I have two Salvador Dali prints hanging near the front door, perhaps to remind me that the surreal is present everywhere. This afternoon hearing and reading reports from Catalonia my thoughts kept wandering back to the image of the burning giraffes in this Catalan’s work. In the space of hours, we went from President Puigdemont and the Catalan Parliament declaring an independent and sovereign state to PM Rajoy invalidating the declaration and moving to dissolve the regional government. The EU and many of its individual members declared an ongoing commitment to Spain as a unified member state. Desires to restore and expand provincial autonomy that Catalans had tasted and lost multiple times over the last century come into direct conflict with Madrid’s desire for control and stability and Europe’s greater vision of unity and harmony. Nationalistic and nativistic impulses have been on the rise across Europe, but where the boundaries are drawn depends on who holds the pen.
The Euro showed further weakness this week, perhaps in anticipation. What this will mean for US investors is uncertain. Catalonia accounts for a significant percentage of Spain’s GDP, but Spain as a whole is only 6% of the investable MSCI Europe Index. Any trajectory other than peaceful discussion and accommodation will hurt Spain’s economy, but that in itself does not seem to pose a major investment risk for diversified international investors. However, the potential for contagion to other provinces of Spain and beyond their borders to other parts of Europe that historically enjoyed separate identities could be profoundly disruptive to border permeability, travel, trade, currency and other factors that have made Europe increasingly attractive as an investment prospect in the last year.
This will be an interesting weekend. Keep your eye on the giraffes.