Euro drops as Catalonia declares independence

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The single currency has lowered slightly against the dollar in reaction to Catalonia declaring independence from Spain this afternoon.

The regional assembly backed the motion in a majority of 70 to 10; however, three parties opposed to secession representing 55 seats walked out before the vote.

The Spanish benchmark index, the Ibex, fell 2.1 per cent on the news.

The euro was at at three-month low of $1.1590 this afternoon; however, a strong US dollar on the back of positive GDP data was a significant contributor.

Spanish prime minister Mariano Rajoy has since tweeted that the rule of law will be returned to Catalonia.

ECB president Mario Draghi yesterday played down the risks of Catalan independence for the eurozone during a press conference following the governing council’s monetary policy decision.

Independence would effectively see Catalonia leave the single currency and the European Union, although secessionists and unionists both seek to remain part of both.

The central government is preparing to throw out the current regional government, which was elected last June.

Independence parties are the largest bloc in the Catalan parliament, but are not a majority at 48 per cent. Thirty nine per cent are unionists with the remainder neutral or in favour of increased autonomy.

Rajoy’s Partido Popular accounts for 8 per cent of the Catalan government.

Fitch said last month it was prepared to take action on ratings if hostilities escalated.

Catalonia currently has a BB rating with a negative outlook, although Fitch has said devolution for the region could have been credit positive due to the its strong economy and tax base.

Tension between the regional and central governments has escalated since the Catalan government hosted an independence referendum on 1 October that was deemed illegal under the Spanish constitution.

Police brutality against Catalan voters by the Spanish civil guard was widely condemned by international media.

Catalan president Carles Puigdemont and prime minister Mariano Rajoy have failed to conduct dialogue since.

While Puigdemont put forward an offer for dialogue rather than immediately declaring independence, Rajoy responded by launching Article 155, which removes Catalonia’s elected government and will see Spanish control of Catalan state media.

It would also see police powers returned to the central government.

Donald Tusk has tweeted that for the EU nothing changes and that Spain remains their only interlocutor, although he notes the government should use “force of argument, not argument of force”.