By Patrick Moses
Recent independence movements in Catalonia and other European regions have brought up concerns about European Union member states breaking apart[1]. One concern is the question about applicability of Euro convergence criteria to a newly independent region. Another concern is the uncertainty about dividing up the sovereign debt of the parent and daughter countries. Just these two concerns alone are enough to discourage substantial investment and lending within the EU, placing significant stress on the member state’s economies. This stress could ripple through the EU, threatening its integrity. I intend to breakdown how these concerns threaten the EU’s integrity, and demonstrate how the European Central Bank and the Eurogroup could have strong motivations to discourage independence movements that may lead to secession.
Any independence movement would pledge to improve the regional economy. For a region that presently utilizes the Euro, questions about if they would be allowed to continue to use the common currency would lead to volatility in the Eurozone markets. The Maastricht Treaty requires a country to meet five criteria relating to its inflation and exchange rate of its currency, debt and deficit of the government, and the interest rate at which they borrow. These criteria must be met for at least 12 months prior to joining the Eurozone currency union[2]. A central issue would be if the seceding region would be allowed to continue to use the Euro. If they need to apply as a new member country, would the new country have to create a new currency in order to meet the full Maastricht Criteria? Or, would the ECB and the Eurogroup allow the new country to meet only some of the criteria while they continued to use the Euro currency?
These questions alone would stress Eurozone markets if a region had commenced a secession process. Any monetary agreement short of full, continued use of the Euro would add significant uncertainty to the European economy. Member countries that already have slow growth could see their economies go into recession, and those already there would only see it worsen. Government deficits would grow with lower tax revenue and higher expenditures on social safety net programs. However, the ECB could be discouraged from grandfathering in the new country because of the uncertainty of trusting the new government to maintain its deficit and debt-to-GDP ratio within the bounds of the treaty. It’s also worth mentioning the unlikelihood of a new country meeting the long term borrowing interest rate requirement with the uncertainty in its market. Therefore, the EU would likely not allow any new country to continue to use the Euro. Should they allow some form of this, it could create a precedent, encouraging other regions to pursue independence further threatening economic stability in the Eurozone.
The second problem with a region seceding is the question of the how to divide the sovereign debt. A region like Catalonia seceding for mainly economic reasons may have a large number of disputes with Spain concerning debt that remain unresolved for a significant amount of time.[3] These disputes will affect the parent countries debt in context of the Maastricht Treaty and discourage investment in both regions. The parent country will find its economy and government budget negatively affected. A similar situation played out when South Sudan seceded from Sudan[4], but in that instance, it was without the strong regional economic ties that EU members have with each other.
For these two reasons, the ECB and the Eurogroup would strongly discourage secessionist movements. Should independence appear imminent, the other members of the EU may decide to suspend the country’s membership or even expel it. However, the European Union and the Eurozone models rely on cooperation and eliminating trade barriers. Forcing out member states increases barriers and restrictions, hurting growth in remaining member countries.
The EU is already stressed by Greek debt crisis, slow growth in the Mediterranean region, and the Syrian refugee crisis. A region wide recession, whether created from regional secessions or member state expulsion, could contribute to member countries voluntarily leaving the European Union. This could escalate into a wider Eurozone breakup.
[1] Minder, R. (2016). Catalan Independence Bid Looms Over Spain’s Coalition Efforts. Retrieved March 11, 2016, from http://www.nytimes.com/2016/01/12/world/europe/catalan-independence-bid-looms-over-spains-coalition-efforts.html?_r=0
[2] EUR-Lex Access to European Union law. (n.d.). Retrieved March 11, 2016, from http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV:l25014
[3] Catalonia’s push for independence from Spain – BBC News. (n.d.). Retrieved March 11, 2016, from http://www.bbc.com/news/world-europe-29478415
[4] Elbeely, K. H. (n.d.). The Economic Impact of Southern Sudan Secession. Retrieved March 11, 2016, from http://info.southsudanngoforum.org/dataset/fcbcff4f-91a9-408e-8d99-751c98778de5/resource/9861f462-5031-4b2f-986e-879a44f3f7cd/download/elbeely2013theeconomicimpactofsouthernsudansecessionpaper.p