsided fiscal deal with Madrid that sees Catalonia transfer more tax money to Madrid than it gets back in national government spending.
Data provided by Catalonia's economy department claim that the region's "fiscal deficit" with the Spanish government has ranged from 6 per cent to 8 per cent of Catalonia's gross domestic product a year since the mid-1980s. In 2009, the latest year available, that translated into Catalonia sending €16.4-billion more to Madrid than it retrieved.
"We would like to have full fiscal responsibility to control entirely our fiscal income [but] our hands are tied in every way," Mr. Mas-Colell said in an interview with The Globe and Mail earlier this month.
The Catalan independence movement is could not come at a worse time for Spain, as its economy unravels, youth unemployment shoots beyond 50 per cent and its banking system falls apart.
The national government recently negotiated a bank bailout from the EU that may cost €100-billion and Mr. Rajoy is considering a sovereign bailout from the European Stability Mechanism (ESM), the €500-billion bailout fund, and the European Central Bank.
If the bailout is triggered, the ESM and ECB would buy Spanish sovereign bonds in an effort to bring down, and stabilize, the country's borrowing costs. ECB president Mario Draghi has said the bailout program is ready to go, but will not proceed without a formal request from the Spanish government.
In a recent note, Deutsche Bank economists said that "the current turmoil in Catalonia could be one of the catalysts which ultimately would force Spain into officially requesting European support."
Mr. Mas has said Catalonia can have a "brilliant" future if it were untethered from Spain. He described Sunday's poll as "the most decisive elections in the history of Catalonia."
The election result will trigger a showdown with Mr. Rajoy, who is philosophically opposed to devolution and has said a regional referendum on independence would be unconstitutional unless the constitution itself were changed, an unlikely event as long as he is prime minister.
Catalan independence would be a blow to the Spanish economy. Catalonia, whose capital is Barcelona, is Spain's biggest economic region and, traditionally, its industrial powerhouse, with strong trade and investment links to Germany, France and Italy. Catalonia is responsible for about 19 per cent of Spain's GDP.
If it were independent, it would be the 13th-biggest economy in the European Union, which now has 27 members. Measured by GDP per capita, it would rank 10th, just behind Finland but ahead of Britain.
Mr. Rajoy's government, however, is in a powerful negotiating position with Catalonia, which, like the rest of Spain, is in deep recession. Catalonia's economy is in such dire shape that it has been shut out of the debt markets and was forced to negotiate €5-billion in emergency credit from the national government to pay its bills.
Mr. Mas-Colell, the economics minister, has admitted Catalonia is reliant on Madrid for financial survival. "Our only bank is the Spanish treasury," he said.
Catalonia, saddled with €42-billion in debt, the highest among Spain's 17 regions, expects its economy to shrink about 1 per cent this year, in line with the rest of the country. It sees no improvement next year as Spanish austerity measures damage growth and the 17-country euro zone slips back into recession. Catalonia's unemployment rate, at 23 per cent, is only slightly less than the national jobless figure of 25 per cent.
The Catalan election came one day before euro zone finance ministers make yet another attempt to unlock more than euros 31-billion in overdue aid for the Greek government, which is close to running out of money. The Greek bailout package has been delayed for months because of differences over debt targets.