Economics impact of Cataluña's independence dream and the Volswagen scandals
Elections and more politics in Europe: The meaning of Cataluna
The pro-independence platform (Junts pel si), together with the Popular Unity Candidacy, which also supports independence, won 47.7% of the vote and an absolute majority of seats in the 135-seat regional parliament of Catalonia. EuroIntelligence provides a detailed breakdown of the results. The future of the government in Catalonia is unclear (EuroIntelligence), with negotiations between representatives of Junts pel Sí and the hard-left separatist party CUP (CCMA)—both in support of independence (El País). Several alternative coalitions are possible (Europa Press and El Confidencial) on both the right and left wings.
Independence prospects downplayed… Junts pel Sí had published a detailed roadmap to independence before the election. Although the likelihood of independence has increased, Barclays Capital still does not see independence as the most likely outcome mainly because: 1) the costs of independence for Catalonia are very high; and 2) they expect Catalonia to win some concessions from the central government. Alberto Gallo (RBS Silver Bullet) writes that the election produced mixed results: pro-independence parties won a majority of seats in the regional Parliament, but failed to gain an outright majority of the vote—hence seeing a log ultimate risk of a Catalan separation. In case of a move ahead towards independence, Madrid warned that it could invoke Article 155 of the Constitution as a last resort. Further, under Article 49 of the EU Treaty, Catalonia would need to be recognized as a “state” by all 28 member states, including Spain, for it to gain EU membership.
For Goldman Sachs, the lack of a political process to accommodate Catalan demands is a source of political risk. The election result will clearly give greater impetus to Catalonia’s demands for greater autonomy (and, potentially, for independence).
Scandals and Macroeconomics: the Volkswagen case
On September 18, 2015, the U.S. Environmental Protection Agency (EPA) reported on the fact that in their analysis the engine software at Volkswagen was manipulated to show lower pollution results when the engine is tested for pollution.
Elena Vaccarino (Bruegel) provides a preliminary assessment of the possible costs: potential fines as high as US$18 bn (the FT) to which other significant costs could be added. Looking at the evolution of the company’s share price, she notes that all carmakers have been equally affected by the scandal.
For EuroIntelligence, the costs to VW (and possibly the German state if there is bail-out) may well exceed any hypothetical damage that might accrue to Germany from a Grexit. With cars from other companies in the VW group - Audi, Seat and Skoda – also affected, the total number of affected cars could be 11m. EuroIntelligence lists the potential claims against VW’s balance sheet total of €371bn:
Direct costs include the threatened fine by the EPA (€18bn); a class action suit by US buyers of VW cars (a multiple of the fine); the direct costs of repairs of all VW cars to be retrofitted with a second catalytic converter; compensation to European buyers (€22bn); lawsuits from investors, who lost 40% of the value of their shares as a result; claims for health damage. A conservative estimate for the sum of these costs is €50-100bn, but the US courts could easily push this figure to into triple digits.
The indirect costs may be a lot higher, from the need to lower prices to keep market share, further losses of income, more rationalization, and product outsourcing, with a negative impact on suppliers.
Wolfgang Munchau (hat-tip EuroIntelligence) argues that the German corporatist model is collapsing in a globalized world and that the case illustrates the strong need for structural reforms in Germany (see also Jakob Augstein) with troubling reports (Wall Street Journal) that authorities were lenient on information received on potential fraud.
Other impacts range from investors (hedge funds – see The FT; sovereign wealth funds – see Bloomberg) to the price of some commodities (Reuters on platinum and palladium). As a side effect of the scandal, VW was on the list of companies whose credits were part of the vanilla ABS the ECB is buying as part of its ABS purchasing program but according to the FT, the ECB has suspended those purchases because of the plunge in the share price by almost a third within 10 days.
