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Friday, October 27th the political situation in Spain intensified as Catalonia declared independence and the Spanish government imposed direct rule over the autonomous community. With the rest of the Eurozone currently experiencing the great combination of faster-than-expected growth and slower than expected inflation, Spain’s political uncertainty is causing it to miss out on the Euro economic upswing.
The autonomous community of Catalonia is located in the northeastern part of Spain and is home to approximately 7.5 million people. In Spain, an autonomous community is a political and administrative division which exercises the right to self-govern within a set of limitations put forth in the constitution. Spain has 17 autonomous communities. So what happened?
In November 2014, Catalonia’s government held an informal referendum in which more than 80% of Catalonians voted in favour of independence. The Spanish government declared this referendum illegal and a crackdown ensued to confiscate ballots resulting in violent clashes between voters and Spanish security forces. The standoff has since escalated and the Spanish government has dissolved the Catalan parliament following the Catalan pro-independence leader’s declaration of independence.
The political differences between Spain and Catalonia are best reflected in the financial markets as uncertainty.
Catalonia accounts for 1/5th of Spain’s economy and has advocated for independence for years. Independence could lead to national political ramifications such as greater difficulty in legislating policy and economic ramifications around wider EU trade flows. Hardest hit investments were Catalonian banks and Spanish government bonds. Bonds are essentially a mini-loan from an investor to a government. Generally, they are assumed to be one of the safest forms of investment. Therefore a decrease in bond prices typically indicates a decrease in the investor’s trust and certainty in the government’s ability to pay.
The Big Picture:
Spain’s growth is at risk and uncertainty may cause it to stall. Catalonia hosts approximately 7000 foreign companies and is one of Spain’s most productive regions. Since the referendum 10% of the companies have moved their headquarters out of Catalonia and tourism has dropped nearly 15%. While the rest of Europe rallies behind great economic growth with France stocks hitting their highest level in 9 years and German stocks reaching new record highs, Spain is missing out.