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The economic trade-off and the size of states
Over the past decades, the idea that regions such as Cataluña, Scotland or Veneto would become independent seemed unreasonable and unfeasible. However, along with historical and cultural reasons, the dimensions of the states also depend on economic trade-offs, as explained by Alesina and Spolaore in their book The Size of Nations.
The advantage of large nations is represented by economies of scale in the production of public goods, while the disadvantage is the increasing heterogeneity of a population as its size increases.
A big nation can benefit from economies of scale in the production of many public goods, such as infrastructure and defence, but is more likely to face the “one-size-fits-all problem”. In fact, larger nations tend to be characterized by more heterogeneous population, for instance in terms of religion, language and traditions. In these cases it is harder to meet their needs when policies are designed at the central level.
By contrast, in small states characterized by a more homogenous population, public policies can better meet the needs of citizens. However, small states are less efficient since they are less able to benefit of economies of scale. Another important point is the access to the market. The size of the market is important in that the more limited the market, the more limited the productive potential of specialization, and specialization is the key source of productivity growth. In large countries, firms also have access to a larger market.
The federated states are precisely a synthesis on this trade off. In the U.S. for instance, the autonomy of the single states allow them to meet the preferences of their citizens, while the presence of a federal state allows for economies of scale in the management of a number of public policies, such as defence, monetary policy, trade policy, and it also represents one of the biggest markets in the world.
Heterogeneous countries are often characterized by a delicate balance between the benefits of being part of a larger nation and the cost of a less suited policy. The last cost is especially high for citizens that are different from the majority for various reasons, religion, ethnic, etc. Therefore, there are large costs associated with secessions (let us called them “secession costs”).
For instance, an autonomous state of New York or Massachusetts would no longer benefits from economies of scale associated with the production of several public goods at the federal level; they would no longer benefit from a large army; and they would no longer benefit from the big bargaining power of the U.S. within international organizations and in bilateral negotiations.
The central argument of this column is that this no longer applies to European regions that aim to be independent. An independent Scotland, Cataluña, or Veneto would be attracted into the European Union. A counter argument could be that once a region becomes independent it is excluded from the European treaties. At this stage the European states could impede the new state from joining the EU. This becomes a complex political issue to deal with, but it appears hard to impede Scotland or Catalonia to join the EU while other countries like Croatia are joining the EU. The reason is that, in fact, one of the side effects of the creation of the EU is the sizeable reduction of the secession costs.
The impact of the European Union
The creation of the European Common Market in 1992 and the subsequent process of European integration in a number of areas have led to a considerable reduction of secession costs. In the first place, the dimension of the market is no longer limited by national borders, but it is represented by the European Common Market, in fact one of the biggest in the world. The currency and the monetary policy are already managed at the European level by an independent and respected central bank. Several other policies, such as the agriculture and environment policy are increasingly shifting from the national to the European level. At present, the EU already sits in the most important international organizations, e.g. the WTO, the G8, and it manages important commercial bilateral agreements, such as the Transatlantic Trade and Investment Partnership (TTIP).
As long as the European Union will centralize more political power in other areas, e.g. foreign policy and labour market, the secessions costs will decrease relentlessly. As a result, claims for autonomy will become more feasible and credible along with political integration.
For these reasons, an independent European region that would join the EU would bear far less costs than an independent American state or herself before the creation of the EU. In terms of the benefits, secession would allow rich regions like Cataluña and Veneto to retain the whole amount of their citizens’ revenues, while separatist regions would benefit from a complete autonomy. Scotland for example was envisaging introducing a reform in her welfare state in order to make it more similar to the Scandinavian model. As a matter of fact, Scotland, Catalonia or Veneto are not smaller than the Netherlands or Belgium.
To conclude, one the one hand it is often argued that social cohesion in Europe depends on a deeper political integration and more centralization of power. On the other hand, this column has argued that this process will encourage further claims of independence in several countries. A larger European budget with redistributive policies across Europe, along with reforms of decentralization and devolution can offset this (unintended) consequence of the process of integration. But are Frau Merkel, Monsieur Holland, and Signor Renzi ready to give their power away both upward and downward?