Opening Remarks

One Europe, Many Tribes


One Europe, Many Tribes

Illustration by 731

Italy, unified in 1870, is newer than Nevada. Spain was split down the middle by a civil war as recently as the 1930s. And reunited Germany, dating back only to 1990, is younger than two of the Jonas Brothers. Just a reminder that, for all their claims to antiquity, many of the nations of Europe have been nations for only the briefest of times. For most of history they were rivalrous territories, kingdoms, duchies, principalities, and city-states. They were bound by language and culture—and riven by tribalism.

As Europe’s financial crisis drags on, the tribes have returned with a vengeance. It’s not just Greece vs. Germany. Today it’s Sicily vs. Lombardy, Berlin vs. Bavaria, Andalusia vs. Catalonia. Keep this in mind as optimists point to the successes of the campaign for “more Europe,” such as the European Central Bank’s agreement on Sept. 6 to support the bonds of hard-pressed countries that comply with deficit reduction agreements. Europe is boiling over with regional grievances. Money is the issue—who gives it and who gets it. The 1999 launch of the euro has forced an unwanted intimacy on Europeans in flagrant disregard for Robert Frost’s poetic dictum: “Good fences make good neighbors.” And the euro entices separatists to strike out on their own, figuring even small nations can survive if they share a currency. (Malta, a euro-zone nation, has fewer people than Dublin or Dresden.)

Barcelona is the latest flash point. Each year on Sept. 11, Catalonia commemorates the 1714 defeat of its troops at the hands of the Spanish king, Philip V. This year more than a million Catalans flooded the boulevards and medieval alleyways of Barcelona, some waving or wearing the striped flag of Catalonian independence, others carrying signs with slogans like, “Catalonia Is Not Spain.” They blame redistribution of their wealth to poor regions for Catalonia’s financial stress, which has forced it to seek a €5 billion ($6.5 billion) loan. Catalonian President Artur Mas said he would push for independence from Spain unless the central government allocated it a bigger share of tax revenue. “If we cannot reach a financial agreement, the road to freedom for Catalonia is open,” he vowed.

The secession threat may not be a bluff. Even if it’s averted and Mas succeeds in reducing what Catalonia pays to Madrid, Spain’s financial squeeze will worsen and it will need even more help from the rest of Europe. That will intensify the anger toward Spain in the contributing nations, such as Germany, the Netherlands, and Finland, undercutting the efforts of European leaders to keep the 17-nation euro area intact.

To survive, the region needs more unity: a bigger permanent bailout fund, enforceable limits on deficits, centralized banking regulation. But Spanish Prime Minister Mariano Rajoy, Italian Prime Minister Mario Monti, and German Chancellor Angela Merkel can’t deliver more unity if voters back home won’t pull together in a spirit of shared sacrifice.

European unity depends on the unity of nations, which is in short supply. In Italy, the popular and sometimes-secessionist Northern League political party complains that wealthy northern regions like Lombardy and Piedmont are being bled by the south—the Mezzogiorno. In Germany on Aug. 30, a former weekly newspaper editor named Wilfried Scharnagl called for the independence of Bavaria, which joined the German Empire in 1871 but kept (for a while) its own king, army, and postal service.

The euro was from the start a project of cosmopolitan elites—politicians and business people who regarded themselves as Europeans first, secondly Spaniards or Germans, and only thirdly Galicians or Valencians, Rhinelanders or Hessians. The elites got out ahead of their own people, who were less “European” then and even less so today. In a survey conducted last May by the European Union, 63 percent of Spaniards said they felt very attached to their city, town, or village. Only 49 percent felt very attached to their country—and only 10 percent felt so toward the EU. Spaniards’ local allegiances have intensified since 2010, while their national and continental attachments have weakened. (Italians and Germans also chose their hometowns first, albeit by smaller margins.)

After the horror of World War II, European leaders tried to pull off a neat trick: give a high degree of autonomy to regions whose cultures had been suppressed under fascism, while simultaneously preventing the extreme poverty that’s a breeding ground for fascism by requiring rich regions to share with poor ones. Article 72 of Germany’s Basic Law, the 1949 constitution, requires “establishment of equal living conditions throughout the federal territory.” Although well-intentioned, the transfers have bred resentment in rich states and chronic dependency in poor ones, including those of the former East Germany. By providing generous welfare benefits of various kinds, “the state became a competitor of business, pushing up wages, thereby making the establishment of companies more difficult and causing mass unemployment,” writes Hans-Werner Sinn, president of CESifo Group Munich, an economic research institute. Much of the spending is wasteful. In Italy, the New York Times reported in July, the island of Sicily “employs 26,000 auxiliary forest rangers; in the vast forestlands of British Columbia, there are fewer than 1,500.”

Regional autonomy has also allowed local elites to gain strangleholds. Some of the strongest resistance to centralized banking regulation comes from banks that are owned or controlled by regional governments and in turn make loans to those governments or their favored partners. In Spain, it’s been the cajas; in Germany, the Landesbanken. In spite of a €100 billion backstop and more than €400 billion in gross borrowings from the European Central Bank, Spain’s banks continue to lose deposits at a rapid clip. WestLB, Germany’s biggest Landesbank, was shut down this summer after a failed international strategy produced enormous losses, and other Landesbanken are in frail condition. But Germany’s regional banks reject ECB meddling. Stephan Goetzl, president of cooperative banks in Bavaria, says that submitting to the “diktat” of the European Central Bank “surrenders the sovereignty” over regional finance.

The mistakes that Europe made in setting up postwar governments, it repeated in launching the euro currency in 1999. Greece overspent, overpaid, and became uncompetitive. As Sicily is to Italy, so Greece is to the euro region as a whole.

There’s no easy way out. Making each regional government responsible for more of its own finances would widen the gaps between rich and poor, although it’s possible to design aid that induces less moral hazard, says Camila Vammalle, an economist at the Organization for Economic Cooperation and Development in Paris. Regional governments’ poor performance “rather undermines the case for regional autonomy,” says John Loughlin, a professor at Britain’s University of Cambridge. “There is now a tendency for the national governments to claw back some of the autonomy that some of the decentralized entities were given.”

Valerie Montmaur, who rates European subnational government debt for Standard & Poor’s, says ratings have remained investment-grade partly because of support from central governments, such as equalization payments. But there’s a scenario, she says, in which “the capacity and willingness of the state may drop and the support to the local governments may no longer be expected. That hasn’t happened yet anywhere in Europe.” Not yet, anyway.

It’s been three centuries since the War of the Spanish Succession, but today’s factionalism would seem familiar to Philip V. The day after the Barcelona demonstrations, opposition leader Alfredo Pérez Rubalcaba told the Spanish Parliament, “We are seeing increasing territorial and social tensions that this chamber cannot ignore.” Europe’s crisis is far from over.

With Ben Sills, Rainer Buergin, and Charles Penty
Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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