International Policy Digest

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Sponsored Content /16 Nov 2017

The Effect of the Catalonia Crisis on European Markets

The Catalonian independence movement is currently seen as one of the most significant political risks to the Eurozone economy. On October 10th, the president of this Spanish region, Carles Puigdemont, declared Catalonian independence before immediately retracting his statement by announcing that he wanted to initiate a constructive dialogue with Madrid.

However, the Spanish Conservative government didn’t plan on negotiating with the separatists and Mariano Rajoy’s administration merely offered the Catalans an ultimatum: to confirm or rescind its declaration of independence within 3 days, or face the prospect of direct rule from Madrid. The Catalan authorities didn’t clarify their position regarding independence. The Spanish government has now invoked Article 155 of the Spanish constitution, taking full control of Catalonia and suspending the autonomy of the region in order “to restore legality in Catalonia’s self-government.”

The situation poses significant risks to the Spanish economy, as the region contributes about 20% of Spain’s total GDP. It also impacts the Spanish stock market, and by extension, the European markets. For example, many companies based in the region have already decided on – or are actively considering – relocating their headquarters to other parts of Spain.

The most significant decision in this regard is the one by Banco de Sabadell, the 5th most important bank in Spain, which has opted to leave Barcelona and to set up shop in Alicante. CaixaBank, Catalonia’s largest lender, has likewise expressed grave concerns about the situation and is also considering leaving the region. All these uncertainties have increased volatility on the main European stock market indices, especially the IBEX 35, the principal Spanish stock index.

U.S. indices are currently at their highest levels, while European markets are also performing well. Many analysts think that every market dip caused by the Spanish crisis could be an opportunity to buy in.

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