Last year saw a number of political events dominate the headlines while forcing changes to currency markets. The euro, the US dollar and the pound sterling were those that were affected the most, as trading intensified in the wake of certain votes.
Elections drove market moves, with unpredicted outcomes in Germany and in the UK prompting dramatic shifts in local markets. But perhaps the biggest drama came from Spain and the independence vote in Catalonia. This is It’s a story that refuses to go away while at the same time, political observers and FX traders alike are asking "Who’s Next?"
Dis-United
To answer that question, perhaps we could start by heading to Great Britain, where we find a less-than-United Kingdom. Scotland has already held an independence vote that decided to stay in the Union, but the Scots are largely pro-European, and the Brexit vote has urged the powers-that-be to call another poll on the question of becoming an independent nation.
The previous poll was held in 2014 and the ballot simply asked voters to decide Yes or No on the subject of separating from Great Britain. At the end of campaigning, the country voted by 55.3% to 44.7% to stay in the United Kingdom. But with disaffection running through the country in the wake of Britain’s decision to leave the European Union, it could be much closer next time and even tip in favour of a Yes vote.
Scotland’s ministers have much to digest and organize as they discover exact details of their future following the Brexit deal, but it would surprise very few people to see another Scottish independence vote follow in the near future.
Less than Rock Solid
Britain has also experienced issues over the sovereignty of Gibraltar, but this is another region where the question of independence crops up, albeit on a less regular basis. To an extent, this is a region that is under dispute between the United Kingdom and Spain and there have been referendums based on sovereignty in the past.
The most recent of these came in 2002, and the result at the time was an emphatic one. Voters were faced with a simple question - whether Britain and Spain should share sovereignty over Gibraltar moving forward - and there were 17,900 ‘No’ votes, equivalent to over 98% of the ballot.
That would represent a big endorsement of British rule, but any referendum of this kind is enough to unsettle the currency markets, and Spain may take a closer look at the Gibraltar question if Catalonia were to ever break out on their own.
Elsewhere
Speaking to CNBC in 2017, Willem Buiter stated that ‘Too many countries in the European Union have secessionist problems, including the UK, Belgium and Italy.”
We’ve already seen the issues facing Great Britain but perhaps the other countries mentioned there may come as a surprise. In Belgium however, the nation is split into three distinct communities and there are political groups working on rights and possible independence for Flanders and Wallonia.
In Italy, it’s Veneto and Lombardy that seek more autonomy from the state. Reports are confined to smaller sets of column inches but the point is that all of these areas are watching the Catalonia situation with great interest and may well look to increase pressure if that region were to break free from Spanish rule.
Further Headaches
Spain’s interest in keeping Catalonia may well stem from further questions that may come from other areas of the country if independence were to be granted. The Basque Region has a long history of disputes with Spain and sadly it’s one that has descended into a number of acts of terrorism in the past.
The separatist group Eta installed a permanent ceasefire in 2011, but this is another region that is known to be following the Catalonia situation closely. A spokesman for the Basque Nationalist Party stated that they would like the possibility to have a referendum on independence themselves in the near future.
Europe and beyond
Elsewhere, there are similar stories to those we have listed above: South Tyrol in Italy is another region of Europe where independence calls have been made in the past, while moving further afield, Canada is facing potential issues with Quebec.
All of these areas have one thing in common and it comes back to Catalonia. Regions across Europe and beyond are eyeing up the situation and asking, "Why Not Us?"
Turning back to the election front, it’s expected to be a quiet year at the polls, with attention mainly being focused on Italy and Sweden. Elsewhere, little is scheduled although there are isolated calls for another poll in the UK, but what do the financial experts make of it all?
Emanuele Canegrati, senior analyst at BP Prime, said:
I don't expect much volatility in Forex markets due to European national polls in 2018. The most important event will be the Italian national election which will be held on March 4th. Nevertheless, we could have a great variability only in the case of a strong victory by the Five Stars Movement. Even if no one party reaches the 40% threshold, which is necessary to obtain the majority, the possibility to form a national coalition is given as very likely.
Furthermore, the exit from the single currency has never been a main topic in the electoral campaign, with only the Northern League having said something about the possibility to leave the Eurozone. The Democratic Party and Silvio Berlusconi's Forza Italia are both in favor of increasing the Italian role in Europe. All the other national polls should not provide many surprises.
As for the UK, it is perfectly possible we could have early elections, should Brexit talks end in a 'no deal' or a very unfavourable (for London) deal. Otherwise, the situation in Germany is solved, as Angela Merkel's CDU and Martin Schultz' SPD reached an agreement to form the Grosse Koalition.
So the shifts may be small as far as the experts are concerned, certainly when compared to Germany’s election results last year, but it could still be an interesting 2018 for the markets, depending on how certain votes go. Those comments relate, of course, to well-known events, but as far as independence polls are concerned, it’s somewhat of a step into the unknown.
Meanwhile, in the wake of the Catalonia vote, the potential is for further calls for independence around the world. It’s certainly going to be a fascinating 12 months in that respect but it’s also a period that could threaten global currencies even further.