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Euro drops as investors gauge impact of Catalonia unrest

The euro and Spanish stocks fell on Monday as investors tried to gauge what the weekend unrest in Catalonia means for the future of the Spanish state and European unity.

Following weeks of unease surrounding Sunday’s independence referendum in Catalonia that Spain’s courts deemed illegal, the standoff degenerated into mayhem. More than 800 people were injured as riot police clashed with unarmed civilians trying to cast their ballots.

Catalonia’s regional government declared a landslide win for the “yes” side in the vote and is considering whether to declare independence.

The uncertainty over Spain weighed on the euro, which was down 0.7 percent at $1.1733. Spain’s main stock index also fell 1.3 percent, underperforming its European peers, which were modestly higher.

The future of Catalonia is hugely important for Spain, as the region, whose capital is Barcelona, represents a fifth of the national economy. Polls consistently show that while most of its 7.5 million residents favored a referendum, they are roughly evenly split on the question of independence from Spain.

Kathleen Brooks, research director at City Index, said the weekend developments have “caused mild confusion in financial markets rather than panic.” She cautioned that the quest for Catalan independence and the risk of a break-up of the fourth largest economy in the eurozone will not be ignored by markets indefinitely.

For now, there seems to be a general expectation that the Spanish state and the Catalonian regional government will avoid a further escalation in the conflict and find a compromise that could grant more powers to the local authorities.

Also keeping in check investors’ worries is that there is growing optimism surrounding the eurozone’s economy overall.

Official figures released Monday show that the number of unemployed people fell by 42,000 across the region in August, though the headline rate remained at 9.1 percent, its lowest level since early 2009.

And financial information company IHS Markit said that business activity in the manufacturing sector rose to a level that’s only been higher once in the 17-year history of the survey. Its main purchasing managers’ index rose to 58.1 points in September from August’s 57.4.

Neil Mackinnon, global macro strategist at VTB Capital, said Spain and other national movements could become a problem for the EU “over and above any potential constitutional crisis” and even warned that it “could threaten the integrity of the monetary union.”

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