Separatism in the EU (2017)

Recently, referendums in Scotland (2015) and Catalonia (2017) have renewed concerns about separatism and fragmentation in the EU. There is a large number of groups seeking greater regional autonomy and in some cases outright independence in various EU member-states. The potentially most politically significant autonomy-seeking and/ or separatist movements are to found in Northern Italy, Scotland, Belgium and Northern Spain. Though unlikely, in the Spanish and UK case, one successful separation might trigger further departures (Wales and Northern Ireland in the UK; Galicia and the Basque Countries in Spain).

Following the recent referendum, Catalonia has come closest to declaring nominal independence, but is facing fierce opposition from the central government in Madrid. The government in Madrid is concerned about losing an economically important region and its possible knock-on effect on other Spanish regions. States generally defend their territorial integrity. The most likely outcome is one where after changes to the Spanish constitutions is granted far greater autonomy, but remains formally part of Spain and the EU. 

In Italy, Lombardy and Veneto, two of Italy’s wealthiest regions, have just held referenda to try to obtain greater fiscal autonomy from the central government. Unlike in Catalonia, the referenda were approved by the central government in Rome and the outcome was non-binding. Over the medium term, the two regions may be able to retain a greater share of taxes, but breaking away from Italy is not currently on the political agenda. 

Belgium has seen long-simmering differences between French-speaking Wallonia and Flemish-speaking Flanders. A break-up is unlikely in the very short term. If it happened, it would be relatively amicable. Both regions would want to remain part of the EU following the partition.  The status of Brussels would prove difficult to find a solution for. Wallonia would lose out economically, being the poorer region. An alternative scenario is one where Wallonia joins France and/ or Flanders joins the Netherlands. But this assumes sufficient public support for such a solution in all four countries. A divorce would be relatively amicable and comparable to the separation of the Czech Republic and Slovakia in the early 1990s. An amicable separation would increase the likelihood of both regions retaining EU membership.

Scotland held a referendum on independence in 2015 and was narrowly defeated. Right after the UK Brexit referendum, Scotland looked as if it might go for another referendum given that the majority of Scottish voters had voted to remain in the EU. However, SNP losses during the 2016 parliamentary elections it and its political mandate in favour of independence. That said, in case of a hard Brexit and/ or increased economic problems in the UK, Scotland may hold another referendum in a few years. Such a referendum is unlikely to take place before 2020 and its success or failure would probably hinge on what the EU would offer in terms of its future relationship with an independence Scotland.

Source: Informo

The EU has been firm on not re-opening border disputes in Eastern Europe. While the separatism issue is somewhat different, it is also similar in the sense that the EU is keen to avoid instability and fragmentation. The EU is very unhappy about Brexit. If two member-states decided to merge, that would likely be acceptable to the EU and the EU member-states. The EU had no problems with East Germany becoming part of the EU following German re-unification. Separatism is another matter, as it risks leading to increased political instability and fragmentation – and the EU is already dealing with a number of semi-existential issues (e.g. euro area reform, security, less multilateral US, Brexit, refugees). While it would be politically difficult to deny recognition to a peaceful separatist movement, the EU and especially its member-states will not want offer separatists any incentives, either, by granting them, for example, immediate/ automatic EU membership or access to the EU Common Market. 

The EU prefers any demands for sovereignty to be settled amicably and preferably through greater regional autonomy, including fiscal and administrative decentralisation. The EU will also make it clear that the separatist region would not qualify for immediate EU membership, thus imposing significant economic and financial intolerable costs on the separatists. The EU may adopt a different stance in case of an amicable separation. The EU and its member-states, especially those facing possible separatist groups themselves (Spain, France, Italy etc.), will not do anything to encourage separatism in the EU. This would open the proverbial can of worms. Politically, this creates significant incentives for member-states to oppose separatism in order to prevent an amicable separation and indirectly prevent the separatists from remaining in the EU post-independence.

EU membership comes with a great number of economic (and financial) benefits, especially for smaller economies. Economically, leaving the EU Common Market would force the new economy to default to WTO rules. The WTO lays down rules for trade in goods, but services, investment and cross-border labour mobility would be severely impacted. Moreover, whether the newly independent state defaults to WTO rules will depend on whether it manages to gain sufficient international recognition to be admitted to the WTO and it does not address whether or not the government has enough technocrats to implement the measures necessary to join the WTO. The financial sector would be affected very negatively. The local banking system would lose access to cut off from central government central bank liquidity and its lender0of-last resort. This would likely force the government to redenominate the currency and introduce capital controls or unilaterally adopt the euro (or pound in the case of Scotland). This would lead, as see in the case of Scotland and Catalonia, force banks and other financial firms to relocate. Local companies that rely on exports are similarly exposed to economic and financial distress in case they lose access to the Common Market. If the new state does not achieve international recognition, the country as a non-member will not even have access to the IMF. The short-term economic effect of dropping out of the EU would be disastrous. EU will be keen not to lower the exit costs high for fear of otherwise encouraging other separatist movement and fragmentation. Leaving aside the economic shock, the longer-term consequences would be negative, too. If the UK finds it difficult to strike favourable trade deals, much smaller economies like Catalonia or Scotland would find it even more difficult to do so. 

What would successful separatism mean for the country the separatists are separating from? Italy would lose its economically most successful and wealthiest regions and Southern Italy would receive fewer national financial transfers. Depending on how public debt is shared, this could put the rest of Italy into a difficult financial position. If Scotland became independent, Northern Ireland and Wales might follow, even if at present this does not seem very likely. Similarly in Spain, Catalan independence might trigger centrifugal forces in Galicia and the Basque Countries, even though these regions are far less economically successful and are less likely to seek independence given the immediate fiscal/ financial losses they would incur. Catalonia would be able to retain control of all of its taxes, but these would be much diminished given the economic consequences of independence. The break-up of Belgium would create two successor states comparable in economic size to city-states like Hong Kong or Singapore. Even if they gained EU membership, their weight would be diminished. If other regions followed Catalonia and separated from Spain, Spain would be comparable in terms of GDP to the Netherlands. The remaining entities will be somewhat poorer economically, but the departing regions are more at risk of suffering an economic and financial crisis.

Separatism is unlikely to succeed in the EU over at least the next decade or so. Economically, the costs of independence are very significant. Fiscally, independence is self-defeating via its negative impact on the separating economy. Financially, the economies would see currency redenomination, possibly a banking crisis and an exodus of banks, financial firms and outward-oriented companies. Politically, the EU and EU states remain very much opposed to further fragmentation. The costs of separation should make it relatively easy to mobilise business in favour of finding a solution short of independence and to weaken public support for it. (It would probably require a surge in political violence to change public attitudes sufficiently to be willing to bear the costs of separation.) Last but not least, formal independence would have to be recognised by the international community. If this does not happen, the region/ new state will be left in further political, economic and financial limbo. The most likely scenario is one where separatism can be defeated by granting regions significant autonomy allowing the region to remain in the EU Common Market. There are many example of how this can be achieved (e.g. German-speaking Southern Tyrolia, Scotland).