Catalonia will hold a de facto independence referendum through regional elections on September 27, 2015. This one will have “real” effect, unlike the 9N, because the Catalan independence parties would form a unity government and set up the institutions of an independent state, ultimately declaring independence at a date yet to be announced.
Posts Tagged ‘secession’
My paper on the political philosophy of secession is now out in Public Affairs Quarterly, an open-access journal. Read it here. Teaser:
The United Kingdom currently sets the gold standard for management of secessionist politics. The British and Scottish governments negotiated in good faith over the terms of the independence referendum that Scotland held on September 18, 2014. If Scotland had voted to secede, the British government would have recognized its independence, thus affirming that the United Kingdom is a free partnership among its peoples.
Spain presents a different scenario altogether. Catalonia intends to hold its own “consultation” on independence, but the Spanish government has denied its right to do so, thus denying that Spain is a free partnership. The Catalan government has repeatedly sought to hold negotiations on the self-determination process, but has been rebuffed. What ought the Catalan government to do? By the criteria set forth in this paper, Catalonia has tried to conform to a just institutional regime for regulating secessionist politics, while Spain has not. Catalonia would be justiﬁed in using all proportionate means to secure a just outcome.
Constitute.org is a useful website designed by political scientists to let researchers search for and compare constitutional texts on particular topics. Here for instance is a search on secession clauses. Although one of the site’s creators, Zachary Elkins, says that 22 states contemplate some process for state divorce, only three constitutions expressly authorize some part of the country to secede: Ethiopia, Liechtenstein, and St. Kitts and Nevis. Ethiopia lets each people or nationality secede by a supermajority vote of its legislature, Liechtenstein lets each commune secede (I believe this was an addition of the 2003 constitution), and St. Kitts and Nevis lets Nevis secede by a supermajority referendum vote.
In addition to these, Britain’s Northern Ireland Act of 1998 lets the majority of Northern Irelanders decide to join the Republic of Ireland, and the constitution of Uzbekistan lets Karakalpakstan secede with the consent of the Uzbekistan government.
It would be interesting to see how many states define themselves as “indivisible,” thus tying a government’s hands and preventing it from authorizing secession. A search on the term brings up some irrelevant cases, but 72 constitutions contain the term.
Last week I was in Barcelona for two days, giving a talk at an event on “the right to decide,” sponsored by the Centre Maurits Coppieters (nonprofit arm of the European Free Alliance, the European Parliament group for ideologically mainstream minority nationalist parties) and by the Fundació Josep Irla (nonprofit arm of the Catalan Republican Left [ERC], largest pro-independence party in Catalonia). I also did some media interviews. You can see some excerpts of my interview with Catalonia’s TV3 evening news here (in Catalan).
I was interested in going to find out more about Catalonia’s independence movement and its prospects. For background on the Catalan movement, see my post here on Pileus from September 24, 2012, two weeks after the massive Catalan National Day demonstrations that kicked off the current process. (That post, including its forecasts, has held up pretty well, I’d say.)
Now that the Spanish Constitutional Court has invalidated the consulta (consultative plebiscite) that the Catalan Government had authorized with the support of over two-thirds of Catalan MP’s and three-quarters of the Catalan electorate, the way forward is murky. An official consultation will not now happen. Instead, tens of thousands of volunteer poll workers are signing up to help with an unofficial poll that will involve ballots and ballot boxes and occur on November 9.
It remains to be seen how successful the November 9 consultation will be. The pro-independence parties and civil society organizations are trying hard to mobilize voters and volunteers for the event. The anti-independence parties are boycotting the vote, as indeed are some far-left types who hate Artur Mas, such as the leader of the ex-communist, ecosocialist party ICV-EUiA, which otherwise supports the “right to decide” and remains agnostic on independence.
If the November 9 consultation is successful, then the pro-independence parties will try to negotiate a “unitary party list” for early elections to the Catalan Parliament. They will treat this election as a plebiscite-by-proxy, and if an absolute majority of seats and votes go to the pro-independence list, Artur Mas will take it as a mandate for independence.
However, several difficulties remain. The more radically independentist party, ERC, wants to declare independence right away after a successful “plebiscitary election.” Artur Mas’ party, Convergence and Union (CiU), is divided between independentists and those favoring a solution like confederation. (Technically, the party is a long-standing alliance between two separate parties, the now-independentist Democratic Convergence of Catalonia and the autonomist Democratic Union of Catalonia.) Generally, the last few days have seen more division and acrimony among secessionist leaders than the previous two years, and if it continues, that division will alienate voters. Civil society groups continue to call for unity among the pro-independence leaders.
Another difficulty is that while a majority of Catalans with an opinion on the matter favor independence (a recent El Mundo poll had the anti-independence side ahead within the margin of error, but their polls have always been biased in an anti-independence direction), polls suggest the pro-independence parties would not together gain a majority in early elections. The reason for this is that many independentists are not in the secessionist parties. For a successful result, the “unitary list” will need to contain important leaders from civil society and non-secessionist parties.
If the Catalan process stumbles now, it will be a shame, because it will show the Spanish government that they can face down demands for more autonomy simply by standing pat and threatening to arrest politicians. Spanish autonomous communities like Catalonia enjoy far less autonomy than American states (they are not allowed, for instance, to vary the overall tax burden from a central standard).
The most likely outcome of the process now seems to be (more…)
Posted in British politics, Economics, elections, finance, secession, tagged capital markets, economics of secession, financial markets, scotland, scottish referendum, secession on September 17, 2014 | Leave a Comment »
Unless the polls are systematically biased or there is a late-breaking surge in support for “Yes,” the “No” campaign looks set to squeak by with a narrow victory in the Scottish independence referendum. On the betting markets, a “Yes” vote has plunged below an implied probability of 20%. What has this decline in the prospects for independence done to capital markets? In my last post on the subject, I found that British firms and the pound were nearly untouched by what was at the time significant momentum for “Yes,” but that a nine-firm Scottish equity index was hit hard. If those losses reflected unease about independence, then the latest news should have caused growth in my Scottish equity index.
The biggest decline in the Yes team’s chances actually came overnight September 11-12, when the chances of Scottish independence abruptly fell about 10 percentage points on the release of new polls in the evening of September 11. (For a full list of recent polls, see Wikipedia.) The Yougov poll showing “No” in the lead (a dramatic reversal from its previous poll) seems to have been leaked just before the closing bell on September 11.
Accordingly, I examine the performance of the Scottish equity index on the London Stock Exchange between 4:30 PM and 5:00 PM local time on September 11, when the odds of Scottish independence declined so rapidly. These are the nine stocks I include in the index: SL, SSE, FGP, WEIR, SGC, AGGK, WG, ADN, and MNZS. Of these, eight of nine rose on the poll news. Again, I weight by each stock by its market cap to create the index. The index rose 0.5% on the news, a rather small increase compared to the 1.7% decline after the shock Yougov poll showing “Yes” ahead. The overall patterns were pretty similar, though. The two transportation companies, Firstgroup and Stagecoach Group, were basically unchanged between the two. Energy-linked firms and Standard Life led gainers. Aggreko (temperature control systems) registered a small gain, and Aberdeen Asset Management a somewhat larger one.
Roughly a ten-percentage-point drop in independence likelihood led to a 0.5% gain in the value of Scottish equities, less than a third of the loss in Scottish equities after an eight-percentage-point gain in independence likelihood just a few days prior. On balance, these results suggest we should revise downward the costs of secession suggested by the prior post.
One objection to this interpretation might be that the leak of the Yougov poll just before the closing bell gave traders little time to respond. But this does not appear to be the case. The Scottish equity index was flat at the opening bell on September 12, suggesting that there was no new information for traders to consider.
Here are two more interpretations. First, betting markets are less liquid and well-capitalized than financial markets. The actual gain in the probability of Scottish independence after the first Yougov poll may have been greater than the immediate response on betting markets. Second, the shock of a poll actually showing “Yes” ahead may have led traders to overestimate the likelihood of Scottish independence, and perhaps even the costs of secession (in a moment of panic). Having been inured to the initial shock and its aftermath, traders then took later news with more equanimity.
Overall, though, the results are still suggesting net economic costs to Scottish independence. How much of the emphasis should be put on the “Scottish” part of that phrase and how much on “independence” remains a matter of debate, but clearly energy and financial firms are more affected than transportation and service ones.
What can we learn from capital markets about the likely consequences of Scottish independence? A trio of recent polls has shown the “Yes” side to have pulled roughly even with “No.” With momentum on their side, it’s not unthinkable at all that “Yes” will pull it out, resulting in the first secession from a Western democracy since Iceland withdrew from Danish union in 1944. Most American commentators, from Paul Krugman to Tyler Cowen, oppose Scottish independence and forecast economic disaster for the new country. Are they right?
Let’s look at the behavior of capital markets in Britain since these polls’ release to find out. First, let’s set the stage by looking at how betting markets price the probability of Scottish independence. Unfortunately, there are no nice InTrade-style charts for implicit probabilities anymore, at least not that I can access from the United States. From oddschecker.com, I am able to pull odds from different exchanges from the beginning and end of each day. Looking at the markets with most liquidity, it looks as if the odds for independence moved from about 19.5% Friday night to about 25% Saturday night, after the release of the YouGov and Panelbase polls (the Panelbase poll suggested “No” might still have a small lead). On Monday morning the odds stood at about 23.3%. After the release of the TNS poll Monday evening (confirming the dead heat), the odds moved in to 26.0%.
Next, let’s look at the behavior of capital markets over this period. Here is how the pound has fared against the euro:
Not much of a correlation. To be sure, the pound fell against the euro when trading opened Monday morning, following the shock weekend poll from Yougov and the somewhat-reassuring poll from Panelbase, but the TNS poll released late Monday night appears to have had zero effect on the pound, even though it did have a small effect on the betting markets.
Now, the pound has fared a little worse against the dollar, because the euro has also dropped against the dollar. This may reflect that traders believe Scottish independence raises the probability of British exit from the EU. But this would not be a direct cost of Scottish independence, and it would ultimately be up to English, Welsh, and Northern Irish voters whether they want to withdraw from the EU.
I’ve got the Dow in there for comparison (in green). So the FTSE fell about 0.3% on opening Monday, then drifted downward throughout the day, finally recovering all that ground except the initial 0.3% drop. On opening Tuesday after the TNS poll, it actually rose. As of this writing is down just about 0.4% from Friday’s close. This looks like a muted response to me.
But what about Scottish-exposed stocks in particular? I took the list of top 25 Scottish companies here and winnowed the list down to those listed as having Scottish ownership and being publicly traded. Nine companies fit that test. I then constructed a weighted average of their share prices at Friday close, Monday open, Monday close, and Tuesday open, the weights being each stock’s market cap according to investing.com. Recall that there were two surprise polls, one over the weekend and one released Monday evening, the former having the greater effect on betting markets.
The Scottish index I created lost 1.7% of its value on opening Monday morning, a noteworthy drop because it happened right away. It’s plausible to attribute this drop to the increased risk of independence. However, today it lost nothing on opening – in fact, it was up 0.1%. Still, the total loss to these nine firms’ market value amounts to about $800 million. The fact that there was no further response of capital markets to the TNS poll, even though betting markets did respond, weakens our confidence somewhat that investors are responding negatively to the prospect of independence, but let us work with the assumption that they are.
What would happen to these firms’ value if independence were dead certain? Expected utility analysis helps us here. They lost $800 million in value on an increase in the probability of independence of 5.5+2.7=8.2%. We can infer that an increase from 20% to 100% would wipe out $800 million*8/.6=$7.8 billion. That’s a fair proportion of their existing value: about 16%. Of course, investors are risk averse, and the very uncertainty of the outcome might be driving a fair proportion of the losses.
A closer look reveals that different stocks responded differently to the poll news. Two transportation companies, FirstGroup and Stagecoach Group, lost virtually nothing, and Aggreko, which rents temperature control systems, lost absolutely nothing. Financial and energy/power companies were pounded. An engineering company closely linked to the oil industry, the Weir Group, took a more modest 1.0% loss.
How to sum up? So far (more…)
Tyler Cowen thinks Scotland should stay in the UK, and so do I. But this bit of his blog post I can’t quite agree with:
If a significant segment of the British partnership wishes to leave, and for no really good practical reason, it is a sign that something is deeply wrong with contemporary politics and with our standards for loyalties.
I find this entire prospect depressing, and although it is starting to pick up more coverage in the United States and globally, still it is an under-covered story relative to its importance.
This is a referendum on the modern nation-state, an institution that has done very well since the late 1940s but which is indeed often ethnically heterogeneous at its core. While I expect Scottish independence to be voted down, if it passes I will feel the world’s risk premium has gone up, even if the Scots manage to make independence work. (emphasis original)
The main reason why some Scots want to leave the UK is ideological. Scotland consistently votes 15-20 points to the left of the rest of the UK, and with a current center-right government and a constantly improving prospect of a Conservative victory at the next election, many left-wing Scots fear the policies they’ll face in a united Britain. If you follow the Twitter feed of Yes Scotland, you’ll see a stream of claims about new social programs an independent Scotland could implement, and explicit fears about future Tory rule.
Furthermore, Scots are discontented with devolution, wanting something more, but many of them do not trust that David Cameron will follow through on promises to enact more generous autonomy for Scotland (his party is, after all, still the Conservative and Unionist Party).
Growing state intervention in people’s lives has made ordinary ideological disagreements more salient and fundamental. As a result, ideologically polarized people in advanced democracies often wonder whether they can live in peace with “the other side.” Is this depressing or just inevitable? Anyway, I’m not sure Scottish secession would raise the world risk premium any more than Norwegian or Icelandic secession did, or than Faroese independence would. It would at least be peaceful and negotiated. Still, I reiterate that it is probably a bad idea for Scots, and unlikely to happen according to the polls.