It is 5 AM in Lisbon, and I am sitting in an airport lounge with wifi, writing this week’s OTB on my iPad, clumsily. GaveKal has written a very candid analysis of the Catalonia vote/debacle, which was a hot topic at the conference where I was speaking – Spain is right next door. There were numerous past and current foreign ministers and other parliamentary leaders here, all very pro-EU, and they were aghast at Rajoy’s heavy-handed response. Howewver, they all agreed that Catalonia could never be recognized as a new country in the EU, as this week’s OTB notes. Allowing Catalonian independence would fuel the flames of the numerous separatist movements all over Europe and disintegrate the movement to a closer EU – something that all here agreed would be a
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It is 5 AM in Lisbon, and I am sitting in an airport lounge with wifi, writing this week’s OTB on my iPad, clumsily. GaveKal has written a very candid analysis of the Catalonia vote/debacle, which was a hot topic at the conference where I was speaking – Spain is right next door. There were numerous past and current foreign ministers and other parliamentary leaders here, all very pro-EU, and they were aghast at Rajoy’s heavy-handed response.
Howewver, they all agreed that Catalonia could never be recognized as a new country in the EU, as this week’s OTB notes. Allowing Catalonian independence would fuel the flames of the numerous separatist movements all over Europe and disintegrate the movement to a closer EU – something that all here agreed would be a bad thing. Remember, Catalonia is much bigger than Greece – it’s 20% of the Spanish economy and Spain’s strongest region. Not a small deal. But I think the outcome will be a deal like the Basques got – more independence, and they get to keep more of their tax revenue. But the referendum was a great negotiating tactic. And Rajoy, with his clumsy police action, actually gave the separatists the upper hand.
I may at some point write a full letter on what I heard at this confernce. There were some very different viewpoints than you hear in the US (even from my close friend George Friedman). When you spend a great deal of time with Jean-Claude Trichet, former president of the ECB (who was extraordinarily polite and gracious) and hear him advocate for a stronger European NATO, and hear as well from far-left German Politician Joschka Fischer, who also espoused a hard line against Russia and China and a stronger NATO – almost sounding like Trump – you wonder what rabbit hole you have fallen down. Herr Minister Fischer was however not amused when I pointed out the similarity between his views and Trump’s. He swears he has no interest in ever being a politician again. But his talk, which I oddly found myself agreeing with much of, certainly sounded like a stump speech. My new friend may have protested his reluctance too vigorously. Oddly, the greatest disagreement I stumbled into was with a fellow American who is a friend of Hillary. Which made for a couple very lively dinner debates – which I hoped amused our hosts.
I return with much to think about. Joschka laid out the point that if Le Pen had won, Italy would have left the EU in just a few weeks. The Eurozone would have dissolved. He sees the nationalist impulse in many countries as a great threat to the EU project, and not surprisingly. The views of Trichet on the debt situation deserve more than a sentence or two. He forcefully argues the Europeans can sort it out – without mutualization of their total debt – and he offered data and facts to support his view. I am skeptical, and others agreed with me. Europe is going to be very interesting in the coming years.
This was a very different conference from many I have attended in the past. It was certainly one geared to debate and a candid exchange of views. It was exhilarating. And exhausting. I sign off from the flight lounge in Madrid, about to take a 12-hour flight to Dallas. I might rest an hour or two so I can have some energy for my Thursday morning speech in Dallas. And for an early breakfast with my friend Steve Moore. Maybe he can help me make some sense of the chaos in Washington.
I hope to have wifi from Madrid to Dallas. I really have not had time to work on correspondence much at all, because I rarely get such a great opportunity to interact with so many good minds. For 15 hours a day. And my deep thanks to the Soares dos Santos family for being such fabulous hosts. I have never been treated so well. I experienced mordomia.
The Q and A after my speech was intense. This was their upper-level management team of maybe 70 people. (Jerónimo Martins, the firm that put on the conference, has 100,000 employees.) They are intently focused on making sure they are on the cutting edge of future change. They broke into eight groups after each presentation to come up with one big question per group. It made for some of the toughest and most provocative exchanges of my life. And then they confronted me (politely, as is the Portuguese style) with even deeper questions. I was challenged to come up with good answers, as they really made me pause and think. All in all, I learned more than I imparted. I want more of this type of engagement.
Your coming back with even more questions analyst,
John Mauldin, Editor
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By Tom Holland, Gavekal Research
October 2, 2017
Yesterday the world was treated to the unedifying sight of the national police of a democratic state using violence in an attempt to prevent peaceful crowds of citizens from voting. If any investors still believed that the electoral defeat of the far right earlier this year in the Netherlands and the election of Emmanuel Macron in France had resolved the structural forces working to fragment the European Union, yesterday’s footage from the unofficial independence referendum in Catalonia will surely have disabused them.
Although Catalan independence in any meaningful sense remains highly unlikely in the near term, Madrid’s clumsy response to Sunday’s vote guarantees that the secessionist sore will continue to fester. With a lively cyclical upswing under way in the eurozone, that may not bother investors too much in the near term. However, the weekend’s events in Spain underline how neither Europe’s national governments nor its supranational institutions have yet to offer a workable formula to counteract the political forces working to drive the EU apart. That failure threatens to add considerably to the risk premium on European assets when the next cyclical downswing inevitably sets in.
Yesterday’s violence follows a string of political blunders from Spain’s central government led by prime minister Mariano Rajoy. The sensible response to the Catalan regional government’s proposed independence referendum would have been to dismiss it as of no legal validity, but to allow it to proceed uninterrupted. In that case, recent polls suggest Catalans would have voted “No” to independence by a margin of 5-10pp. Such a result could potentially have buried the question long enough for a combination of increased devolution at the domestic level and greater EU integration to render it permanently moot. Most Catalans, after all, are not Euroskeptic, rather regarding the EU as guarantor of their minority rights.
However, Rajoy’s response that the referendum contravened Spain’s constitution and must not be allowed to proceed has surely backfired. In strict legal terms no doubt he was right. But sending heavily armored riot police to lay into peaceful citizens with truncheons in order to prevent them from voting is never a good look. Not only has his decision likely strengthened support for Catalan secession, it also allowed the regional government to declare an overwhelming 90% vote for independence on a 42% turnout in a deeply flawed vote. That could lead the Catalan regional parliament to declare independence from Spain as early as this week (assuming Madrid allows the assembly to meet).
As a result, the face-off between Catalonia’s government and Madrid will persist, with little chance of any externally-brokered reconciliation. The Catalan question will become one more unsolved problem on Europe’s to-do list, along with the unchecked influx of illegal migrants from the Middle East and Africa, the “Article 7” legal dispute between Brussels and Poland, the upcoming negotiations with Athens ahead of the expiry next year of Greece’s current bailout program, Brexit, and the seeming impossibility of overcoming constitutional obstacles to the implementation of much-needed structural reforms in the eurozone’s third largest economy: Italy.
This matters, because another item on the list of unsolved, and possibly insoluable, EU problems makes even less likely the sort of progress towards deeper integration the eurozone badly needs if it is to successfully ride out the next cyclical economic downswing. In France Macron has sketched out a plan that includes the first pan-European taxes, Franco-German tax harmonization, and a common eurozone budget. But although German politicians have made encouraging noises, the Free Democrats, chancellor Angela Merkel’s likely new partners in a “Jamaica coalition” have so far spoken coolly about any possible steps towards a fiscal transfer union.
The FDP, which is likely to take the finance ministry in a new coalition government, prefers a strengthened version of the current Fiscal Compact backed by a beefed-up European Stability Mechanism. Whether such a formula will be sufficient in a future downturn is doubtful. A fiscal transfer union would stand far more chance of averting an existential crisis for the eurozone. But with the Catalan question unresolved, achieving such a fiscal union will be even more difficult, and very likely impossible.