What Spain’s constitutional crisis means for your money

published 30 October 2017

171030-catalonia-b — Let's hope Spain and Catalonia can reach an agreement without too much aggro.

Good morning a few things you shouldn't miss on the website this morning. Simon Wilson takes a closer look at the wages of public sector workers, while Matthew Partridge takes a quick look at the investment prowess of JFK's father, the speculator Joseph Kennedy.

If you're finding all the debate around Brexit a bit stressful, just be grateful you're not living in Barcelona right now.

The Catalan parliament voted to declare independence from Spain on Friday. As far as it's concerned, the world has a new country the Catalan Republic.

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As a result, Spain has fired the Catalan government. As far as Spain is concerned, Catalonia is now under the direct control of Madrid, pending new regional elections in December.

Clearly, those are two very different viewpoints not ones that can easily be reconciled.

So what happens now?

Whatever your view on Catalonia, it's probably wrong

At the start of this month, Catalonia held a referendum on declaring independence from Spain. The Spanish government run from Madrid did not agree to the referendum, which it argues is unconstitutional. Hence it was illegal. That made the ensuing landslide for independence not much of a surprise ("no" voters stayed at home, and only the nationalists voted).

Catalonia's parliament dominated by separatist MPs declared independence anyway. Spain has therefore invoked article 155 of the Spanish constitution, which enables the central government to take charge of Catalonia and "restore order".

There is no simple solution to this problem. If you think there is, then that's probably because you're looking at it through a prism of your own political or nationalistic bias.

The region is clearly split. Most of the focus has been on the independence campaigners, which wasn't helped by the Spanish government's aggressive-looking reaction to the vote. But yesterday there was a big pro-Spain protest in Barcelona. And judging by opinion polls and the like, the split is probably about 50/50 on independence.

My personal view is that it would be best if Spain took the Scottish referendum option. In other words, Madrid should allow a legal, binding referendum to happen, campaign vigorously to maintain the status quo, and simply cross its fingers and hope that it wins.

Whatever the outcome, everyone involved can see that a transparent, democratic process has been followed, and everyone has to live with the result. And if that means that Catalonia has to ditch the euro and erect hard-to-navigate borders, well, that'd be petty, but it's a valid outcome.

Democracy's key selling point the thing about democracy that makes it better than any other system we've found so far is that it enables significant transitions of power, without anyone getting killed in the process.

But while it's easy for me to say that, there is no real direct analogy with the UK here. Catalonia is not the only part of Spain that might want to renegotiate its relationship with the central government. Spain has 17 autonomous communities (plus two autonomous cities).

It's also always worth remembering just for perspective that Britain has been a member of the European Union (since 1973) for longer than Spain has been a democracy (since 1977).

The point is to outsiders, there might seem to be a simple solution here. But you can't rely on that view as a guide to what will actually happen on the ground.

It seems most likely that things will rumble along until the new elections on 21 December, which would function perhaps as a surrogate referendum. But given Spain's stance on independence, there's no guarantee that they'll accept a result that goes the "wrong" way. Equally, Spain is looking at making revisions to the constitution, which may end up appeasing enough of the independence supporters to cool things off.

What this means for your money

So what does it all mean for investors? Firstly, this is an issue specific to Spain. I wouldn't extrapolate to other secessionist movements this doesn't necessarily mean that Italy is going to break up, for example.

Catalonia has had a strong independence movement for decades. It's even stretching the point to argue that this has much to do with "populism". So I wouldn't take it as a harbinger of the end of the EU.

That said, Spain is, of course, one of the most important members of the EU. And there is the strong potential for this to hurt the Spanish economy. The Catalan region is an economic powerhouse relative to the rest of Spain.

Disruption caused by a) violence (hopefully avoidable); b) civil disobedience (more likely); or c) actual independence (seems unlikely, but you never know) would put a dent in Spanish GDP, and knock some of the eurozone recovery optimism on its head.

Given that Mario Draghi, head of the European Central Bank (ECB), is still working hard to keep his options open on the money-printing front, that suggests a weaker euro for now. The single currency had made a big recovery this year that increasingly looks like it's over now.

Spanish stocks have also taken a knock; again, that's unsurprising. The lesson from the eurozone crisis was that investors tend to sell first and ask questions later. There may be opportunities for bargains ahead (keep an eye on your Spanish exchange-traded funds), but for now I'd expect the path of least resistance to be lower.

As for bonds the gap ("spread") between the yield on Spanish government bonds and that on German bonds has widened a little during October, but not so much that you'd make a fuss about it. The crisis would have to get a lot worse to threaten Spanish solvency, particularly in the face of ongoing ECB money printing. That said, it is worth keeping an eye on.

So, overall, unless you have a big position in Spanish stocks in your portfolio, then this isn't one to spend too much time worrying about investment-wise. But let's hope they can reach an agreement without too much aggro in the meantime.

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.