The Catalan Independence Referendum’s Impact On The Euro

On 1 October 2017, the Spanish region of Catalonia held a referendum on its independence. While 90% of the roughly 2.3 million voters who took part in the referendum opted for secession, Catalonia repeatedly refused to declare that it had formally seceded from Spain.^[1]

This situation could provide headwinds for the euro, as analysts warned that investors might sell off the common currency as long as the spectre of a Catalan secession remained a possibility.^[2] As the possibility of Catalonia breaking free remains, it imperils the eurozone.

At the time of report (17 October 2017), Carles Puigdemont, president of Catalonia, had not declared independence, and it was unclear whether he would.^[2] If he did declare independence, the Spanish government stated that it would invoke Article 155, which allows control of Catalonia from Madrid.

Why Did Catalonia Hold A Referendum?

There have been repeated calls for independence from Spain's Catalonia region, which has had a certain level of autonomy for the last 40 years.^[4] This desire to break free has intensified amid Spain's continued economic challenges. Some believe that the wealthy Barcelona region pays an unfair amount to the nation's central government.^[5]

On 6 September 2017, the Catalan government voted to hold the referendum.^[6] Spain's central government, however, insisted that any such vote was illegal.

Spanish Prime Minister Mariano Rajoy stated that he would "stop at nothing" to prevent the referendum from taking place.^[7] Even though the Constitutional Court of Spain suspended the Catalan law that allowed the vote to take place, the Catalan government pressed forward with its plan to hold the vote.^[8] At the time, the Constitutional Court suspended the law so it could put some time into reviewing its language.^[9]

On 1 October, voters answered the question "Do you want Catalonia to become an independent state in the form of a republic?" While Catalan officials had vowed to declare independence within 48 hours if voters approved the region's independence, Carles Puigdemont, president of Catalonia, presented the outcome of the referendum but immediately postponed the process of secession.^[10]

More than two weeks after the vote, Puigdemont had not declared independence. He instead sent a four-page letter to Rajoy, asking for two months of dialogue.^[10] While Puigdemont refused to provide Spain's central government with a definitive answer, the nation's Constitutional Court stated that the Catalan law that enabled the region's independence referendum violated the Spanish constitution.^[9] More specifically, the court stated that this particular law stood in opposition to national sovereignty.

Further, the nation's highest court ruled that the parliamentary session that passed the law in the first place violated the constitution.^[9]

The Impact On The Euro

The euro dipped slightly following the referendum, with the EUR/USD closing 0.7% lower on Monday, 2 October than it did on Friday, 29 September.

In the following days, the euro experienced a small recovery and recovered some of these losses.

On 3 October, thousands participated in a strike in Catalonia's capital. The next day, Puigdemont stated that his government was getting ready to proclaim independence, claiming that it might do so at "the end of the week."^[11]

On 3 and 4 October, the EUR/USD rose to 1.1748 and 1.1757—levels that were 0.15% and 0.22% higher than their closing low on 2 October.

The EUR/USD experienced some minor fluctuations over the next few days, closing 9 October at 1.1743. The currency pair then rose another 1% by the close of business on 11 October, at which point it was worth 1.1864.

Over the next several trading sessions, the EUR/USD fell back somewhat, dropping to 1.1795 on 16 October, 0.6% lower than its level on 11 October.

The EUR/USD experienced these fluctuations as Catalonia's leadership wavered, as its president refused to state whether the region had formally declared its independence.^[10]

Summary

The Catalonia referendum has created significant uncertainty. At the time of report, it was unclear what the situation's outcome would be. Analysts cited the uncertainty surrounding the situation as helping provide headwinds for the euro, but the common currency did not experience any significant fluctuations in the weeks following the referendum.

Further, Catalonia seemed to have little room to obtain independence. The Spanish government previously warned that if the Catalan government declared independence, it would take action to ensure that it could rule that region from Madrid.

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