By Ben Beard
In the wake of the EU referendum last June, the prospect of the United Kingdom isolating itself from the single market encouraged Londoners–many of whom had voted remain–to campaign for independence for the UK capital.
This was never a realistic prospect, of course, but incredibly we are now seeing a similar scenario play out in Spain. More specifically, the region of Catalonia has voted heavily to finally seek independence from the Kingdom of Spain, after nearly 100 years of debate and thriving Catalan nationalism. While former independence movements were placated with autonomy within the Spanish state, the modern campaign recently secured a referendum that saw a decisive vote for independence and caused ripples throughout the whole of Europe.
But what has been the short-term impact of this vote on the financial markets, and how will the creation of an independent Catalan republic change the fiscal landscape in the future?
How the markets first reacted to the vote
In October, Spain’s worst fears were realised as Catalans voted in favour of independence and exacerbated a political crisis that has sent an entire nation into a downward, economic spiral. This has arguably come at the worst possible time, after Spain had enjoyed a period of sustained economic prosperity that culminated a growth forecast of 2.6 percent for 2018.
It was immediately revised to just 2.3 percent after the vote, with the Spanish economy standing to lose an estimated 20% of its GDP should Catalonia become independent.
This represented just the tip of the iceberg, however, with Spain’s stock market coming under increased pressure in the aftermath of the vote. As the nation’s borrowing costs soared and economic sentiment dwindled, for example, investors and forex trading analysts also noted that the Euro (EUR) had begun to drift against the U.S. Dollar (USD). As always during times of political volatility, the markets quickly bore the brunt of rising uncertainty while the demand for secure stores of wealth such as gold began to rise.
The Eurozone also suffered as a result of the vote, and not only because the single currency began to depreciate and lose most of the gains that it recorded during the third financial quarter. It also faced up to the prospect of a sustained decline in one of the region’s best performing economies, while being forced to deal with another political crisis alongside Brexit.
What can we expect in the long run?
Although some have predicted that the latest push for Catalonia independence will end with mediation and the promise of even greater autonomy for region, this is far from guaranteed while the process of reaching an amicable agreement could take years.
The sheer will of the people is also hard to ignore, with around 90 percent of the 2.26 million referendum votes calling for independence from Spain. Even though this turnout represents less than half of the Catalan population, there is a clear demand for change and revolution within the state.
This demand will undoubtedly complicate the resolution process, while the Spanish government’s announcement that it will suspend Catalonia’s autonomy unless the push for independence is abandoned is hardly likely to help matters.
The issue here is economic uncertainty, particularly as the Catalonia region of Spain accounts for a fifth of the nation’s economy and generates significant tax revenues. The prospect of such a sizeable economic loss could cause longer-term declines in the financial marketplace and undermine the banking sector, with the Banco de Sabadell and Caixabank (which are both based in Catalonia) having already seen their share prices drop by 5.3 percent and 4.4 percent respectively.
As the tensions between Spain and Catalonia officials continues to rise and the economy suffers, there is also a serious risk that the former’s credit rating could be adversely affected. Although S & P Global affirmed that Spain’s BBB+ rating would remain in place for now, the group have suggested that a prolonged stalemate could ultimately lower this and send business confidence plunging.
Cryptocurrencies coming into play
In terms of the long-term outlook for the EUR, there could be complication surrounding Catalonia’s choice of currency as an independent state. It is rumoured that the regions’ government has sent representatives to Estonia; to learn first-hand about how an e-residency program could be implemented to create a sustainable model for economic development. At the heart of this would be a plan to issue national, blockchain-based tokens as currency, and a wider, electronic ecosystem that would exist independently of any central bank.
The region’s blockchain experts have already held talks with the Ethereum founder Vitalik Buterin, so that they can be prepared to create an ICO offering should independence be secured. With the proposals in Estonia having recently being rejected, a newly-independent Catalonia could become the first nation to officially adopt cryptocurrency while driving the devaluation of an often temperamental Euro.
Ultimately, the recent drive for Catalonian independence has come at the worse possible time for the Spanish economy, while the nation now faces an uncertain short and long-term future. The same can be said for the stricken Eurozone, which must suddenly contend with more geopolitical uncertainty at a time when Brexit is still far from being resolved.
The hope must be that Spain are able to assuage the people of Catalonia with the promise of greater autonomy. There are questions as to whether this would be possible, however, while the hard-line being adopted by the Spanish government and the decisive nature of the referendum vote suggest that Catalonia has a real chance of finally establishing itself as an independent state.
This will undoubtedly weaken the Spanish economy and financial markets in the long-term, beyond any adverse effects that are caused by the current uncertainty. In fact, Spain would find it hard to recover from the blow of losing Catalonia, particularly in terms of ifs GDP and the value of national company shares.
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Securities Disclosure: I, Ben Beard, hold no direct investment interest in any company mentioned in this article.
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