Europe, Fracturing From Within

Why Integration Makes Secession More Appealing

By Edoardo Campanella, FOREIGN AFFAIRS

[EDOARDO CAMPANELLA is an economist in the financial industry and a shortlisted author for the 2015 Bracken Bower Prize, awarded by the Financial Times and McKinsey.]

On top of the many economic and political challenges Europe will face in 2017 is secessionism. At present, there are about 100 [1] active autonomist groups across Europe—although with varying degrees of popular support and commitment—and Catalonia and Scotland are once again at the epicenter. In a New Year’s speech [2], Catalonian President Carles Puigdemont promised to hold in September a “legal and binding” referendum on the territory’s secession from Spain. Meanwhile, Nicola Sturgeon [3], Scotland’s first minister, has made clear that a hard Brexit, involving an outright withdrawal of the United Kingdom from the European Union and the single market, would trigger a second referendum on Scottish independence. Although a number of legal and political obstacles are likely to frustrate Barcelona’s and Edinburgh’s irredentist plans, secessionism will remain a major threat to European integrity in the years to come. And here is the Catch-22: The more Europe integrates, the more the nations within it disintegrate.

Historical grievances, cultural heterogeneity, and political tensions underlie these secessionist movements. Since the unification of the Iberian Peninsula five centuries ago, Catalonia has repeatedly [4] tried to break away from Spain. Under Francisco Franco’s brutal dictatorship, Madrid attempted to repress the Catalan culture altogether—banning its language, traditions, and institutions. Currently, the main cause of resentment has to do with the excessively high levels of taxation imposed upon the region. Similarly,Scotland [5] asserted its independence over and over again from the ninth century until its official unification with England in 1707, when the Scots, short of money, had to capitulate. This tragic decision led poet Robert Burns [6] to write, “We’re bought and sold for English gold—Such a parcel of rogues in a nation!” And now the major sources of tensions are represented by diverging views on the role the British government should play in the Scottish economy and on the management of the region’s energy sources.

But neither culture nor history has been enough to justify a painful divorce; economics has always mattered more—and the current climate is supportive of the irredentists. In the years between the launch of the euro and the start of the recession, when Europe was still enjoying decent economic growth, secessionist groups struggled to gain popular support. But an endless financial crisis has inevitably generated huge tensions over shrinking resources between groups that differ in traditional culture and political preferences but are tied together legally and administratively. These frictions are especially acute when there is a huge wealth gap between regions, such as that between Catalonia and the rest of Spain.

However, although the euro crisis is certainly fueling irredentist ambitions, the embitterment of regional tensions is structural in nature and is driven by globalization and the European integration process itself. In their breakthrough work, The Size of Nations, the economists Alberto Alesina and Enrico Spolaore argue that the optimal size of a state is determined by certain tradeoffs. On the one hand, access to a barriers-free market, lower per capita costs for public goods, and bigger armies call for large nations. On the other hand, heterogeneity of people’s preferences with respect to culture, the legal system, or welfare calls for smaller nations.

When trade and migration barriers are high, and goods and people cannot easily cross borders, it is more convenient for a region with a strong autonomous identity to be part of a large national jurisdiction and, thus, expand its economic opportunities. That was the case for Scotland before the United Kingdom joined the European club in 1973. When states remove trade barriers, such as through the European integration process, then the economic benefits of a large nation fall, making secession more appealing. And in such a case, a newly seceded region would have access to a continental—and not just national—barriers-free market and would enjoy the security and global influence provided by a large-nations club, while enjoying the autonomy of making choices according to its own preferences. Fittingly, Scotland’s first step toward independence was a vote on power devolution in 1979, six years after the United Kingdom joined the European Community, the EU’s predecessor.

It is not surprising, then, that the Catalans and the Scots want to retain access to the larger European market, while untying themselves from Madrid and London. Indeed, national disintegration can be thought of as byproduct of an “ever-closer union,” as a group of world-renowned Catalan economists from Columbia, Harvard, Princeton, and Barcelona’s Pompeu Fabra have argued in creating the Wilson Initiative [7], named after U.S. President Woodrow Wilson, a defender of self-determination, to press for Catalonian independence.

To complicate matters even more, beyond making smaller and more ethnically homogeneous jurisdictions more appealing, the European integration process is also fracturing countries on economic lines rather than purely cultural ones. This widens the divide between the regions that benefit from continental integration and those that are marginalized. In the immediate aftermath of the Brexit vote, a number of commentators—somewhat provocatively—suggested that the city of London [8], which voted overwhelmingly against Brexit, should secede from the United Kingdom and remain in the EU. The perceived benefits of being part of the European Union are certainly higher for urban professionals than for farmers in rural areas.

Similar dynamics are at play in Belgium, too. The more a region benefits from being part of a large open economy, the more it supports it, and vice versa. Last October, for example, the poorer Belgian region ofWallonia [9] blackmailed Brussels by voting against the free trade agreement with Canada and by temporarily blocking its ratification.

Although the economic rationale for secession looks strong, the political consequences could be devastating for Europe. The breakup of a nation would imply endless negotiations to split assets and liabilities (such as the public debt), the emergence of tensions between the central government and other regions, and the loss of global influence, which is a function, at least to some extent, of the size of an economy. At the same time, although small jurisdictions tend to be more supportive of continental-wide policies than large nations, the proliferation of sovereign entities would create enormous coordination costs for the European Union. And financial investors, no matter how well the process is managed, would panic and fly away. That is why Europe should avoid creating dangerous precedents—but it should do so in an enlightened way.

It might seem, then, that the best deterrent for irredentism would be threatening to deprive a secessionist region of its membership to the European bloc. That is probably why Spanish Prime Minister Mariano Rajoy continues to warn Catalonia that its access to the single market as an independent entity would not be guaranteed. The same goes for Scotland. And no European leaders want to open the Pandora’s box and trigger an avalanche of secessionist movements in a continent containing 250 regions [10] with clear cultural, ethnic, or historical identities. But should Scotland or Catalonia successfully gain independence, Brussels would hardly be able to ignore their requests for membership, as doing so would isolate millions of people from the rest of the continent. Not surprisingly, Jean-Claude Juncker [11], president of the European Commission, imprudently stated that Scotland deserves a “hearing” in the aftermath of the Brexit vote.

There is clearly confusion in Brussels and in many European capitals. The founding fathers of the European project believed that the creation of a common market, a common currency, and a common identity would dilute national sovereignty from the top down. That’s why jingoistic leaders such as the late French President Charles de Gaulle and the former British Prime Ministers Margaret Thatcher and David Cameron always obstructed the process of economic integration. But they did not realize that the process of economic integration would come to threaten the nation-state from the bottom up as well by reviving regional identities in unprecedented ways. So, here is the dilemma: If European leaders want to build a more solid union and push for further political and economic integration, then secessionism will inevitably be reinvigorated.

But secession does not have to be inevitable. It is just the most extreme outcome of the interaction of economic and cultural forces. Governments should intervene before autonomist movements become too radicalized, resentment with the imbalance of wealth grows out of control, and compromise becomes impossible. By carefully monitoring their popular support, governments should assess whether new legal arrangements might be needed. For example, in the countries where secessionist movements are inactive or even dormant, central governments can appease local communities through financial transfers, tax arrangements, or a devolution of central power. When a secessionist movement is ripe, as in Catalonia, Flanders, or Scotland, a government should instead consider renegotiating the terms of the relationship, such as granting higher degrees of autonomy to irredentist regions. Although many people in these regions are flirting with the idea of more independence, few are willing to go through the economic and political pains associated with a breakup—at least, for now. So a compromise is still possible.

Hard-line approaches, such as suffocating the independence movements, economically boycotting the region, or threatening military intervention, will only backfire, nourishing discontent and delaying the problem. For example, in 2014, at the time of the Scottish referendum, large British corporations threatened to move their companies away from an independent Scotland, and London announced that it would be unwilling to share the sterling with Edinburgh. Similarly, in 2015, Madrid threatened to send the army [12]to Catalonia in the case of an illegal secession.

Therefore, instead of upholding the status quo, Rajoy should opt for a federalist solution to give more leeway to Barcelona, especially when it comes to managing regional tax revenues. At the same time, Theresa May, the British prime minister, should opt for a soft Brexit to keep the Scots on board. And in Belgium, where the secessionist New Flemish Alliance is currently the most popular party across the country and is a member of the coalition government, Brussels should consider granting more autonomy to Flanders.

A proactive and pragmatic approach can prevent a cascade of secessions, avert unnecessary fragmentation, and tame dangerous tensions. Only then can Europe become more politically unified and culturally integrated. Otherwise, sooner or later, regional tensions will erupt and some nation will inevitably fall apart.

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January 20, 2017 | Comments »

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