Catalonia dreaming…

What happens in Catalonia this Sunday could, even more than Brexit, cause massive headaches in Brussels…

2014 reimagined…

Imagine, if you would, an alternative history of the events in the UK in 2014. The Scottish Parliament votes to hold a referendum on Scotland’s independence from the UK. The British Prime Minister, David Cameron, condemns such a move as unconstitutional. Mr Salmond, First Minister of Scotland, declares that it is for Scotland to decide the matter. He sets about printing ballot papers. Mr Cameron sends in special officials to seize them. Mr Salmond then starts to issue ballot papers over the internet. So, Mr Cameron issues warrants for the arrest of 14 members of the Holyrood civil service.


There are mass demonstrations on the Royal Mile. Reports circulate on social media that London has sent tanks and infantry north of the Tweed… A secret committee of the Scottish Parliament convenes… How will Mr Salmond and his deputy Ms Sturgeon react? I keep thinking of that line from PG Wodehouse: It is not difficult to distinguish between a sunbeam and Scotsman with a grievance…

But if you think this is the plot of some slightly way-out Ian Rankin novel – it has just happened. Not in the UK versus Scotland, obviously; but in the Kingdom of Spain versus Catalunya (Catalonia).

And guess where I find myself this week?

Another sunny day in Barcelona

Since Catalonia’s national day on 11 September when hundreds of thousands of Catalonians thronged the streets of Barcelona, many dressed in traditional national costume, to protest against Madrid, a degree of normality has prevailed. Barcelona vs. Madrid is one of the world’s most iconic football rivalries; but this contest is even more charged.

The other morning I walked through the Barri Gòtic (the medieval heart of Barcelona) towards the Picasso Museum through an almost eyrie, preternatural calm. A few mangy cats stirred in some of the recesses of these fascinating ancient passage ways. But there were Catalonian flags everywhere: draped over balconies and public buildings; and even from the cathedral tower. Some balconies were draped also with a brazenly political message: Si!

Barcelona vs. Madrid is one of the world’s most iconic football rivalries; but this contest is even more charged.

We all know that Barcelona ranks as one of Europe’s most vibrant and iconic cities. EasyJet (LON:EZY) is flying there today (Friday) six times from Gatwick as opposed to just five times to Edinburgh. Culturally, gastronomically, architecturally, Barcelona is stunning; and economically speaking, it is one the most dynamic cities of Spain.

A cultural dynamic

One of the things I took away from the Picasso Museum was how much Picasso’s style changed when he came to live in Catalonia around the turn of the last century. His style changes from academic and stylistic to experimental and effusive – a totally different use of colour. He had met the Catalonian Modernists…

It is no coincidence that Catalonia was a cradle of modernism and that its artists are world-renown. Catalonia and Scotland are both ancient nations which have struggled to assert and maintain their identities while in union with a larger neighbour. Failure to do so would have meant cultural suffocation. So, both nations have developed a world-class flair for design; and both nations venerate their artist sons and daughters.

You cannot move in Catalonia without being accosted by art. It is everywhere – in their architecture (the flamboyant edifices of Antoni Gaudì); their unique tiling and ceramics; their interior design; even the street furniture. (I wonder if Mayor Khan has been here: perhaps he might reflect on how hideous the built environment in London has become by comparison.) Most Catalonian hotels have ten times more paintings than guests.

Catalonia and Scotland independently developed powerful, subversive, even transgressive schools of art. Catalonia can boast among its illuminati the arch-priest of surrealism, Salvador Dali, and the hugely influential abstract expressionist, Joan Miró. Scotland gave us Eduardo Paolozzi – and the funniest, and most surreal, comic of my lifetime – Billy Connelly. And many geniuses more.


Scottish readers will probably understand better than English ones the cults of anti-poetry (of which the Catalan Joan Brossa was a luminary) and anti-painting (Joan Miró). In old age, Miró, on completing his canvasses, used to get out a carpet knife and slash them to ribbons. He ritually set some of his paintings on fire until they were burnt to a crisp.

Odd, I know; but I think he was kind of trying to tell us something: that art should never get too much up itself – paintings are only splodges of paint on canvas – even if the effects transport us, briefly, to another world. (I wish that Ms Emin and Mr Hirst would take a leaf out of Miró’s book – I would admire them so much more.)

Everything is evanescent – as canny investors understand.

There is a direct positive correlation between a dynamic economy and a dynamic arts scene. Why do you think the world’s major financial centres are all centres of excellence in opera? That doesn’t mean that the art market is positively correlated with the economy overall: quite the reverse – art is a defensive investment, as I shall explain another time.

Catalunya vella

Since gaining autonomy from Madrid in the 1970s, when Spain finally became a democracy, the Generalitat de Catalunya – Catalonia’s regional government – has fought hard to protect and sustain Catalonia’s economic and cultural interests. Under the autocratic regime of General Franco, the Catalan language was suppressed. Now, it is preponderant.

Catalan is far removed from Castilian Spanish, being far closer to Provençal and Occitan – the (now almost extinct) lingua francae of (what is now) Southern France. It is a purely Latin language: unlike Castilian and Portuguese it is without Arabic words. There are still villages in the Pyrénées Orientales department of France which speak Catalan; not to mention the Principality of Andorra and some villages on the Costa Esmerelda of northern Sardinia. Catalan literature is rich – and Catalans are rightly proud of it.

Back in history, Catalonia was a separate entity – first a city state under the Counts of Barcelona, and then a realm within the Kingdom of Aragon. By degrees, through feudal inheritance and dynastic marriage, Catalonia came to form part of the Kingdom of Spain founded by the marriage of the Catholic Monarchs Isabel of Castile and Fernando of Aragon in 1469. For centuries, however, its distinctive culture and autonomy were respected by the Spanish crown.

Under the autocratic regime of General Franco, the Catalan language was suppressed. Now, it is preponderant.

It was the Bourbons – the overweening French dynasty that assumed the throne of Spain in 1700 in the form of Felipe V – who smashed Catalonia’s autonomy. Philippe, Duke of Anjou was a grandson of the Sun King, Louis XIV. He brought to Spain the centralising imperative of the French crown. He defeated and subdued Aragon and Valencia in 1714, Catalonia on 11 September 1714 and Majorca in 1717. When Barcelona fell, the Bourbons burnt the libraries of Catalan books – something never forgotten.

Under the Spanish Republic (1931-39) Catalonia’s autonomy was restored. Of course, it sided with the Republic in the Spanish Civil War – much to its cost. Barcelona was ferociously treated by Franco’s victorious fascists. Under the Franco regime (1939-75) Catalonia was virtually wiped off the map, its rich culture and language submerged.

One of the first acts of the new democratic dispensation which emerged after Franco’s death in 1975 was to restore Catalonia’s autonomy under the Generalitat de Catalunya. When the crowds chanted last week that Madrid was Franquista, they were basically saying that fascist rule from Madrid had returned.

What went wrong?

On 20 September, Spain’s Guardia Civil – which is controlled by Madrid – raided Catalan government offices to stop the preparations for the independence referendum scheduled for this Sunday, 01 October, seizing about 10 million ballot papers to be used for the vote. To be fair to the government of Prime Minister[i] Mariano Rajoy, the raid was ordered by judges after the Spanish Constitutional Court ruled that the referendum breached Spain’s constitution of 1978 which declared Spain “indivisible”.

Spanish Finance Minister Cristóbal Montoro had previously signed an order tightening financial controls and restricting the Catalan government’s freedom to borrow on the international financial markets (a freedom the Scottish Government does not enjoy). Banks operating in Catalonia were instructed by Madrid not to process any payments from the regional government without the approval of officials in the Madrid Ministry of Finance.

The President of Catalonia, Carles Puigdemont, announced that “this attack has been carried out violating the rule of law”. He claimed that the Spanish state had effectively applied a state of emergency[ii]. Vice-president Oriol Junqueras reaffirmed after these events that he would do everything possible to allow the referendum to go ahead.


Launching the referendum a few weeks ago, the Catalan government said that if Catalans were to vote in favour of independence – and a certain threshold of participation (as yet unspecified) is reached – then the Catalan government would unilaterally declare independence within 48 hours of the vote. Mr Puigdemont had previously said that rulings by the Spanish Constitutional Court would no longer apply to Catalonia.

Before the events on 20 September, polls suggested that fewer than half the population of Catalonia would vote for independence. But it seems that Madrid’s cack-handed response has boosted support for a YES vote. The Mayor of Barcelona, Ada Colau, who opposes independence, shifted her stance and is now permitting the vote to go ahead in the capital. According to the Financial Times on 28 September, two thirds of Catalonia’s 948 municipalities have followed her lead[iii].

I can now assure you that the referendum will go ahead on Sunday: although its outcome will be contested whichever way it goes. A YES vote will be dismissed by Madrid as an irrelevance; but the Generalitat may just declare independence in defiance of Madrid, leading to a full-on constitutional crisis in the Eurozone’s fourth largest economy. And, as in Scotland, a NO vote will not be the last word for Catalan nationalists. They will argue that they were undermined by Madrid’s machinations. Either way, Spain is heading for turbulence.

Catalonia held a previous “informal” referendum on independence in 2014. This saw an overwhelming majority in favour of independence (80.8 percent), but it had an estimated turnout of only 37 percent. There were no immediate consequences from that referendum, except that the Generalitat called early elections in Catalonia, which resulted in the current pro-independence government of Senyor Puigdemont.

It seems that Madrid’s cack-handed response has boosted support for a YES vote.

This time, the stakes are higher. Article 155 of the Spanish Constitution gives Madrid the power to assume direct control of the region. This would require an absolute majority of votes in the Madrid parliament, where Señor Rajoy’s Partido Popular (PP) government is 39 seats short of a majority. To date, the main opposition socialist party, PSOE, has been opposed to this drastic move, but has said it would not rule out such action in in the future.

Another option for Madrid would be to use the National Security Law which can be invoked by government decree rather than the absolute majority needed for Article 155 in the Cortes. But this would be politically incendiary, and would undoubtedly trigger mass protests in Catalonia.

Economic consequences

According to HSBC, Catalonia, with over 7.5 million inhabitants – that is 16 percent of Spain’s population – accounts for 20 percent of its GDP. (In contrast, Scotland accounted for just above eight percent of the UK’s GDP in 2014 – much less than London, for example). So an independent Catalonia would enjoy a GDP approximately equal to that of Chile, Finland or the Republic of Ireland. It would be a viable entity.

In contrast to the Scottish independence referendum debate, there is no question as to what currency an independent Catalonia would use. Everybody assumes that Catalans would continue to use the Euro. But there is no way that a slighted remnant Kingdom of Spain would permit an independent Catalonia to become a member of the European Union. Catalonia would therefore be, de facto, a Eurozone member which is outside of the EU. This would cause bigger headaches in Brussels and Frankfurt even than Brexit. (Britain is not in the Eurozone, so the monetary implications of Brexit are negligible.)

Another difference with Scotland is that Catalonia, being the most prosperous region of Spain, is a net contributor to Spanish coffers – much to the benefit of Spain’s poorest regions such as Extremadura. A Kingdom of Spain without Catalonia, which is home to some of Spain’s strongest financial institutions and one of the oldest functioning bourses in the world, would be a much enfeebled one.

And without Catalonia, the Basque country would be emboldened…

Market implications

It took the dolts who man (they are still mostly male) the foreign exchange trading floors nearly three days this week to work out that the German elections were not the good news story that they had first supposed. Angela Merkel will remain Bundeskanzler but with the lowest vote recorded for the ruling party for many years – a full ten percent down on previous levels. Moreover, she will have the right-wing AfD breathing down her neck from hereon in. It took them until Wednesday afternoon to start selling Euros.

Similarly, the markets have not priced in the risk of a major constitutional crisis in the Eurozone’s fourth largest economy.


Nor, for that matter have they priced in the risk of nuclear war breaking out between the USA and North Korea – with catastrophic geopolitical consequences. The problem is that, as I have consistently argued in these pages for more than two years now, there is no valuation model by which political risk can be translated into price or currency risk. This has the result that markets tend to ignore approaching political catastrophes until they have already happened. Remember how the major market participants just could not believe that the Brexit vote could happen.

Thinking of those poor forex dealers, one recalls that line from TS Eliot: Humankind cannot bear very much reality[iv].

Assessing the risks

I would put the risk of a major – and ugly – political crisis in Spain at almost 50 percent. My wager, having talked to people this week, is that the vote on Sunday will go for SI! But I suspect that Mr Puigdemont will demur from an immediate unilateral declaration of independence which would trigger direct rule from Madrid and possibly mass unrest. Yet, the risk of this scenario is still very high. If and when this crisis does finally unfold then the sell-off on the foreign exchange markets could be dramatic. It might therefore be prudent to take a more defensive stance vis-à-vis the Euro in the short term at least.

The bigger picture

I watched President Macron’s Sorbonne speech live in my hotel room on French TV. There were many interesting things that he said which were hardly reported at all in the UK media – like the fact that Europe needed a common language (and clearly not German!). But, if I may say so, everything that I predicted in my article about Macron in these pages on the morrow of his election was correct. He wants a Eurozone Ministry of Finance which will harmonise taxes and fiscal policy – and much more.

It is the creeping creation of a unified federal European super-state that is creating both centrifugal forces (Brexit) and centripetal nationalist movements (Catalonia, and, to a lesser extent, Scotland). Do not expect this Napoleonic project to play out without extreme material consequences for the continent and civilisation that I have always loved.

[i] His correct title is Presidente del Gobierno.

[ii] El National Catala, 20 September

[iii] Also, see: http://www.politico.eu/article/catalonia-independence-referendum-what-spain-has-to-lose/

[iv] The Four Quartets, 1944.