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.