Catalonia’s referendum, Madrid’s heavy-handed response and the region’s subsequent declaration of independence from Spain have all caused jitters in markets in the past four weeks. But the standoff with Madrid looks unlikely to cause a major correction. Indeed, European stocks have risen to a ten-year high and Spain’s Ibex-35 index eclipsed its pre-referendum level early this week.
This makes sense, as Capital Economics points out. The spat between Catalonia and Madrid looks nasty, but there is no terrorist group like the 20th-century Basque separatists in the picture. “Spain is not heading for civil war”, and even if the separatists win the elections called in Catalonia, a compromise based on more regional autonomy is a likely outcome. Catalonia is worth a fifth of Spain’s GDP, but the overall economy is still on track to grow by 3% this year. Nor is this a case of the eurozone crisis flaring up again: Catalonia doesn’t want to ditch the single currency.
There is also no sign of the political fracas denting the eurozone economy, which is “partying like it’s 1999”, or almost, as Bert Colijn of ING told FXStreet.com. The euro-area-wide Economic Sentiment Indicator (ESI), which covers both business and consumer confidence, hit its highest level since January 2001. Spain’s ESI is at a 22-month high; Germany’s reached a six-year peak. As Europe relies far more on exports than Britain or America – in Germany, for instance, exports comprise around half of GDP – the increasingly healthy global economy is also buoying sentiment. Note too that the European Central Bank, while halving its monthly bond purchases, is extending quantitative easing until September 2018 at the earliest. Europe’s rally should continue.