Wednesday 28November2012 - What Next?

From Western Unions Monday World Market Update.

More Pain in Spain?

Catalonian voters delivered victory to separatist parties in a regional election last night, raising the likelihood that Spain's strongest regional economy will hold an independence referendum in the near future.

On the surface, it seems that this should trigger significant volatility in the euro. After all, Spain has long tended to bear a strong resemblance to the former Yugoslavia. Tito's iron fist kept the country unified (at great cost), but once it was removed, the ties that bound different groups together began to fray— eventually leading to war and a dissolution of the state itself.

Since Franco's death, Spain has also struggled to remain intact. Leaders have attempted to prevent disintegration by granting many regions autonomy from the central government, allowing them to gain a degree of control over their own destinies while keeping them within national boundaries.

In a sense, this has worked to build a national identity, but it has also backfired. Because of this splintered political structure, Spanish economic policy is rarely applied across the country as a whole, and reform measures are almost impossible to pass comprehensively. As a result, the Spanish economy is struggling with one of the world's highest unemployment levels, while also maintaining one of its most rigid labour markets.

This is creating economic hardship that is providing fertile ground for those extremist parties that promise to upend the status quo. However, we must remember that the desire for change is not synonymous with a deep seated commitment to the separatist cause. The electorate's primary grievance is economic, not political.

What is worrisome however, is the precedent that is being set. Governing parties across Europe are increasingly vulnerable to upset, as voters react to economic circumstances by throwing them out of office. More political volatility is clearly on its way to the euro area, and market participants need to prepare for the consequences.