The threat of a Spanish crisis is haunting the euro’s recovery

Following the chaotic and upsetting images emanating from Catalonia at the weekend, the region’s leader Carles Puigdemont appeared keen to avoid inflammatory language yesterday, insisting: "We don’t want a traumatic break... we want a new understanding with the Spanish state.”

Sunday’s independence referendum had been ruled unconstitutional by Spanish courts and raised eyebrows across the continent. But many people, including those on trading floors, expected a turnout low enough to weaken the separatist case.

In the event, authorities said well over 2m votes had been counted, out of around 5m registered voters, with many people prevented from voting.

Moreover, the heavy-handed and counterproductive actions of the Spanish police will surely have achieved nothing except to bolster the case for separation.

"The scenes on TV over the weekend make Catalan independence highly likely, whether it is a good idea or not,” comments Douglas McWilliams from the Centre for Economics and Business Research (CEBR) this morning.

McWilliams has crunched some numbers surrounding the potential economic consequences of a formal split. His calculations show the rest of Spain’s debt-to-GDP ratio jumping from 99.4 per cent to a somewhat alarming 116.4 per cent, if Catalonia is excluded from the equation. Under such a scenario the annual budget deficit climbs from an equivalent of 4.5 per cent of GDP, to 7.8 per cent.

While such a scenario looks far healthier for Catalonia itself (which would run a substantial budget surplus), it "assumes a fairly peaceful separation, no attempt to punish Catalonia and no contagion effects on other regions in Spain or elsewhere,” the CEBR boss says. In reality, the situation "could be much worse”.

It is this fear, of an extended political crisis, that rattled markets yesterday, knocking Spanish stocks, bonds, and even denting the euro.

After a year marked by a surprisingly strong and much-needed economic recovery across the Eurozone, and specifically within Spain itself, the situation acts as a reminder of the continent’s complexities and fragilities. Investors will be keeping an extremely close eye on developments.