The risk of a Catalan independence declaration triggering a breakup of the Eurozone remains low, but it will leave the European integration agenda on life support and the common currency struggling to achieve its full potential.

An anticipated declaration of independence from Catalonia next week would not only add downward pressure to the Euro in the short term, it could place a hard stop on Eurozone integration and a firm cap on the common currency’s upper limit over the longer term.

With last Sunday’s independence referendum in Spain marred by scenes of a violent clampdown, after having been declared illegal by Spain’s top court, Catalonia’s regional government may move to declare independence as soon as Monday.

This could result in Catalonia seceding from Spain, leaving the European Union by default and finding itself without an official currency.

“An independent Catalonia would face major economic challenges even if it were recognised by Spain and the other EU countries,” says Dr Ralph Solveen, an economist at Commerzbank.

The province, which accounts for around a fifth of Spain’s economic output, would also find its trade with other parts of Spain and elsewhere subject to damaging tariff barriers.

“Euro may see some corrective activity in the near term as markets remain nervous about Catalonia's plan to declare independence, helped also by a stronger USD as US yields rebound,” says Gek Teng Khoo, a strategist at Morgan Stanley.

Spain has a short window either side of an independence declaration to prevent a secession by Catalonia.

Madrid can use powers under its constitution to dissolve the Catalan parliament and call a regional election, which might not be a long term solution, in order to prevent a valid declaration.

Or it can wait until after a declaration has been made and then invoke Article 155 of the Spanish constitution to overturn the declaration, rendering the declaration null in Spain and void in the eyes of the international community.

“Madrid's most powerful weapon against a regional government – as yet never applied – is article 155 of the Spanish constitution,” says Solveen. “It is not clear whether Rajoy will apply this article. If the regional government were suspended and its members perhaps arrested, the situation would escalate further.”

European Integration Agenda On Life Support

The risk of Catalonia or any of the remaining independence movements in Europe triggering an outright breakup of the Eurozone remains low. Their is near unanimity among strategists and economists on this point - at least as far as the near future is concerned.

“In contrast to concerns about nationalists seeking to withdraw their countries from the euro-zone, regionalists present far less of a threat to the single currency or the euro-zone economy as a whole,” says Stephen Brown, a European economist at Capital Economics.

However, the very presence of secessionist movements in Spain, Italy, Belgium and the UK, as well as the ideological drivers that propel them, bode ill for the European integration agenda.

“Increased demands for regional autonomy appear at odds with recent proposals for greater fiscal integration within the euro-zone, and could therefore be a barrier to fiscal union,” says Brown.

Any move by Spain to prevent or overrule an independence declaration by Catalonia may prevent a breakup of Spain, but it won’t help prevent doubts from growing over the long term viability of Europe’s push for fiscal integration.

“The Catalan conflict shows that a euro zone transfer union can only work if there is a strong sense of solidarity among nations – and this is not the case,” says Commerzbank’s Solveen.

Others have said in the past that the long term survival of the Euro as a currency is hinged upon the bloc achieving fiscal integration as well as monetary union.

“Given that revenue sharing within Spain has strengthened the separatist camp in a region like Catalonia, a net contributor, it would almost certainly be even more unlikely that transfer payments between the members of monetary union would be accepted,” says Solveen.

Solveen cites an emerging trend on the subject of fiscal integration in that it was the bailout of Greece, and therefore fiscal transfer, that fuelled the creation and rise of anti-Euro political forces in Germany later in 2013.

The AfD, which gained around 13% of the national vote in the recent German election and now has representation in the Bundestag, was founded as an anti-Euro party.

All told, quotes of Euro based currency pairs might not dissapear from the screens of traders overnight if Catalonia pushes further to secede from Spain, but it could mean the common currency struggles to achieve its full potential against others - even in a normalising monetary policy environment - amounting to a de facto cap.

Background: Catalonia's Independence Push

Catalonia is a wealthy province of Spain that plays host to some 7.5 million inhabitants as well as the cultural and economic powerhouse that is Barcelona. It accounts for around 20% of Spanish GDP.

“The question of what has caused the current conflict is usually answered with reference to the War of Spanish Succession in the early 18th century,” says Solveen.

But the renewed and ongoing push for independence by Catalonia has its roots in much more recent history, according to Solveen, who flags a timeline of events running back to the Franco dictatorship as more relevant.

“During the Franco dictatorship (1939-75), Catalonia lost its right to autonomy and the Catalan language was banned. Only in 1979 did the region receive a new statute of autonomy,” says Solveen. “In 2006, after lengthy negotiations, a new statute was drawn up under which Catalonia was termed a 'nation'.”

Madrid’s modern day efforts to find a compromise with Catalonia over historical injustices met with a roadblock in the form of the constitutional court.

“In 2010, in response to legal action by the People's Party, then in opposition under the current Prime Minister Rajoy, the constitutional court declared some passages of the new statute unconstitutional,” says Solveen.

Spain’s constitutional court ruled the designation of Catalonia as a nation affords it no special rights and is seen by Solveen’s team as triggering the current push for independence, which broke ground around the same time.