Euro continues to fall on Spanish budget, Catalonia doubts

Welcome to the Pure FX account of the latest changes in the euro exchange rate, covering the 21st to 28th September 2012. This is intended as a brief guide to movements in the euro this week, to put you in the best position for when you exchange currencies.

Exchange rate changes this week:

GBPEUR: 1.2511 to 1.2577 (+0.528%)
GBPUSD: 1.6252 to 1.6267 (+0.092%)
EURUSD: 1.2987 to 1.2933 (-0.416%)

So it looks like that fall in the euro that we saw last week, following the common currency’s two-month climb against the pound and US dollar, wasn’t a one-off then: this week, the euro has again lost out against its main counterparts. This currently puts the pound and greenback at a two-week high against the euro, which is beneficial if you plan to transfer funds to the Eurozone.

However, unlike last week, when the euro fell due to generalised nerves about the Eurozone economy, the common currency’s decline this time has a much more specific focus: namely, Spain. Whether because of its budget, the threat of secession from Catalonia, or its bank bailout, the Iberian nation has barely been out of the headlines this week, with news that all points to an uncertain future. That then has seen the euro fall.

What made the euro fall this week

Arguably the biggest factor in the falling euro this week, and certainly the most exciting, is the threat of secession from Spain by Catalonia.

On November 25th, Catalonia will hold a general election, widely seen as an unofficial referendum about whether it should push ahead with independence. This will then be followed by an actual referendum, in which the question will be openly posed to the Catalan people.

Now, the problem is that, under the Spanish constitution, it’s both illegal for Catalonia to hold a referendum (that power belongs solely to the Madrid central government) and illegal to do so without asking all of Spain. So what will Madrid do about it?

Speaking yesterday, Spanish debuty prime minister Soraya Sáenz de Santamaría said that, “Not only do instruments exist to prevent [a referendum], there is a government here that is willing to use them.” But what does that mean?

Could it mean an appeal to Spain’s constitutional court, to strike down the result of an referendum should it be held? Or could it mean more active intervention, sending the army into Catalonia to prevent the referendum happening at all?

Right now, the question is up in the air, with tensions between Madrid and Barcelona running high. Compare the secession threat here, for example, to that happening in the UK with Scotland.

In the UK, the Westminster government has already agreed to give Scotland a referendum on independence, with both sides (pro and against) reasonably debating the issue in public. The question in Spain meanwhile seems dominated by veiled threats and hot-headedness by comparison.

Hence market unease, and the falling euro.

Spanish budget points to more pain

Second of all, the euro has come under pressure this week as the central government unveils its 2013 budget.

This has been written almost solely with ensuring that Spain meets its 4.5% deficit reduction target next year. It therefore involves a 58.0% cut in public spending according to some reports, bringing everything under the axe except pensions and debt repayments. Indeed, as Oli Rehn, European Commissioner for Economic and Monetary Affairs, notes, “in certain areas it goes even beyond what the European Commission recommended.”

But conversely, in the same instance Madrid wants to use its budget to demonstrate its dedication to austerity, and so boost confidence, it gives the opposite impression. The markets, after all, need only look to Greece or Portugal, to see the effect of continual spending cuts during a recession. As Nicholas Spiro of Spiro Sovereign Strategy notes then: “Spain needs more austerity like it needs a hole in the head.”

In addition, there’s also the social cost of these cuts to be considered, especially in a week in which Spain has seen its most violent anti-austerity protests yet. What does the prime minister Mariano Rajoy think continual cuts will do to the mood in Spain? Does he think the protests will stop, if he continues to cut deeper?

All that’s likely to keep the situation in Spain volatile which, of course, will contribute to a falling euro.

What’s going to happen to the euro next

So regarding both Catalonia and the budget, Spain looks unsettled. Both these questions will drag on into the coming weeks. Of course, Spanish deputy prime minister Soraya Sáenz de Santamaría may say “This is a crisis budget aimed at emerging from the crisis,” yet for the markets it risks deepening Spain woes.

Given that, the Iberian country will continue to have a huge influence on high the euro performs, with lots of potential for the common currency to fall a third week.

Find out more: To find how what I’ve talked about here will affect your euro transfers, simply fill in your details into the form below. I’d be delighted to answer any questions you may have.