It is easy to forget that we are just a scant few decades into Spain recovering from the Franco regime and joining the community of developed democratic Western nations. The echoes of the systematic repression of the Basque, Galician and Catalan regions and identities still ring. Protest, conflict and terrorism have punctuated the post-Franco period as they try to reassert identity, language and culture, and expand the autonomy suppressed after the end of the Second Spanish Republic. These are just a few of many such situations that challenge a liberalized, free and unified Europe.
What are the implications for European investment? In recent weeks there has been much discussion about the impact and reverberations if Catalonia continues to pursue its quest for independence. Equivalencies have been drawn to Great Britain’s lurch toward nationalism and departure from the EU. There are some significant differences in these two situations though which we believe are notable. To begin with, Britain never fully integrated with Europe. They maintained their own currency and central bank as an example. Their impending departure will likely drag on economies for some period of time because of added layers of friction in labor mobility, trade, transit, and tourism. Catalonia on the other hand seeks self-governance and to be an independent state member of the EU. This would clearly be a devastating blow to Spain given the amount of national GDP represented by Catalonia, but as an outside investor in greater Europe, does this change the overall economic picture? The Catalan economy and its people would still be European participants, just at a remove from Madrid. In some regards, it may actually unleash economic potential by stripping out a layer of government.
Brexit is not the right comparison. “Screxit” is. The Catalonian referendum bears the greatest resemblance to the Scottish independence vote that narrowly failed. The motivations for exit were not dissimilar – moving away from the imperial power in London, reinforcing their national heritage and identity, unleashing the full potential of their economy, taking internal control of their valuable natural resources like North Sea oil, and, yes, directly joining the EU.
Our question as investors is what the hazards to Europe’s growth and stability story could be with nationalist and secessionist movements gaining traction. There are two separate impulses at work both rooted in the cause of self-determination but pointing in opposite directions. Autonomous and semi-autonomous regions like the Basque and Catalonia desire independence, internal control and freedom to participate directly in markets and the European Union. Nation states are wrestling with movements to self-determine border permeability, currency and debt, regulation, cultural dilution, and trade, and a push to move away from the greater Union. The risk in tilting at too many windmills in capital allocation decisions is doing a lot and achieving nothing. At present we expect a stable, slow-growing Europe and a long-term climb of the Euro back to historical levels. The push-pull of the nationalists and the secessionists may not directly offset, but to us it seems like sufficient countervailing forces to keep the big picture intact.