What’s the next move for Catalonia and what does it mean for markets?

Carles Puigdemont pledged to declare independence within 48 hours of the referendum

Today’s the big day.

The Catalan president, Carles Puigdemont, is planning to address the regional parliament this evening for the first time since last weekend’s independence referendum.

What’s the likely outcome, and what might it mean for markets?

Catalonia will have a tough time declaring independence

A quick recap: at the start of October, Catalonia, a wealthy region in the northeast of Spain, held an independence referendum. Catalonia already has a great deal of autonomy, but the current regional government is run by an Independence Party, who want Catalonia to be a separate country altogether.

The problem is, the Spanish government ruled the referendum illegal. It then also marched the police in to prevent the referendum from going ahead. Whatever else that was, it didn’t look very good on television sets around the world.

Most of the polling stations stayed open and the referendum went ahead. The results came back with a huge majority for independence. Again, though, this can hardly be described as representative, given the chaos on the day, the therefore questionable quality of the voting, and the simple fact that the electorate is pretty self-selecting – why would you risk getting your head cracked with a baton to vote against independence in an illegal referendum?

Nevertheless, the Catalan president, Carles Puigdemont, had said that he’d declare independence unilaterally within 48 hours of the result. That didn’t happen. Now, this evening, he’s meant to address the Catalan parliament.

The big question is: what will he say, and how much does it matter?

First things first: to be very clear, if Catalonia declares itself independent, it will be a unilateral declaration, because Spain doesn’t agree; Spain doesn’t want to let Catalonia go. The Spanish government has threatened to end the region’s autonomy and it seems highly likely that devolution would be suspended.

So an independent Catalonia is not on the cards right now, not without an awful lot more negotiation and potentially (though hopefully not) more strife in the streets.

From that point of view, it seems unlikely that the Catalan president would make such a futile gesture, particularly given that a significant number of Catalan people – potentially even a majority – don’t want to split from Spain.

As a result, I’d have expected talk rather than action. And presumably Catalonia will hold out hope for an official referendum with a proper campaign conducted by both sides – much like the Scottish independence referendum here in 2014.

Catalonia’s cliff-edge exit

Yet would Spain be happy to allow that? It seems unlikely, given Spain’s actions so far. However, an official referendum would be the best way to get the bad blood out of the way. And Spain most definitely has a lot of arguments on its side when it comes to Catalonia breaking away.

There is no question that Catalonia would be a viable stand-alone entity. It’s a wealthy part of Spain, which has Barcelona as its capital and a population of nearly eight million people.

But the practical problems for Catalonia are similar to those that face any other entity that breaks away from another with which it shares a currency. There are questions over how you split the debts, for a start. There’s also the minor inconvenience that all of the utility networks are run from Madrid.

On top of that, the European Union has said that an independent Catalonia would cease to be part of the EU. That means it would have to apply for membership, which is time consuming and would also probably be blocked by Spain. It would also mean an awful lot of problems with border controls and customs.

If the EU didn’t have to keep nation states like Spain happy, you do wonder if it would ever be tempted to push the case for smaller regions declaring independence. It could define itself as an umbrella federation of smaller states with close-knit regional identities, but no concerns about sharing a currency and open borders. It’s an interesting question but not one I think, we shall have to think about in detail for at least a few decades.

The point is that as both Brexit and the Scottish referendum show, even when you have a (sort-of) process in place – or at least a legitimate referendum result – all of this stuff is complicated. When you have nothing more than a dubious unilateral declaration of independence – and no currency of your own, in particular – it becomes much more tricky.

We’ve already seen corporate and capital flight from Catalonia, merely on the hint of independence happening. Spain’s fifth-biggest bank – Sabadell – plans to move its headquarters out of Barcelona. Caixabank – the third-biggest bank in the country – is doing the same. Infrastructure player Abertis, property group Immobiliaria Colonial, and telecoms group Cellnex have all said they plan to relocate to Madrid, notes the BBC.

Markets have been a little rattled too. The main casualties have been Spanish stocks (down a little since the vote, at a time when most other markets are higher) and Spanish debt (yields have edged up).

Given the obstacles, I’ll be surprised if there’s anything more than a symbolic gesture of defiance tonight. The problem though, is that without an official referendum or any give on the part of Spain, it’s hard to see how this goes away. Expect this story to run and run.