Five days have now passed since the elections in Catalonia and it is still not clear who will form a regional coalition there, let alone what relations will be with the rest of the country. Although Spanish Prime Minister Rajoy's conservative Popular Party (PP) had a disastrous election, winning just three of the 135 seats, he will for the moment keep control of the region, because he imposed direct rule in October, invoking Article 155 of the constitution. That extraordinary measure was a first in post-Franco Spain and though it was said to be “temporary”, no end date has yet been announced for the current situation.
The European Union has treated the matter as an internal affair for Spain to resolve and is highly unlikely to change its stance. Meantime, the Catalan economy has suffered. Thousands of businesses, including major banks and energy firms, have moved their headquarters out of the region and, as it accounts for around 19% of Spanish GDP, the economic uncertainty is weighing down on activity. The OECD, for example, now forecasts GDP growth of just 2.3% in 2018 after 3.0% in 2017.
The ECB publishes its monthly Economic Bulletin tomorrow and it will be interesting to see how much weight, if any, it places on developments in Spain. The country accounts for only 11% of Eurozone GDP and is the fourth largest country after Germany, France and Italy.
Having swung between USD1.1816 and 1.1877 yesterday in the North American session, the EUR has been generally well-bid overnight in Asia. EUR/USD has risen to a high of 1.1885 - its best level since last Thursday morning - and the Single European Currency has kept pace with the Australian Dollar which has been the best performer overnight.
The euro opens in London this morning at USD1.1885, with GBP/EUR at 1.1265.