The critical elections in Catalonia on September 27th could result in an outright majority for secession from Spain, something considered unthinkable only a few years ago. While Greece, is out of the headlines, a new risk to the euro-zone could emerge from the other side of the Mediterranean.
Such an outcome does not mean an independent Catalan country overnight, but this conflict certainly moves away from being an internal Spanish affair to an outright crisis for the euro-zone, with a “Cataleave” posing more risk than a “Grexit”.
Growing support for Independence
The support for independence in the rich northeastern region stood at only 20% 5 years ago. Yet it has grown as the economic situation worsened and especially with stubborn moves from the current center right Spanish government. Contrary to the center-right government in the UK that allowed a binding referendum on independence for Scotland, Rajoy’s government refused to talk over and over again.
It seems that had the authorities in Madrid allowed for a referendum in Catalonia like in Scotland, the outcome would have been the same: a majority for “Better Together” and putting the aspirations to sleep for a long time.
This does go to put all the blame on one side: politicians have certainly utilized the conflict to divert attention away from corruption cases, which are rampant also within the Catalan ranks.
And there is no question on austerity here: while some pro-secession parties are clearly anti-austerity, some, including the current president of Catalonia Artur Mas, have enacted the very same economic policies as the government in Madrid.
Catalan Elections
Towards these elections to the Catalan parliament, the Generalitat, the political landscape has significantly changed. A wide coalition of mainstream pro-independence factors with right wing and left wing orientation has teamed up to form a joint list called “Junts per Si”, which means Together for Yes. A radical left and pro-independence party named CUP is running on its own. Recent polls have shown that these two parties could win and they want to begin a process to reach independence within 18 months. Yes, just like in Scotland.
The elections are also a test to the left wing Podemos party. Its leader, Pablo Iglesias, is a good friend of Alexis Tsipras, the freshly re-elected Greek PM. They are also a test to the mainstream center right PP party and the center left PSOE, which are seeing a decline in support.
The intention to proceed with a unilateral declaration of independence has already ruffled some feathers not only in Spanish politics but also among the business community and from leaders in the European Union that clearly oppose any such move. The talk about possible bank freezes and bank runs echo similar events in Greece, and not by chance. Other European countries would not like to see any sort of discontent, whether against austerity or against the sovereignty of the fourth largest economy in euro-zone.
The status quo is king for Merkel as well as for other leaders. There are quite a few other regions aspiring for independence, from Flanders in Belgium, to various parts of Northern Italy and even Bavaria to name a few. Similar to a Greek departure from the euro-zone, one secession opens the door for more.
In case the pro-independence mainstream Junts per Si coalition wins an absolute majority, Catalonia would continue its collision course with Madrid and this spells more trouble for the euro-zone. In case this party needs the other pro independence and radical left CUP for a coalition, it adds up with similar developments like the rise of Podemos in Spain, SYRIZA’s challenge and the election of Jeremy Corbyn as the leader of Labour in the UK. All this means a bigger headache for the EU leaders.
Cataleave
The Bank of Spain has already said that an independent Catalonia would basically leave the euro-zone and not enjoy the ECB’s support for banks. While the number of member states will not change, a departure of Catalonia from the euro-zone is more significant than a Grexit.
A “Cataleave” of the euro-zone means a rupture of a rich industrial region. The immediate pain would be seen in Barcelona, the prosperous capital, but the wider implications would be felt across the euro-zone.
A victory for the independence camp does not mean an immediate breakup of Spain, but it does mean a very severe escalation in the conflict, internationalizing it by a few orders of magnitude.
Impact of the Catalan elections on the euro
In both cases of a majority for the pro-independence parties, the negative effect for the euro-zone could actually result in a stronger euro on safe haven flows, as we’ve seen in the case of the Chinese stock market crash in August and at the peak of the recent Greek crisis in July. In case these parties don’t reach a majority, no reaction is expected as the topic returns to be an internal Spanish one.
Yet like with Greece, without a clear resolution, the extend and pretend policy means the next crisis is just around the corner.
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