European Crack-Up?

Today’s Wall Street Journal has a very fine front page article on separatist movements and parties within the EU, especially in Spain (“Europe’s Crisis Spawns Calls For a Breakup—Of Spain”).  In Catalonia, independence parties are expected to prevail in regional elections on November 25.  Pro-independence parties have already won control of parliament in Basque Country. Elsewhere in Europe, Belgium sports a powerful separatist movement in Dutch-speaking Flanders. One could add (although the Journal does not) that Scotland is displaying similar tendencies.  And in Italy and even in Germany, regional tensions are on the rise.

The continuing fiscal crisis has a great deal to do with these centrifugal tendencies. When the political apparatus goes into the business of dishing out pain, voters tend to look inward. Wealthier communities—Germany, Catalonia, Flanders, Milano—wonder whether it is really such a great idea to transfer resources to losers—Greece (or for that matter Mecklenburg-Vorpommern), Spain’s inland regions, Wallonia, Sicily. The recipients for their part feel or affect wounded pride. Speaking of self-examination, though: the freshly minted Nobel Peace laureate should also blame itself for the rise of regional tensions.

Point One: for decades, the EU has talked and buttered upon regions (financially and otherwise), on the theory that what’s bad for nation-states must be good for the union. The intellectual class has cranked up an entire theory of “postmodern” and “post-national” politics to rationalize this strategy. There is nothing weird (the theory goes) about the EU’s halfway status between treaty alliance and full-blown statehood. Its genius, rather, is the supposed recognition that people can live with multiple political identities: European, Spanish, Catalan, whatever. And so they can—until something serious happens. Like a war, for instance, which EU countries can’t and won’t fight together, ever. (Germany led the Libya intervention from way behind: it declined to participate.) Or a fiscal crisis, when people naturally tend to choose the “identity” that promises to stem the losses.

Point Two: the Journal notes Harvard economist Alberto Alesina’s observation that rising regional tensions are typically preceded by federalism arrangements that grant junior governments greater authority to spend, without a concomitant devolution of tax autonomy and responsibility. An expansion of fiscal transfer payments tends to produce waste and government bloat; it also tends to breed resentment all around. See Spain. See Italy. See Germany. Etc.

That important insight sheds a harsh light on the EU’s crisis-fighting efforts. The EU’s mistake, it has often been said, was to create a monetary union without a fiscal union, and there is a great deal of truth to this observation. It is also true, however, that the EU’s greatest strength has been to create a free trade union without a fiscal union (aside from the EU’s relatively small “structural” and agriculture funds). Alas, the EU is in the process of creating such a union—not by endowing the EU with explicit tax-and-transfer authority, but under the umbrella of the European Central Bank, a bail-out facility (the European Stability Mechanism), and maybe one of these days a “banking union.”  In light of EU member-states’ experience with enhanced transfers, one has to be skeptical about the integrative force of the EU’s fiscal federalism strategy. It’s hard to fight a fire with gasoline.