Regional autonomy movements in Europe – also about


1 1 December 2017 Focus Europe Regional autonomy movements in Europe - also about finances ■ Barbara Boettcher Beyond the Catalan referendum, independence movements in Europe Senior Economist seem to enjoy a revival. But calls for greater autonomy or even secession (+49) 69 910-31787 are not just about cultural identity - financial discrepancies between [email protected] regions also play a major role. Unsurprisingly, most of the regions Kevin Koerner with strong separatist tendencies are amongst the wealthiest in their Economist respective countries. Calls for (more) independence seem to be loudest (+49) 69 910-31718 when national financial equalization mechanisms lead to results that are [email protected] perceived as disproportional, such as in Spain or Italy. Figure 1: European autonomy/ separatist movements (selected) Not only in Catalonia Flanders (BE) that followed Catalonia's (unconstitutional) The political escalation in Spain Faroe Islands (DK) Bavaria (DE) Scotland (UK) independence referendum early October has been a reminder: even in a Europe N. Ireland (UK) with (almost) no borders and a single market, calls for more regional autonomy have not silenced. Only a few weeks after the Catalan crisis unfold, an Brittany (FR) overwhelming majority of voters opted for greater autonomy in the wealthy Basque country (ES) Northern-Italian provinces of Lombardy and Veneto. Three years ago, Scotland decided in a contested referendum to stay within the UK. But that was before the Brexit vote, and there are concerns that a second Scottish referendum might be Istria (HR) Catalonia (ES) South Tyrol (IT) held if the UK leaves the EU with unfavorable terms. And after all, what is the Corsica (FR) Lombardy/Veneto (IT)) Sardinia (IT) Sicily (IT) Brexit vote itself than a call for more "regional" self-determination? Source: Deutsche Bank It's about finances (and redistribution), too It is important to note, though, that most independence movements in Europe Per capita income - regions Figure 2: do not seek outright secession but rather greater regional autonomy within with autonomy movements versus their respective nation-states. Underlying motives may vary between regions other parts of country and include cultural, language-related, historical and other "emotional" aspects. % of national average, 2015 But more often than not, public finances and the distribution of fiscal revenues DE ES IT BE UK play a key role as well. It therefore seems no coincidence that calls for more 180% independence are often loudest in the most prosperous regions. London Brussels South Tyrol Hamburg 160% Among Spanish regions, the Basque Country and Navarre — for decades haunted Madrid 140% by separatist violence — rank second and third in terms of per capita income, Basque Country right after Madrid (see lower chart). Catalonia follows in fourth place. Also in Italy, Bavaria 120% ... Ven Catalonia regions with strong independence movements lead the ranks. Lombardy has the Flanders second largest income per capita, right after South Tyrol (which already is partly 100% Scotland autonomous and historically had strong separatist support). Veneto ranks sixth. 80% Belgium is deeply divided between the French-speaking Wallonian and Dutch- speaking Flemish. In Flanders, with per capita income substantially higher than 60% 1 in Wallonia, the separatist New Flemish Alliance is the strongest political force. Source: Deutsche Bank, Eurostat Scotland 's income per capita is at 93% of the UK's national average, but the latter 1 Brussels, the largely francophone capital has a special status. Page 2 Deutsche Bank AG/London

2 1 December 2017 Focus Europe Scotland is pushed up strongly by London (170%). follows London, the South-East Germany , income divergence and East of as the fourth richest region. In England increased after the German reunification. Excluding the city states of Hamburg 2 and Bremen, Bavaria is the most prosperous state per capita. Figure 3: : asymmetry between regions with/without fiscal autonomy Spain GDP per capita (2015) Per capita financial resources after equalisation (2014) 200 100 = national average 180 160 140 120 100 80 60 Andalucia Extremadura Cast. y Leon Illes Balears Catalonia Navarra La Rioja Cast. La... Basque Country Aragón Murcia C. Madrid Canarias Asturias Galicia Valencia Cantabria Source: Deutsche Bank, Ministry of Finance and Civil Service/de la Fuente et al. (2014), Eurostat But while in Catalonia, Lombardy, Flanders and Scotland, independence movements enjoy broad public support (even though not necessarily by the majority), the Bavarian Party has no real political weight. The same applies to separatists in France such as in Brittany as well "Basque" and "Catalan" areas on the border with Spain . The strong independence movement in Corsica is a main exception. Figure 4: Germany - no change in To understand these differences it might help to have a look at the national relative ranking of fiscal capacity after equalisation fiscal equalization schemes. In Italy , five regions (including South Tyrol) have autonomy status but this does not apply to Lombardy and Veneto. At the same % of per capita average, values for unweighted population, incl. municipal taxes (2015) time, Lombardy and Veneto are among the highest net payers per capita in the Bavaria , the Basque Country and Navarre have a interregional fiscal transfers. In Spain Hesse special autonomy status, which exempts them from the Spanish equalization Baden-Wuerttemberg scheme. For Catalonia, however, the fiscal transfer of revenues between regions Hamburg Lower Saxony leads to a changed ranking in terms of per capita financial resources after NR-Westphalia equalization. Unsurprisingly, preserving the ranking has been a key Catalan Rhineland-Palatinate Schleswig-Holstein demand (but denied by the constitutional court in 2010). This contrasts with Saarland the situation e.g. in Germany . Also here, a high level of financial integration Brandenburg Saxony between the federal states is reflected in a substantial redistribution of tax Saxony-Anhalt revenues. However, through the strong representation of the German states in Thuringia national politics, net contributors have warranted that the German equalization Mecklenburg-V. Bremen scheme does not lead to a changed ranking of relative fiscal capacities (see figure Berlin opposite). This last example illustrates that in dealing with separatist sentiment, 50 100 75 fiscal concessions may sometimes be a price worth paying. before financial equalisation after financial equalisation Source: Deutsche Bank, Federal Ministry of Finance 2 For a detailed discussion, see Deutsche Bank (2014): "Better off on their own? Economic aspects of regional autonomy and independence movements in Europe". Deutsche Bank AG/London Page 3

3 1 December 2017 Focus Europe Appendix 1 Important Disclosures *Other information available upon request *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg, and other vendors. Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at . Aside from within this report, important conflict disclosures can also be found at https://gm/ under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Barbara Boettcher, Kevin Koerner, Mark Wall Page 4 Deutsche Bank AG/London

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