Gergely Hudecz (on the staff of the European Stability Mechanism) presented the results of research, undertaken with Edmund Moshammer and Thomas Wieser, on the evolution of disparities across European sub-national regions, over the medium term and in response to the COVID-19 crisis. (Detailed results are available in Hudecz, G., Moshammer, E. and Wieser, T. (2020), “Regional disparities in Europe: should we be concerned?” ESM Discussion Paper 13.) They look at income and employment in individual regions, investigating what factors have contributed to relatively good performance and where there has been convergence or divergence. On this basis they offer suggestions on what policies might be effective in helping weaker regions catch up and share in the benefits of integration.
Regarding developments since the turn of the century, they find a complex picture: there has been a tendency for relatively poor countries to grow relatively quickly, and in particular the “new” EU member states have converged towards the mean. However, performance differences within countries have been pronounced, not least in the “old” member states. The differences do not fall into a simple urban/rural or north/south divide. Rather, the ex-urban areas surrounding vibrant metropolitan centres seem to have been most successful in attracting well-paying jobs in expanding, knowledge-based sectors. The research suggests that education levels and also the quality of local administration contribute to regional success, as does labour force flexibility, but no one factor is sufficient in itself: investment in education, for example, may facilitate emigration if attractive local jobs are not available. A weak region risks entering a vicious circle of poor growth, emigration, and lack of resources for public goods such as human capital, infrastructure, and efficient administration. The economic effects of the pandemic are likewise highly heterogeneous across regions. Areas reliant on tourism and services generally (such as many cities) have been hit hardest, at least initially. A subset of these regions had been doing especially well before, but the full ramifications of the shock are still working themselves out (for example, because it is unclear how drastically global value chains will be restructured). There may be persistent effects (“hysteresis”) where human and physical capacity is lost. Moreover, regional and even national governments will be challenged to shelter regions in the near term while also helping their adjustment and catch-up following the shock.
Regional divergence can contribute to political polarization at the national level. It may also undermine support for European integration, which may come to be seen as a mechanism for sucking economic vitality into a few agglomerations. Therefore, finding means to support lagging regions is not just a matter of economic welfare: it has a strong political economy motivation as well.
Hudecz suggested a combined approach of improving labour supply through education while attracting investment to generate labour demand and enhance productivity. To this end, strong administrative capacity and better infrastructure—especially IT infrastructure, which enables distance work in a post-pandemic world—will be crucial. The European institutions can help in all these areas. A continent-wide industrial policy could help spread the success of leading regions more broadly, and ensure that global value chains are complemented by “European value chains” connecting all regions.
Cinzia Alcidi (Centre for European Policy Studies), as discussant, asserted that EU regional and social cohesion funds have indeed been effective in helping regions catch up, especially by addressing structural handicaps. However, the bulk of resources available for redistribution come from national governments. The scope for cross-country mutual insurance is less than might be supposed because, as it turns out, economic cycles are fairly well synchronized across the EU and even more so across the EMU; they differ in amplitude more than in timing.
Christian Odendahl (Centre for European Reform), the second discussant, focused on other political economy issues. European integration has been “sold” as promoting convergence and mutual benefit. The project will be unpopular if it is viewed as mainly serving the interests of those who are already well-off. Discord may increase if COVID-19 is seen as having very asymmetric effects initially and in the course of the recovery. But regional policies can mitigate the tendency towards divergence, provided they are sufficiently holistic. Holistic policies would address in a coherent way such problems as Europe’s severe deficit in digitalization, congestion in thriving conglomerates, and decline in old industrial centres.
There was extensive discussion on which policies may be most effective. For example, investment in education facilities that convey relevant skills and in health services has proven to be highly worthwhile. It was stressed that social infrastructure (such as child care) and amenities can help make a region attractive. If emigrants can thereby be induced to return, a region can achieve a virtuous circle of rising employment, wages, and funding for public goods. Also, the “European green deal” and related infrastructure projected could complement policies aiming at regional convergence, for example, by concentrating alternative energy projects in lagging regions (which incidentally often have ample solar resources).
Professor Nicolaidis, chairing the seminar, stressed how the research sheds light on a number of political trends and issues across Europe, and demonstrates the value of looking at distributional effects across regions and not just across nation states or individuals. The adverse economic and political consequences of rising inter-regional inequality, which have been exacerbated by the COVID-19 pandemic, demand targeted public policy and resources. There was consensus at the seminar on the magnitude of the challenges, but also optimism that Europe has the tools to address them.
Daniel Hardy (Academic Visitor, St Antony’s College, Oxford)
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