Earlier this year investors worried that the euro was under threat. Its very future in the Netherlands and in France was on the ballot paper. As many of us expected, the euro survived its brush with democracy. In the Netherlands the anti-euro party topped the poll, but well short of the seats needed to govern or even to put it into government in coalition with some parties from the pro euro majority. In France Mr Macron swept all before him, defeating Mrs Le Pen with her anti EU tones convincingly in a low turnout election. He is strongly wedded to the Euro and to more EU integration.
Today the worries are more about the resilience of some of the member states of the Euro area and their ability to tax and to govern in an orderly way. Immediate attention is focused on Spain, but there are also stresses in Italy and on the borders of the EU in Ukraine. If these matters of identity politics are not well handled they will damage investment and output in the affected areas and be a negative markets have to weigh more generally.
In Spain, the Catalan crisis is deepening. The Catalan nationalists tried to engage the Spanish state in talks after their illegal referendum showed a strong vote for independence with other voters absenting themselves. Instead of offering them a legal way forward, the Spanish state proposes to double up on its unpleasant behaviour when they sent in the national police to try to prevent the vote. It is now threatening to close down the Catalan regional government. It could call for new elections in Catalonia. It can seek to impose direct rule from Madrid under Article 155 of the Spanish constitution.
If they go ahead as suggested there could be a tussle over who controls the officials and police currently answering to the Catalan government. If Madrid imposes direct rule will independently minded officials and police working for the Catalan government willingly acquiesce? The alternative of sending in police from elsewhere in Spain as they did to seek to close down the referendum led to bad scenes of violence. The Catalan politicians are invoking memories of Franco’s regime which also tried to curb independent tendencies in Catalonia. They may want to carry on with their government in exile. With an estimated half a million protesting on Sunday on the streets of Barcelona against the proposed Spanish action, it is not going to be an easy matter enforcing what Madrid thinks should be the rules of Spanish state law.
The Spanish state wishes to get over the message that the independence movement is bad for business. The central government plays up stories of companies relocating their HQs from Catalonia to the rest of Spain. There are rumours of much lower tourist numbers coming to the region for fear of being caught up in strikes or protests. As Catalonia is a fifth of the Spanish economy this is bad news for Catalonia but not good news for Spain as a whole. The Spanish government is so determined to reassert control it will probably not mind the idea spreading that this conflict is bad for business. All the time there is no negotiated settlement or agreed way forward investors will be more cautious about Spain as a whole, not just about Catalonia.
This is but one of several cases of important regions of larger countries seeking to be independent or to have more autonomy. The typical pattern is for the richer parts of a country to come to resent the control of the wider state, particularly because the state takes much more money from them than they get back as public spending in their area. In Catalonia they generate 20% of the National Income but receive only 11% of the public spending for Spain as a whole.
On Sunday in Italy legal non-binding referenda were held in both Lombardy and Veneto over whether the voters want more autonomy. Here again money was an important topic. Lombardy provides over 50bn euros a year to Rome which it does not get back, and Veneto over 15bn. When this is combined with austerity budgets to hit euro area targets it creates resentments. It is difficult to know how the Italian state will respond to this strong demand to keep more of their own money, coming as it does close to a national election. Many voters also want to control their own migration and planning policies which emerged as issues in the referendum debates. It is fuelling support for the 5 Star movement and the Northern League, two parties that are polling well and hoping to benefit from this mood in the next national election. The current Sicilian election is showing strong voter wish for change over migration, unemployment and benefits.
On the EU’s eastern border, Ukraine lost Crimea to Russia. There an illegal act by a separatist movement was backed by Russian force and confirmed by a referendum held under Russian auspices which the rest of Ukraine and the EU did not accept. There is no direct parallel for the early separation of Catalonia from Spain as there is no outside power helping the Catalans, but it is a reminder of the way state mishandling of a minority can produce the opposite answer to that sought by the state concerned. It looks as if Catalonia is destined to stay at loggerheads with Spain with no easy way round the conflict of words and legal powers. This will divert Spanish energies and be a negative to sentiment.
Meanwhile attention should now also shift to Italy. The thumping result in the two legal but non-binding referendums last week-end imply a lively Italian election soon with gathering support for parties that want to weaken the Italian state and limit its capacity to redistribute money through taxation. The EU will be watching that nervously as well. The Euro area lacks formal and open ways of sharing resources from the richer to the poorer areas. Voters in more of the richer parts of the zone are saying they want to pay less in tax or spend more of the tax revenues raised in their own areas.
The above article was first published by Charles Stanley on 27th October 2017