Days after Theresa May triggered Article 50 of the Lisbon Treaty, Brussels issued a nine-page document outlining its guidelines for Brexit negotiations. One of the guidelines gave Spain the authority to veto any deal between Gibraltar and the European Union (EU). The U.K. is currently recognized as holding sovereignty over Gibraltar and thus took exception to this provision, vowing to defend the will of the people of Gibraltar.

The provision is likely the result of heavy lobbying by the Spanish government, who would like to end this 300-year dispute once and for all. A war of words between Spain and the U.K. has already started in response to the announcement. Tory leader Michael Hayward stated that the U.K. is willing to fight for Gibraltar. Although not responding to the threat, Spain has hinted that it would not block Scotland if it were to apply to the European Union upon a potential Scexit.

gibraltar
By Original by Eric Gaba (Sting), label/legend edits by Jeff Dahl [GFDL or CC BY-SA 4.0-3.0-2.5-2.0-1.0], via Wikimedia Commons
Despite the bravado, it is likely that the two countries will come to some sort of agreement as they have deep trade ties. In fact, Spain has been the most vocal backer of a soft Brexit. That being said, the people of Gibraltar are stuck at a crossroads regarding the dispute. On the one hand, they voted 96% to remain in the EU, but on the other hand, they voted 99% against joint sovereignty with Spain. The situation becomes even murkier when its economy is taken into account. Gibraltar is dependent upon the U.K. for trade and Spain for labor. Nevertheless, it is unlikely that Gibraltar would have emerged from Brexit unscathed as its labor force is dependent on the free movement of immigrants permitted under the EU. Ironically, it was the free movement of immigrants that mostly caused British voters to leave the EU.

In this report, we will focus on the significance of Gibraltar, its historical context and the impact of the current dispute. We will conclude with possible market ramifications.

What’s at stake?

Gibraltar is a peninsula located at the southern tip of Spain along the Strait of Gibraltar, a body of water separating the Mediterranean Sea and the Atlantic Ocean. Its location provides both economic and military advantages. The owners of the region have immense influence on trade routes as roughly half of the world’s trade passes through the strait, along with a third of the world’s gas and oil and 80% of goods shipped to the EU. In addition, Spain receives half of its gas from the refineries located along the Strait of Gibraltar. Its geographic location has also proved useful in maritime war during the Napoleonic Wars and both World Wars.

Recently, Gibraltar has become a hotbed for foreign direct investment due to its ultra-low tax rates. As a result, Gibraltar has become a tax haven where many British financial institutions have decided to set up shop. The Economist reports that about 60% of all online betting in Britain is conducted through Gibraltar.

Gibraltar has become an asset for the U.K., much to the chagrin of Spain who forfeited all of the properties belonging to Gibraltar in 1713. That being said, Spain contends that it never surrendered control of the territory and therefore owns the surrounding waters and airspace. As a result, Spain and the U.K. have each claimed ownership of the peninsula.

Recently, Gibraltar has become a hotbed for foreign direct investment due to its ultra-low tax rates. As a result, Gibraltar has become a tax haven where many British financial institutions have decided to set up shop. The Economist reports that about 60% of all online betting in Britain is conducted through Gibraltar.

Gibraltar has become an asset for the U.K., much to the chagrin of Spain who forfeited all of the properties belonging to Gibraltar in 1713. That being said, Spain contends that it never surrendered control of the territory and therefore owns the surrounding waters and airspace. As a result, Spain and the U.K. have each claimed ownership of the peninsula.

Spanish Succession

The start of the 18th century saw the Spanish Empire in disarray as there was no heir to the throne following the death of King Charles II, also known as “the Bewitched.” As King Charles II was childless and his grandnephew, Joseph Ferdinand of Bavaria, had died a year prior, the Spanish throne was, by virtue of his will, given to the grandson of Louis XIV, Philip of Anjou. The Archduke Charles of Austria felt slighted, believing that he was the rightful heir to the throne as the nephew of King Charles II’s second wife, Maria Anna of Neuburg. The dispute had international implications because Philip of Anjou’s ascension to the throne would ensure

France’s supremacy throughout Europe. Furthermore, allegiances were split within the Spanish Empire between the Crown of Aragon, who supported the Archduke Charles of Austria, and the Crown of Castile, who supported Philip of Anjou. In response, Louis XIV, King of France and Philip of Anjou’s grandfather, invaded the Spanish Netherlands. Fearing French rule, the U.K. along with the Dutch and the Holy Roman German Empire formed the Grand Alliance and intervened in the war in support of Archduke Charles of Austria.

During this time,

Article continues in PDF

weekly_geopolitical_report_4_24_2017

 

…………….