From JR Crooks: Spain continues to suffer under its crushing debt load. Meanwhile, one of its autonomous provinces wants to declare its fiscal independence as soon as this Sunday, Oct. 1.
That’s when Catalonia — home to Barcelona, not to mention a great deal of the country’s financial and manufacturing sectors — decides whether it will keep its language, culture and future wealth to itself.
A united Spain already provides financial strain to the European Union. But a divided nation poses a much-bigger problem.
Someone said political premium in Europe is vulnerable to this weekend’s Catalan referendum. And that’s a huge problem because the entire European experiment rests on political premium. It’s kind of like the U.S. dollar resting entirely on the full faith and credit of the U.S. government.
Except that the 19-nation economic and monetary union of sovereign governments brings a lot of different “faith and credit” into the European mix.
Unlike last time, when less than 40 percent turned out to cast their vote in favor of independence, Catalonia’s government is confident that this time, the referendum will be binding.
The eurozone is a balancing act of epic proportions. It’s not just a question of whether Catalonia’s referendum would bring it all crashing down. It’s also a question of, if it does, then how?
To be sure, Catalonia is meaningful for Spain. But it’s peanuts in the grand scheme of the eurozone economy. The impact it might have on investors, however, is anything but peanuts.
We heard it with Greece — if Greece leaves the European Union, it will set a bad precedent.
We heard it with Britain — if the UK leaves the EU, it will set a bad precedent.
Greece never left. Britain is on its way out.
Despite grumblings elsewhere around Europe, the European experiment has not come unwound.
Catalonia still wants to secede from Spain to ensure they may control their own political destiny. Spain isn’t keen on the idea, so they’re intervening in Catalonia’s referendum — which they’ve pronounced illegal — by suppressing it with national police force and a media blitzkrieg of indictment.
You see the potential for “bad precedent” shaping up, don’t you?
Populism — think of it as popular nationalism in this context — threatens the framework of the European experiment that depends on everyone singing kumbaya.
If Spain can’t “manage” Catalan populism, it will hurt Spain and set off a toxic cocktail of political war and social unrest that jeopardizes civil liberties across the eurozone.
That’s why an even-bigger worry is on the horizon …
German elections just this week dealt a blow to the status quo. Der Chancellor Angela Merkel remains in power, but her cohorts lost major ground to parties that embrace populism.
German citizens are uneasy about their country’s political, financial, economic and social obligations to the European experiment.
When the next big decision on how to sustain the eurozone arises, will Germany prefer greener pastures outside its commitments to a volatile economic and currency union?
Before that, though, how will the Catalan vote influence the elections coming to Italy next year?
Perhaps you remember me mentioning Italy two weeks ago in The Liquidity Threat is Real.
Italy is kind of a big deal — it’s a significant risk for this experiment. Its economy is among the world’s biggest, yet it is among Europe’s most fragile. Growth is below average … and debt is well above average … compared to its European counterparts.
And parts of Italy harbor populist animosity just like Catalonia. Just like Scotland. Just like Britain.
The 5 Star Movement, a populist political party in Italy, proposed a referendum on Italy’s euro membership. They feel the country is at the mercy of the currency union’s fiscal demands. Polls suggest the 5 Star Movement is running neck and neck with the governing center-left Democratic Party.
The Italian elections are still many months out. But markets will begin pricing in political risk long before any populist surprises at the ballot box.
Especially if the situation in Catalonian gets out of hand.
Especially if Germany doesn’t want to play ball.
Three Important Actions to Take Right Away
Clearly, the tide may be going back out for Europe. So here’s what I recommend …
Step 1. Make money. One good way to do that is by betting against the euro with shares of ProShares UltraShort Euro ETF (EUO).
Money flowing into European equity ETFs dropped significantly in August. That’s a big turn. Europe’s economic recovery has drawn money into European markets this year, but it appears investors may be losing their appetite.
If investors believe the euro will suffer from political pressure, they are likely to move money from Europe to the United States to capitalize on the exchange rate bonus of a stronger U.S. dollar.
Step 2. Make even more money. The tidal wave of flight capital flowing to the U.S. dollar and U.S. markets is just beginning. So don’t underestimate its potential power to destroy some assets and send others screaming higher.
Step 3. IMPORTANT: Be sure to avoid the asset destruction and jump on board the winners. Get all the information you need and all your questions answered.
The best time and place for that? Next week, right here on our website. That’s when our founder, Martin Weiss, and our cycles expert Sean Brodrick are going to personally answer your questions about these profit opportunities or about ANY topic you want to ask about.
This special Q&A marathon will be held LIVE, exclusively for subscribers. And it’s free for Edelson Institute members like you. But in order to attend, you do have to register here.
The ProShares UltraShort Euro ETF (EUO) closed at $21.68 on Friday, down $-0.15 (-0.69%). Year-to-date, EUO has declined -19.94%, versus a 13.43% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of The Edelson Institute.