- The Catalan referendum has needlessly become a significant Eurozone political issue
- Risks were previously limited, but are rising thanks to Madrid's inept response to the independence movement
- An independence movement can derail the upcoming ECB conference later this month
Prior to the referendum, most opinion polls on the question of Catalan independence were inconclusive. While some pointed to the ‘Yes’ vote winning by a slim majority (50.1% Yes vs. 45.7% No), others suggested that the ‘No’ camp was likely to win (41.1% Yes vs. 49.4% No).
In general, polling results prior to independence referendums have been poor at predicting election outcomes. Polls prior to the last Quebec independence referendum and the recent Scottish referendum both suggested that the ‘Yes’ camp was likely to win. Both polls failed to capture the large number of traditionally inactive voters who voted ‘No’ in each referendum. The opposite was true for Brexit, where polls failed to capture a large number of voters who came out and voted ‘Yes’ on the day of the vote. Had Madrid allowed Catalonia to proceed with an officially sanctioned referendum, the result may have been similar.
Heavy handed response to referendum unlikely to win hearts and minds
While Madrid is technically correct in enforcing the rules, considering that the referendum in Catalonia was illegal, the use of force is a poor way to persuade Catalans to remain Spain. In a democratic society with freedom of press, scenes of police violently stopping a vote is troubling. While the use of force increases risks for the pro-independence camp, it has also catalyzed the movement as Madrid is now seen as the bad actor. As sympathy increases for Puigdemont and is allies, Madrid's initially strong position regarding the issue is now looking weaker.
Recent news suggests that Madrid continues to use aggression to quell the independence movement. Two days ago a Spanish judge jailed Jordi Sánchez and Jordi Cuixart, two leaders of the independence movement, on charges of sedition. According to the BCC, over 200,000 protestors gathered in Barcelona to call for the release of the two figures last night. As Madrid continues to demonstrate its political ineptitude, support for independence in Catalonia is probably growing. Madrid’s actions are also raising the stakes for Catalan President Puigdemont, who is now more likely to declare independence tomorrow.
Impact on the euro and financial markets
While the euro remains supported by the narrative of the ECB tapering its QE program, Catalonia has become a much bigger risk in recent times and can derail the upcoming ECB meeting. Many political analysts have suggested that Puigdemont is likely to lose his gamble, given the weak polling results of pro-independence political parties in Catalonia. Yet support for independence has likely gone up in the last few days, thanks to Madrid’s heavy handed response to the independence issue. If Rajoy triggers Article 155, dissolves the Catalan government and calls for snap elections, he may be surprised to see Puigdemont’s allies emerge victorious in any future elections. Unsurprisingly, the euro remains weak as the issue remains unresolved.