Schrödinger’s Cat-alonia

10 Oct 2017

  • Populism again casts shadow over the European Union
  • Impasse in Spain shows few signs of abating
  • Difficult to have conviction at the moment, but an opportunity to tactically trade dips in the near term

Barcelona vs. Madrid, but not on the soccer pitch

Catalonia’s controversial independence referendum result earlier this month has plunged Spain into turmoil. Catalan authorities claimed that almost 90% of voters backed independence, in a referendum with a paltry 43% turnout, one that Spain’s constitutional court deemed illegal. It didn’t help that the polls were marred by pockets of violence where the Spanish police prevented voters from entering polling stations, and even confiscated ballot boxes. Two weeks in, the future of Catalonia remains up in the air with both sides making provocative statements that are sugar coated in a superficial gloss of diplomacy. The Catalan President, Carles Puigdemont, effectively declared independence but announced he was suspending the declaration in the hope of entering into a dialogue with Madrid about how to resolve the “impasse”. With that declaration, Puigdemont somehow managed to irk both the Spanish government and the radical separatists he desperately needs by his side. Madrid responded with diplomatic aplomb and kicked the ball back in Barcelona’s half, politely asking Mr. Puigdemont to clarify what exactly he had just announced. They did however set a deadline for a response, failing which they threatening to go the “nuclear” route, i.e. take control of the region. At the time of writing, the deadline came and went. Catalan President Carles Puigdemont and Spanish Prime Minister Mariano Rajoy exchanged letters but made no headway whatsoever.

Is Catalonia relevant?

Sure it is. In fact, it is Catalonia’s economic strength that has fueled its independence push. With Barcelona as its epicenter, the region maintains its cultural heritage, despite being part of Spain for centuries. More importantly, its socio-economic profile is arguably better than the rest of Spain. It is a wealthy and open economy that at the latest reckoning, contributed about 20% of Spain’s GDP, a figure larger than most Eurozone countries. Catalonia has a service-based economy, with close to two-thirds of its value add coming from service sector. A quarter of Spain’s exports originate from this region, with more than twothirds of it going to the European Union. Catalonia also has a proven record of attracting investments, with nearly a third of all foreign companies in Spain choosing the regional capital of Barcelona as their base.

Implication for markets

President Macron’s election in France earlier this year led to a period where politics took a back seat in Europe. A period that has seen steady gains across risk assets and compression of country spreads across peripheral Europe. Catalonia has the potential to throw a spanner in the works.

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