How Would A Catalan Independence Referendum Impact Markets?

Political Risks Remain Elevated

The last 12 months have been a constant source of political event-risk with Brexit, the US elections, and European elections all causing elevated volatility at times. Heading into the final third of 2017 this trend shows no signs of slowing down as the market prepares for German and Italian elections. However, there is another key political event set to take place which could also have important consequences for currency markets.

The Catalan Referendum

The government of Catalonia, one of Spain’s 17 “autonomous communities” announced in June that it would be holding a referendum (October 1^st) calling for self-determination and succession from Spain. The unexpected move makes the current Catalonia government the first in 80 years to advocate succession and has been met with adversity by the Spanish government who have vowed to block the referendum stating that the Spanish constitution doesn’t allow for a regional vote on independence unless approved by the government.

Catalan Government Vow to Hold Referendum Despite Court Ruling

The President of the Generalitat of Catalonia consulted the Council of Europe who judged that such a referendum must only be held “in full compliance with the Constitution”. The Spanish government demanded a constitutionality check to be carried out by the constitutionality court of Spain who annulled the Parliament of Catalonia’s resolution to hold the vote. However, the Parliament of Catalonia decided to ignore the judgment and maintain that the referendum will indeed be held on October 1^st.

With anti-EU populism seeing a surge in support over the last 12 months, this latest situation is clearly a worrying sign. Within EU politics, symbolism is important and one of the key risks that a Catalan referendum poses is, if successful in achieving a vote for independence, the referendum could spark support for similar political movements across the eurozone. If separatist parties elsewhere see that the Catalonian government has been successful in achieving a vote for independence, it is likely to fuel a surge in support across the eurozone which will cause elevated uncertainty and volatility, as markets saw in the run-up to the French elections.