A contribution from Peter Lavelle, an economist at foreign exchange broker Pure FX, on the currency situation for an independent Catalonia.
Catalonia continues to press for its independence. This past September 11th (the 299th anniversary of the fall of Barcelona, which led to Catalonia’s accession as part of Spain), 1.6 million Catalans linked hands around the region, to draw attention to their cause. Moreover, next year, Catalan president Artur Mas plans a referendum, to see just how much of the Catalan populous favours ceding from Spain.
However, aside from Catalonia’s ongoing struggle, the possibility of its independence raises certain questions. Like, for example, what currency would an independent Catalonia use? Well, that’s what I want to look at here.
Artur Mas: “No risk” Catalonia would leave the euro
The first possibility is that an independent Catalonia remains part of the euro. From the point of view of the man on the street, this is probably the preferred outcome, because it involves the least uncertainty. It wouldn’t be nice to have your savings in the CaixaBank, for instance, not knowing in what currency they’d be dominated the next day!
Moreover, this is also the preferred outcome for the Catalan government, first because it would bolster Catalonia’s status as an independent state to remain a paid-up member of the EU and Eurozone, and second, because it would make Catalonia a more attractive investment destination.
To this end, Catalan president Artur Mas has himself insisted that an independent Catalonia would remain part of the Eurozone, telling a cadre of international businessmen this past September 19th that Catalonia “will have the euro as its currency whatever happens”. He insisted there was “no risk” of Catalonia leaving (or being thrown out of) the euro.
“The Europeans are not interested in having Spain split up.”
However, just because Mr. Mas says Catalonia will retain the euro, doesn’t make it so. In fact, outside of his Convergència I Unó party, opinion is that an independent Catalonia would not only not be allowed to use the euro, but would also be ejected from the EU. As the European Commission stated earlier this year, “If a region separates from a Member State, the treaties are no longer in place from the day of its independence”.
In other words, an independent Catalonia would be forced to start from square one. It would be like Turkey, subject to lengthy negotiations before it could accede to the European Union, then subject to the requisite conditions before it could join the Eurozone, such as a national debt below 60.0% of Gross National Product.
It may sound here like the European Commission is hostile to the prospect of an independent Catalonia. And in fact, this could be the case. What with the Eurozone fresh out of recession, and unemployment at a record 12.2%, the last thing Europe’s bureaucrats would want to deal with is a new nation. As Jacob Funk Kirkegaard at the Peterson Institute for International Economics said recently, “The Europeans are not interested in having Spain split up.”
Strong currency? Weak currency?
So, if Catalonia went it entirely alone, independent but without the euro, what would happen?
Well, given that Catalonia would be a tiny nation surrounded by what is after all the world’s largest economic bloc, we could expect its currency to immediately plummet in value. This means products imported into Catalonia (this is to say, anything that Catalonia doesn’t manufacture for itself) would immediately become more expensive. In other words, the cost of living would rise.
Moreover, Catalonia would also face the prospect of bank runs, whereby people rush to take their savings out of Catalan banks, so that they’re not denominated in the new, weaker currency. To prevent this, the Catalan government would have to impose capital controls, whereby it becomes impossible to take money out of the country. This in turn would likely scare international investors, thereby weakening Catalonia’s economy.
In brief, just from a currency point of view, the road to independence would not be easy for Catalonia. We must watch and wait to see what happens!
About the author
Peter Lavelle is an economist at foreign exchange broker Pure FX. To find out when the best exchange rate becomes available, sign-up to Pure FX’s free newsletter. We’ll tell you when the exchange rate hits a record high.
What about using the Euro without being in the Euro zone? Sure, we would’t have any power of decision over it (but really, does Spain now have much power of decision in front of Germany already?)
Andorra is a good example of a country that has never had their own currency: they used both pesetas and French franks before euro, and use euro now, but they are not in the Euro zone. And despite this, they have been successful at being a tax paradise for a long time.
Interesting point! You’re right, Catalonia could use the euro without officially being part of the Eurozone. But this is a bit like being a passenger in a car, but where you can’t talk to the driver, and you don’t know where you’re going. For example, Panama uses the US dollar. And every time there’s an economic or political upset in the US (which happens a lot lately), that impacts negatively on Panama. In theory, it’d be similar for Catalonia with the euro.
The way the EU is structured, most -if not all- micro- to médium-sized countries do actually live their daily lives as passengers to the big states. Since representation in all European entities derive from either a diredt population ratio or a modified function as such, Catalonia would in practice be just as decisive a country as, say, The Netherlands. Most nations are dwarves with regards to Germany, France, the UK and Poland… so in this particular instance being left out of the decision-making processes would suppose no difference to the status upheld by most EU-25. However, not being linked to the ECB means full fiscal and monetary economy, and therefore a flexibility, unheard of in, again, say The Netherlands. One could argue that Marta’s scenario allows for the best of both worlds.
@Corrections posted (previous entry hastily typed):
The way the EU is structured, most -if not all- micro- to medium-sized countries do actually live their daily lives as passengers to the big states. Since representation in all European entities derive from either a direct population ratio or a modified function of one, Catalonia would in practice be just as decisive a country as, say, The Netherlands. Most nations are dwarved by Germany, France, the UK and Poland… so maybe, in this particular instance, being left out of the decision-making processes would suppose no difference to the status upheld by most EU-25. However, not being linked to the ECB means full fiscal and monetary autonomy, and therefore a flexibility and response time unheard of in, again, say The Netherlands. One could argue that Marta’s scenario allows for the best of both worlds: non-binding ties to a powerful currency and full ownership of one’s self economy.
(Minor modifications made)
Andorra is a Principality and recognised as a Sovereign Territory by Treaty. Its only allowed to use the Euro because it has a licence agreement with the EU. San Marino, Monarco & Vatican City all have the same licence agreement and are all well established Sovereign Territories. It’s extremely unlikely the EU will extend the same curtesy to Cataluña because the EU has already stated the whole process was illegal and democratic. Besides, Independence is supposed to mean being able to stand on your own two feet and not rely on other institutions to support you. I guess in their rush to get a vote and declare independence they forgot they’d need a basic infrastructure in place. We’ll all find out on Monday 9th October when they make their formal declaration.
I find this article rather mistaken. You have every right to oppose independence of any nationality. I encourage the author to write about how much the British economy would benefit from a probably not very popular decision: becoming a German Land.
Leaving opinion aside, there is some factual mistakes. To start with, Convergència i Unió (check spelling) is not a political party but a coalition. I believe it is hard to understand what is going on in Catalan politics if you are not aware of which parties are in the government. One of the parties was founded some 45 years earlier than the other and their elected representatives make part of different political groups in the European Parliament. That is how different they are.
But getting to the point, I consider rather funny to suggest that the debt of the Catalan Republic would be too high compared to the one of the other European countries. If the Spanish State accepts Catalan independence in the short term and as a result of negociations the Catalan government accepts to take part of the Spanish debt, the Catalan debt would obviously be much smaller, not just in absolute figures but also as a percentage of the GDP, than that of Spain, Germany or the average of the Eurozone.
Finally, to suggest that Catalonia would be “not allowed” to use the Euro makes just no sense at all. Is Ecuador part of the US? Are Andorra, Montenegro or Kosovo part of the EU? Every country can have the currency or currencies that they freely decide, and that is what will happen with Catalonia.
So really, all this article is to say that Catalonia will hardly have a say in the European Bank after independence. Well, I am afraid you have a point. I do not believe the Spanish State or Catalonia under Spanish rule have any seats nowadays.
I do not mean this as a personal comment, I really dislike it when people spread rumours like this.
Thanks for the corrections regarding Convergència i Unió! I copied the name from Bloomberg but, you’re right, I should have checked.
Thanks for your kind reply.
I would like to state, though, that I can not take your article very seriously. I wonder how, why and who would “not allow” “an independent Catalonia” to use the euro. There is only so much the Spanish army can do these days.
The only point I can admit is that an independent Catalonia would have it rather complicated to have a seat in the Decision-making bodies of the ECB.
It is funny how Bloomberg can get so many facts wrong, aside from being more or lest conservative. I was reading a piece they wrote about the Catalan national process towards independence and I spotted more than one mistake (e.g. “[…] like Scotland, which holds a referendum in 2015 […]”).
If anyone has some doubts, maybe the White Paper presented today in Scotland could provide an example of how this works.
It is not granted that a formal currency union will be offered to Scotland or Catalonia, but to suggest that either country would be bullied out does not make much sense to me, unless you’re trying to scare those willing to vote in favour of independence.
Every country decides the currency (or currencies) that wishes to use, that is a fact. We can surely discuss how likely it is that Catalonia would decide the policies approved by the European Central Bank both as an Independent State or as a semiautonomous entity within the Spanish Kingdom. I think Catalonia is more likely to have a say as an independent country (hard as it would be) than as a “historical nationality” under Spanish rule.
I have just read about this and I would like to just add here that no one can impose any restriction on any independent state or country regarding currency. Its solely the decision of that independent state to select which currency they should choose for their economy.
I am a colector of paper money, called banknotes and i welcome new paper currencies. Euro will fail and will bring many new and old currencies back such as Franc, Mark etc.
What do you think? Leave a comment