The Economic Consequences of European Separatism

March 2013 | Statistics

Separatism is growing in a Europe still suffering from the economic crisis. The most economically developed regions of the largest European countries dream of independence, in one form or another, mainly because the richer regions don’t want to finance the poorer parts of the country. And while everyone knows what Catalonia wants, it might be unexpected that regions in the UK and Germany are heading in the same direction.

But what awaits Catalonia, Scotland and other European regions should they gain independence? And who is left with what?

Catalonia
Catalonia’s territory isn’t the largest of Spain’s regions, but it is comparable to Belgium in size. As for the population, in 2012, there were just over 7.5 million people living there – more than in 12 of the European Union member states (e.g., Ireland, Denmark). The population of Catalonia makes up 15% of the total Spanish population, and 6 million of its adults constitute 15% of the country’s labor force. But the unemployment rate is 1% less than Spain’s average (12% vs. 13%).

In 2011, Catalonia’s GDP was about €200 billion, which is almost 20% of Spain’s total GDP. That makes the size of Catalonia’s economy comparable to that of Ireland, Portugal, or the Czech Republic, as measured by GDP. Per capita GDP almost reached €27,000 – 13% higher than Spain as a whole, with living standards higher than the Spanish average. Furthermore, Catalonia accounts for about a fourth of the country’s total exports (about €55 billion). This region is very attractive for foreign investors: Over the past five years there has been an average annual inflow of €3-4 billion. Of the 5,000 foreign companies in Spain, more than 3,500 are based in Catalonia.

Thanks to Catalonia’s favorable business climate, it is the fourth-richest of Spain’s 17 regions. This number is pre-tax, though, and after all deductions, it falls to ninth. For every euro paid in taxes, 57 cents goes back to the region. The rest goes to an assistance fund for the poorer regions of Spain. Residents of Catalonia are not in favor of this “fiscal robbery” and are demanding independence. Perhaps if it weren’t for the economic crisis that is gaining momentum in Catalonia itself, the situation wouldn’t be so bad. Having come to power two years ago, Artur Mas is steering the economy on a strict course, but his measures aren’t enough and the number of jobs is falling while the debt burden has grown to €45 billion – the highest among the Spanish regions. Catalan officials were forced to ask Madrid for €5 billion from the Public Fund, but were turned down.

European economists and political scientists agree that Catalonia is to Spain as Germany is to Europe; that is, by giving it freedom, Spain would lose one of its main sources of revenue for its coffers and would thereby lose its fourth-place position among the European Union economies. This is clearly recognized in Madrid, which explains why the central authorities have refused to give Catalonia tax independence (by analogy with Navarre and the Basque Country, which have historically managed their own tax revenues). A compromise needs to be sought before the situation goes too far. One could argue that the Spanish Constitution does not provide for the division of the country and that Madrid will not recognize the official results of a referendum, but the growing desire for independence, in a worst case scenario, could lead to a civil war.

Scotland
The situation in Scotland differs slightly from that of Catalonia. The UK government isn’t turning a blind eye to the growing separatist mood and is allowing a referendum to take place on October 14, 2014, so that the Scots can determine their fates for themselves. Of course there were conditions from both sides, and while British Prime Minister David Cameron’s government agreed to a referendum, it is probably hoping for a negative result, as currently only a little over a third of Scots support the idea of “free sailing.”

This isn’t the first year the UK’s economy has been on the verge of a recession and the government can’t seem to launch mechanisms that would have a long-term, positive effect and speed up economic growth. Business confidence in the economy is falling and investment attractiveness is declining accordingly. But Scotland’s economy on its own also doesn’t look great. Moreover, more than half of Scotland’s annual budget is subsidized by the national one. Because of this, the health and education systems are better there than in England.

On the other hand, Scotland produces about 90% of Britain’s oil and gas, providing up to €10-15 billion annually in tax revenues. If oil income were to go into Scotland’s own coffers, it would be able to cover its budget deficit. Scotland’s nationalists have seized on this. The Scottish National Party confirms that by gaining control of oil production in the North Sea and collecting all of the earnings, Scotland could expect a bright future. But the volume of oil production is already declining, prices for “black gold” are not constant, and a windfall in this industry is unlikely in the near future. If the forecasts are to be believed, UK revenue from oil and gas by 2015-2016 will fall to 0.6% of GDP, from 0.9% of GDP in 2011-2012. As for Scotland’s GDP in the event of separation, it would be ?150-160 billion, according to various forecasts.

Scotland also has the most hydroelectric stations that generate energy from waves and tides, and if Scotland were to separate, the rest of the UK would have to consider importing electricity.

It’s alarming that industrial production in Scotland has been falling for the fourth year in a row and 2013 forecasts put the decline at about 0.7% (it’s 1.2% for England). Unemployment rates have been growing for the past five years and are above 8%. Over the past few decades, almost all of Scotland’s traditional enterprises have closed, such as the coal and steel industries. Shipbuilding and heavy industry are also declining, but the region has managed to hold on to its industrial status. Besides oil, today Scotland is successful in exporting electronics, textiles, and, of course, whiskey.

Another point on the propaganda agenda was an immediate move to the euro, following Ireland’s example. But the crisis is gaining momentum in the Eurozone and has diminished enthusiasm for that, so now some are leaning towards the Nordic model.

Forecasts for both the UK as a whole and for its individual parts are not especially optimistic, which is why calls from Scotland’s First Minister, Alex Salmond, for independence from the UK are getting more and more support. His main argument is that smaller states are more agile and competitive, allowing them to respond more quickly to the world’s economic realities. Opponents of this position say that, in an age of globalization, the concept of state sovereignty is gradually disappearing, and for small countries it never mattered much anyhow. EU membership for the potential new countries would enhance their viability from a political point of view, but this could become one of their biggest problems, since both Spain and England could block their path to membership. European Commission President Jose Manuel Barroso has already warned that the Maastricht Treaty does not imply continuity, and newly formed states may not automatically become EU members. In order to join, negotiations would be required with all parties, which could take several years.

The problem is that residents of all three regions have already been living within a “free Europe” for several years now, and partial confinement within the Eurozone is unlikely to be pleasing to them.

Moreover, separatism isn’t growing in only these countries: Italy, Belgium, France, and even Germany have their own “Catalonias.” Encouraged by their neighbors, they are sticking their necks out.

Hotbeds of Separatism
Don’t think that only Catalonia and Scotland are demanding their independence. In the near future, the economic crisis could lead to a situation where Belgium no longer exists, and on maps we would instead see Flanders and Wallonia. The more economically flourishing Flemish part of the country wants independence from the poorer, French-speaking Wallonia, since they don’t want to subsidize the southern part of the country. The stumbling block here was the redistribution of tax revenues. Politicians representing Flanders in the country’s parliament are demanding that 45% of tax revenue be left in the local coffers, but the Wallonian politicians only agree to 10%. This has been the backdrop to a political crisis for several years now, and no one seems to want a compromise.

In Germany, a third of Bavarians want independence, and their reason is the “Poor States Fund.” Bavaria’s annual contribution to it is about €3.5 billion, which is about half of the total. That means every Bavarian’s taxes go to sponsor poorer German states with €300 million a year. This state of affairs isn’t sitting well with local politicians, though negotiations aren’t going anywhere for now.

In Italy, the northern regions have always treated the southern ones with some disdain, considering them to be lazy swindlers. Once again, the more economically developed regions don’t want to share with the poor south. It’s also worth mentioning South Tyrol, where some people support uniting with Austria. Even though this region is autonomous from the principle of redistributing tax revenues, that isn’t enough for local authorities.

The islands of Sardinia and Sicily are also demanding autonomy. In France, Corsica dreams of being independent (it is the poorest French territory), as do a minimum of four other provinces. In Spain, on the background of the situation in Catalonia, the Basque Country and Navarre have somewhat moved into the shadows, but they haven’t lost hope in independence and their “fighting spirit” is there to stay.

This list could keep going, and today, there probably isn’t a single European country that isn’t dealing with the problem of separatism. Analysts and journalists have come up with terms like “separatism of the rich,” “separatism of the poor,” and “economic separatism,” but the essence of this struggle was probably best formulated by Catalan President Jordi Pujol: “Language is important. Flags are important. Culture is very important. But money is the most important.”

Text: Oxana Chaika