Independence movements: Europe’s paradox

The formation of the European Union and the Eurozone have been hailed as among the most ambitious political and economic projects of the twentieth and twenty-first centuries.

In its early days, the Eurozone was seen as a powerful competitor to the United States for economic dominance—perhaps especially to American tourists attempting to navigate unfavorable exchange rates during the early 2000s. Real tests of strength, however, come at times of crisis. As the Eurozone stumbles out of the turmoil brought about by the Great Recession of 2008 and the European debt crisis, fractures there are becoming more apparent. Not only is the Eurozone imperiled by periodic rumors of a ‘Grexit’, but many of the nations that make up the Eurozone are having their own existential difficulties, as subnational independence movements are posing a challenge to the very idea of the nation state.

To put the issues that the EU and the Eurozone are facing into perspective, imagine a rope that is being wound tightly together at one end, while simultaneously causing an unraveling at the other. As supranational authority in Europe grows, the concept of the traditional nation state is being challenged by the rise of institutions like the European Council, the European Parliament, and the European Central Bank.

As the Eurozone continues to be mired in a period of low economic growth, economic stagnation, economic malaise, and high unemployment, many have begun to question the utility of remaining in the Eurozone. In places like Greece, for example, where membership in a currency union has prevented currency devaluation that could have helped to jumpstart their struggling economy, there is growing frustration with the constraints of supra-national authority.

However, in addition to outright conflicts between national and supra-national authority, there are also independence movements within the nation states themselves. There are citizens, for example, within the EU who wish to secede from the nation state in which their region is embedded but who still wish to remain inside the EU or inside the Eurozone.

In the EU, citizens are generally able to travel freely from one country to another in search of work. The flow of labor tends to go from the lesser-developed countries in the EU to the more developed countries. In good economic times, we hear less rhetoric about immigrants “stealing jobs”, but as economic conditions worsen and pressures mount, resentment between countries and cultures builds. The concept of the social welfare state, of course, is deeply entrenched in Europe, but when the economic pie shrinks, it generally becomes more difficult to share.

There is growing discontent about the transfers of money from the haves to the have-nots of the EU. It is seen in Germany’s reluctance to lend to the so-called PIGS,  but is increasingly being seen within the constituent nation states and wealthier regions now facing economic headwinds, who are less inclined to transfer to poorer regions.

While ethnic and cultural conflicts are often cited as the root cause of independence movements, we see that many of the problems boil down to something baser: Simple economics.

When it comes to wealth transfers, the sentiment across the board seems to be: “We don’t like it in the good times—and we hate it in the bad times.” Let’s take a look now at some of the country specific problems, and explore what these independence movements may mean for the future of the EU and the Eurozone.

Belgium

Belgium, a nation of 11 million people on the North Sea, borders the Netherlands, Luxembourg, France, and Germany. Though it is situated in the more prosperous, northern portion of the Eurozone, Belgium has faced internal cultural clashes for decades between the Flemish in the north and the French in the south. The French part of Belgium has largely been based on industry and manufacturing while the Flemish part of the country has been more successful in converting their economy to higher value added industries such as technology, healthcare, and the manufacture of luxury goods.

Despite differences in culture, the two regions were able to coexist and perhaps even balance each other out – at least in economic terms. However, now that traditional manufacturing has fallen by the wayside due to technology and globalization, the French side is no longer well balanced against the Flemish. Unlike some areas of the Eurozone where there is economic disparity, the problems in French-Belgium are not merely cyclical, they are structural which has the Flemish wondering why and for how long they will have to support their weaker countrymen.

Italy

Even a casual student of European history will recall that until the late nineteenth century, Italy existed not as a unified nation but as a collection of independent autonomous regions loosely connected by similar cultures and a common language base. (Travelers to Italy today will notice that the Italian spoken in different regions can still sound quite different.) While unifying into a modern nation state brought many of the benefits of being a large country with centralized authority, unification hasn’t been a panacea. Regional conflicts still exist—and have, in many ways, intensified since the Great Recession.

The highly industrialized and economically well-developed north has been transferring resources to the south since unification—and that one-sided transfer has only grown in recent decades. As a result, the Northern League party has emerged as a growing political party in the last 25 years. With economic problems in Italy intensifying, one of the key policy platforms of the Northern League is to return Italy to a federalist system, where the wealth generated in the north stays in the north instead of being transferred to a central government, and then re-routed to the south.

As with many political parties, there are differences of opinion—in the case of the Northern League, there are differences among party members about the extent of separation being sought. For some, the party platform represents a forum for airing grievances, while other members seek radical change. For example, on one end of the spectrum are party members who wish to limit regional transfer payments in Italy, while at the more extreme end are members of the Northern League who want to break up Italy’s territorial sovereignty and secede from the country.

Spain

One of the best documented independence movements in Europe is that of the Catalonians in Spain. Visitors to Barcelona may lament that their high school Spanish is of little help in the region as many residents of the region speak the Catalan language. What is interesting about this independence movement is that it is often portrayed as a clash of cultures and identities when, in fact, the primary source of contention today is economic.

Catalonia has historically been one of the wealthiest regions in Spain. It has a diverse economy that benefits from tourism, agriculture, manufacturing, and increasingly from financial services and technology. An independent Catalonia can certainly seem attractive by economic measures. Factoring in history and the clash of cultures and languages, along with the economic concerns, makes an independent Catalonia seem inevitable to some partisans of secession.

As in Italy, the degree to which independence is sought varies. Some people are pleased saying: “Instead of the 4 or 5% GDP we transfer from us to the center, we should transfer only 2 or 3%, half as much, keep the rest to ourselves, and then we’ll be happy. We will stay in the union.”

Among the people who share that conciliatory view is Andreu Mas-Colell, the incumbent Finance Minister of Catalonia—and, incidentally, my professor during my first year of grad school. On the other end of the spectrum, are the more revolutionary separatist elements, who seek full independence from Spain.

The global financial crisis highlighted the divisions within Spain. Output collapsed, unemployment rose, and taxes rose higher. As a result, everyone feels squeezed – even those who are marginally better off in the wealthier regions. As I alluded to in my opening, the transfer union is tolerated when times are good, when times are bad it is despised — and sometimes a battle cry for independence.

Scotland

It would be a serious omission to discuss independence movements in Europe without examining the Scottish referendum for independence, which took place last fall. Despite some early polling that called for a close vote, the Scots overwhelmingly voted to stay in the United Kingdom.

The Scottish vote could not have come at a more interesting time. An independent Scotland would likely be a net exporter of oil, while the rest of the United Kingdom would remain a net importer. Much of the support for independence was predicated on Scotland’s wealth of oil reserves, with many in Scotland seeing the price of oil only going up. Independence was voted down when Brent crude oil was near $100. With Brent hovering around $50, as of the the time of this writing, Scotland is now seeking tax breaks to bail out the oil industry. Perhaps now some of the most fervent supporters of Scottish independence can see the utility of staying in the UK.

This article is published in collaboration with Roubini Global Economics. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Nouriel Roubini is a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics.

Image: The Euro sculpture is partially reflected in a puddle outside the ECB. REUTERS/Kai Pfaffenbach.