In our prediction for the next three months on 1 Oct we wrote: While members of the political elite manage the financial crisis in the near term and debate long-term structural reforms, popular discontent throughout Europe will grow.
The Start of Europe’s fragmentation
Rifts between northern and southern eurozone countries formed as soon as the crisis began. Traditionally austere and fiscally disciplined countries, such as Germany, Finland and the Netherlands, pressured southern countries, such as Greece and Portugal, to meet their deficit targets. Financial assistance to southern Europe is a constant source of political tension in the parliaments of northern Europe.
In the south, Italy and Spain supported bailouts to other peripheral countries, like Greece, even though Athens clearly is not meeting the targets to which it agreed with the European Union and the International Monetary Fund. Rome and Madrid believed the bailouts for Greece, Portugal and Ireland were essential to prevent the crisis from reaching Italy and Spain.
However both economic and political division also exists within the European Union between the eurozone states and the 10 EU members outside the monetary bloc: the United Kingdom, Sweden, Denmark, Latvia, Lithuania, Poland, the Czech Republic, Hungary, Romania and Bulgaria. Among these 10 countries, there are vastly different views of the banking union and the overall trajectory of the European Union and eurozone.
As the European Union continues trying to resolve the financial crisis, efforts at deeper integration among the eurozone states will be high on the EU agenda in the coming months. Projects such as the proposed European banking union and more comprehensive fiscal integration efforts aiming to overcome the crisis within the currency union -- but affecting countries outside the currency union -- will be especially high priorities.
The eurozone states' national strategic interests have spawned differing views of these projects, and the debate likely will push the banking union's debut well past its proposed start date of January 2013. However, an even deeper division exists between the eurozone states and the EU members not in the monetary bloc. Some of these countries are apprehensive about signing on to projects like the banking union -- which, according to current proposals, will have greater control over banking regulations but will not give the non-eurozone countries what they consider a sufficient voice in decision-making efforts. The EU countries outside the eurozone are attempting to adapt to this new situation. While some of these countries need to keep a distance from eurozone developments for strategic reasons, they face the possibility of increasing irrelevance in European policy discussions if they choose to avoid further European integration.
And now Europe's economic crisis as we recently saw with Catalonia is also heightened the sense of regionalism within certain eurozone countries, highlighted here for example by Spain, Italy, Belgium.
During its first stage, the European crisis caused political tensions primarily at the supranational and international levels. At the supranational level, EU member states debated intensely with Brussels over which policies to apply and the timeframe in which to apply them. Meanwhile, at the international level, countries' leaders held summits to discuss future measures among themselves.
In both cases, the main issues were the scope of economic reforms and the implementation timeframe. The European Commission required Southern European countries to cut expenditures and increase the efficiency of their fiscal and administrative systems. Northern European countries, such as Germany, the Netherlands and Finland, often backed these proposals. The countries in Southern and Eastern Europe asked for flexible timetable goals and targets, along with permanent financial assistance. In this sense, there was a division between the eurozone core states and periphery states that was expressed primarily at the intergovernmental level.
At its present stage, the crisis is expanding at the intranational level, as central governments are having difficulty enforcing austerity measures at regional and domestic levels.
Spanish regions historically have developed independently and relatively isolated from each other, and Madrid's attempts to solidify control over the regions -- such as prohibiting regional languages during Francisco Franco's dictatorship -- have been greeted with resistance. But when democracy was restored in the late 1970s and early 1980s, Spain established a delicate constitutional balance, in which Spanish regions received varying degrees of autonomy.
The highest degree of autonomy was granted to the Basques. The Spanish Constitution of 1978 recognized the Basque people as a "nationality," created the autonomous communities of Basque Country and Navarre (with Spanish and Basque made co-official languages in both regions) and allowed them to collect their own taxes. This helped reduce Basque nationalism and deter militant groups such as ETA that formed when Franco held power. In Basque Country, regional political parties have willingly worked with Spain's two dominant national parties -- the People's Party and the Spanish Socialist Workers' Party -- and the first non-regionalist government in the Basque Country was formed in 2009. The dynamic between regional and national parties suggests that the region is politically stable.
By comparison, Catalan nationalism has been exacerbated by the European crisis. As with Basque Country and Navarre, the 1978 constitution recognized Catalan as a nationality and created the autonomous region of Catalonia. However, the region was not granted the same authority as other autonomous communities to collect its own taxes and spend them at its discretion. Catalonia is the wealthiest region in Spain -- it accounts for more than 20 percent of Spanish gross domestic product -- and it believes that what it contributes to the Spanish state outweighs the benefits it receives. But despite its wealth, Catalonia is also one of Spain's most indebted regions.
After winning elections in November 2011, the conservative government of Mariano Rajoy tightened the central government's control over regional budgets, generating considerable resistance in Catalonia and leading to a political crisis. While separatist sentiment has grown in Catalonia, serious questions remain about the economic consequences of secession and the inevitable exit from the European Union. Moreover, Catalans themselves are divided on the issue; a poll in late September found that 43 percent supported full statehood while 41 percent opposed it. In this context, the most likely outcome is that Catalonia will moderate its demands for independence and focus instead on gaining greater autonomy over taxation.
The biggest challenge for the new Italian government will be to build a stable coalition that can approve policy changes. Italy has a long tradition of political instability, which explains much of its economic instability. Given the number of challenges that the new government faces, that political instability is unlikely to end with the elections and will very likely increase during the transition from Mario Monti's technocratic government.
The consolidation of Italy as a nation-state is a relatively new phenomenon. Before 1861, the Italian Peninsula was a collection of small kingdoms, principalities and duchies, often controlled by foreign powers. Like Spain, geography has contributed to historical Italian fragmentation; the country is divided by mountains and includes the two largest islands in the Mediterranean.
Thus, politically and economically, Italy can be explained in terms of the developmental differences between its north and south. The northern regions around the Po River Valley are some of the richest of Europe and represent Italy's financial and industrial center. The south has traditionally been agriculture-based and ignored by the north in terms of infrastructure and investment. Due to these geographical and economic divides, numerous separatist movements have emerged in Italy since the mid-1800s -- both in the north and the south. However, none of these movements ever achieved sufficient political support to pose a real threat to the Italian state.
Still, the economic crisis has exacerbated Italy's divisions. In July, for example, Sicily received a loan of more than 400 million euros ($522 million) from the central government to help pay salaries and pensions. The island subsequently became the focus of sharp criticism throughout the country -- but especially among northern media outlets and politicians -- due to the huge size of Sicily's public sector and continual scandals involving mismanagement and corruption. Italian Prime Minister Mario Monti has also expressed concern about the situation in Sicily.
In the past two decades, the north-south divide has been exploited most notably by the Northern League, a political party that is especially strong in the northern regions of Veneto and Lombardy. The party has sometimes advocated for northern secession, but it primarily advocates the consolidation of fiscal federalism and greater autonomy for the regions. However, the Northern League is currently in crisis due to several recent corruption scandals that have cost it a considerable amount of public support. No political party has taken the Northern League's place in demanding greater northern autonomy, and, despite the prevalent anti-southern rhetoric, no major Italian party is advocating any sort of real separatism.
Modern Belgium was created in 1830 essentially as a buffer state between Europe's superpowers -- France, Germany and the United Kingdom. As a result, the country is inherently fractured and consists of three highly distinct communities: Wallonia, in the south, is mainly French-speaking and has historical ties with France. The Flemish-speaking communities in the northern region of Flanders share historical ties with the Netherlands. A small German-speaking community lives in the east near the German border.
The Belgian political system was designed to establish a balance of power between the communities. However, Flemish access to the North Sea and traditional trade routes with the Low Countries -- the Netherlands, Luxembourg and parts of northern France and western Germany -- have made it more economically dynamic than the Walloon south. This has created social and economic tensions between the two regions. In recent times, the differences have also become political. While Wallonia tends to vote for center-left parties, Flanders recently has leaned toward conservative parties. This makes consensus at the national level difficult.
Flemish nationalism is not a homogeneous movement. Broadly speaking, there are moderate factions that seek to protect the Flemish language and culture and calls for greater regional autonomy, including the possible replacement of the current federal state with a confederation marked by regional fiscal and judicial autonomy. Some of the Flemish mainstream parties, including the Christian-Democratic and Flemish Party, subscribe to this view. Other factions, however, are demanding full independence for the region. These factions also vary. The euroskeptic and nationalist Vlaams Belang party, for example, combines Flemish separatism with anti-immigration rhetoric, while the New Flemish Alliance proposes an institutional reform that would lead to a gradual separation between Flanders and Wallonia over the long run.
The economic crisis has intensified Belgium's divides, and the New Flemish Alliance has gained support in recent elections. But the party's growth has also exacerbated its own internal splits. Some members still call for full independence, while others propose a gradual separation between Flanders and Wallonia. Thus, Flemish governments are likely to press for more autonomy in the coming years, especially if the European crisis is prolonged. While an agreement on a confederal system is likely, full independence will likely not occur in the medium term.
Separatist forces are weaker in Wallonia. While most political parties defend the French language and Walloon culture, only the Rassemblement Wallonie France (a small party that operates both in Wallonia and Brussels) openly proposes the secession of the region and the union with France.
In all three of the above cases these conflicts are not new, as most European countries historically have regional frictions, but the current crisis is aggravating these pre-existing tensions. Central governments are feeling pressure at all levels, which is reducing these governments' abilities to mitigate the effects of the crisis.
Romantic nationalism can fulfill a people's dreams or nightmares and usually does both. Catalonia gives us a sense of the dreams. But in most places, the distance between dreams and nightmares is not as great as people might like to think. Economic pain coupled with romantic nationalism, now bound together through a massive structure like the European Union that is incapable of understanding the forces that are lurking beneath the surface, have always had a way to generate nightmares in Europe.
Also in Greece, two anti-system parties (the left-leaning SYRIZA and the far-right Golden Dawn) received a record number of votes in the general elections. It took two rounds of voting for the traditional elites in Greece to withstand the onslaught of anti-system parties. Since then, Athens has been governed by a fragile coalition of traditional parties.
Thus it will be only a matter of time before European leaders' options are dwindling. At the international level, the institutional framework of the European Union and market pressure limits their range of choices on economic and fiscal policy. At home, domestic populations are pressing for a change of direction that directly conflicts with the institutional and market constraints. And as we have seen exemplified above, groups that question the current political system are gaining popular support.
The European Commission however has made it clear that if any state separates itself from any EU member, that new country will have to apply for membership like any ordinary country, which means that Catalonia, or whoever decides to separate itself would have to apply for EU membership. This is already creating concerns in Catalonia because the Catalan businesses are worried that they could lose access to the Spanish markets or to the European markets. So what's important about this is that the European crisis is threatening the territorial unity of some European countries, with Spain and Belgium being the most advanced cases. But in other countries we are seeing that the crisis is threatening the links of solidarity between regions within a country. In countries such as Italy or Germany, we are seeing the wealthier regions feeling that the poorer regions are a burden and asking the central government for renegotiations of the schemes of distribution.