Regional Tensions Within EU Countries

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.

Many European countries are facing a similar problem: highly indebted regions that cannot meet their cost-reduction targets are asking their central governments for more time and more financial assistance -- which are exactly what the central governments are asking of Brussels. In the years before the crisis, the creation of a common currency allowed regions in many countries access to cheap credit, emulating the process of borrowing that took place at the international level.

The Regional-Central Split

Spain is an especially clear example of this phenomenon. Madrid is currently negotiating with Brussels over the terms of the Spanish banking system bailout. As a part of those negotiations, the Spanish parliament on July 18 approved some 65 billion euros ($78 billion) in spending cuts. At the same time, Madrid is negotiating with Spain's autonomous regions over the terms of a bailout for the most indebted communities. So far, three autonomous regions have announced that they will ask Madrid for a bailout: Valencia on July 20, Murcia on July 23 and Catalonia on July 24. More regions are likely to follow.

Spanish Prime Minister Mariano Rajoy's administration on July 19 created an 18 billion-euro bailout mechanism to help the Spanish regions. However, this fund may not be enough since the regions face debt redemptions worth about 15 billion euros in the second half of 2012 alone. Moreover, Madrid has its own problems accessing financial markets since the yield on Spain's 10-year bond reached a eurozone record high July 23, partly due to market fears of the troubles in the Spanish regions.

Italy is facing a similar situation. On July 17, Italian Prime Minister Mario Monti expressed concern about an eventual default by the region of Sicily, which has 5.3 billion euros in debt and a recently downgraded credit rating. Sicily's debt is slightly less than 8 percent of its gross domestic product -- a high debt-to-GDP ratio when compared to those of wealthier northern regions, such as Lombardy and Veneto, but not as high as those of Campania and Abruzzo.

In order to prevent a crisis in Sicily, Rome announced that it would send 400 million euros to the island so it could continue to pay salaries and pensions. On July 23, Italian newspaper La Stampa reported that 10 highly populated Italian cities -- including Naples, Palermo and Reggio Calabria -- are experiencing problems in managing their finances.

The Portuguese government faces a similar issue. In May, it created a 1 billion-euro credit line to help Portuguese municipalities repay their short-term debts to suppliers, lenders and banks. Portuguese Parliamentary Affairs Minister Miguel Relvas announced in March that the overall debt of the country's municipalities and municipal companies is around 12 billion euros -- equal to roughly 7 percent of Portugal's GDP.

These examples show how local and regional governments are one of the main obstacles that the European periphery faces in reducing its deficit. The delicate situations in these regions are pushing up bond yields and undermining market confidence in the abilities of Spain, Italy and Portugal to reduce their spending levels. Furthermore, tensions between regional governments and central governments are challenging the constitutional order of some countries -- the Spanish and Italian constitutions give certain key economic and political powers to regional governments.

Regions Versus Other Regions

In addition to generating economic and political tension, the European crisis is testing regions' solidarity. On July 17, the government of Bavaria -- one of Germany's wealthiest regions -- announced its plans to question the legality of Germany's financial redistribution system. This system was created by then-West Germany's 1949 constitution, which East Germany acceded to after reunification, with the purpose of creating equal standards of living for the country's regions.

Bavaria, a net contributor, wants to renegotiate the 2005 interpretation of the system to reduce its contributions. After Bavaria's announcement, the region of Hesse -- another net contributor to the system, whose largest city is the financial center of Frankfurt -- suggested that it is also considering denouncing the redistribution scheme before Germany's Federal Constitutional Court. While this debate is not new, taking the matter before the Federal Constitutional Court escalates the conflict.

In Italy, Sicily's predicament renewed the debate between the country's industrialized, wealthy north and the agrarian, underdeveloped south. The north says the public sector in the south is too large, and there are constant accusations of corruption, nepotism and links to organized crime.

The president of northern Italy's Veneto region, Luca Zaia, said, "To help someone who overspends is not really to help him. I do not understand how we can help those who, like Sicily, have 27,000 forest agents against the 8,000 which serve in the rest of Italy." Criticism of the south has been a traditional feature in the discourse of Lega Nord, a right-wing party that was a part of the government until Silvio Berlusconi's fall in November 2011, and is currently the main source of parliamentary opposition to the Monti administration.

The Economic Repercussions of Political Tensions

The European crisis has exposed the financial fragility of the regions and municipalities in the European periphery, which in turn is a reflection of these countries' economic vulnerability. The crisis has also laid bare the disparities between regions and threatens to destroy the solidarity that unites the different regions of a state.

This political tension is even more dangerous than the crisis' economic effects, because it threatens to destroy the bonds that hold a country together. The lack of an effective system to transfer funds between countries is a major weakness in the European Union. If countries reproduce this failure internally, it could seriously threaten the political stability of the eurozone member states.

In this context, countries with regional tensions have a few policy options, but they are politically costly and are not guaranteed to be effective. First, central governments could put more pressure on the regions and introduce new laws to increase control over them. Central governments have some leverage to do this, because the regions need funding from the state. But this strategy would alter the delicate balances of power between the government and the regions. In some cases, it would require constitutional amendments -- an idea that may not be tolerated by the population, especially if the central government's recovery of powers is mainly carried out to implement further spending cuts imposed by the European Union.

Second, central governments could ask for a more direct intervention from European institutions -- a strategy that Spain and Italy are already implementing. However, this does not resolve the imbalances that occur, both between countries in Europe and within each country. Moreover, this does not address the problem of enforceability -- another issue that occurs both between EU members and within them.

Central governments have an extremely limited range in which to maneuver. Madrid, Rome and Lisbon are combining the request for assistance from the European Union with the application of further pressure on their local governments. Meanwhile, tensions between rich and poor regions can be seen both between countries and within countries, as the cases of Italy and Germany show.

These conflicts are not new, as most European countries historically have regional frictions, but the 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.

The first imperative of a nation state is to maintain territorial integrity -- a concept that is more important than protecting a common currency or deepening a process of continental integration. If countries reach a point at which they consider their territorial integrity jeopardized, they likely will decide to adopt whatever measures they see necessary to protect their most basic interests -- even if it means eventually abandoning the European Union.