Part I - Situation and trends

1 Economic cohesion

Overview of the European economy
Divergence and convergence in economic performance
Disparities between regions have narrowed but by less
Regional disparities within countries are large, but may be stabilising
Disparities double in scale with the inclusion of applicant countries
Regional disparities also double with enlargement
Trends towards convergence

Overview of the European economy

The EU economy today is heavily reliant on services, which now account for 67% of output and 66% of employment, in both cases up by 5 percentage points from 10 years ago. Correspondingly, the importance of manufacturing and agriculture is tending to decline. This shift towards the service sector is likely to continue, while agriculture and manufacturing will continue to experience consolidation of production in higher value added activities and a fall in output and employment in others. In most applicant countries, output and jobs are still concentrated in agriculture and manufacturing, and within these in lower value-added subsectors, suggesting more restructuring in the future.

Growing trade and foreign direct investment have meant a gradual opening up of national economies in the EU towards both other Member States and the rest of the world. In 1999, exports amounted to 32% of EU GDP and imports to 31%. Both figures are the highest recorded since statistics began to be collected in the modern era, confirming the long-term growth in trade in the EU, despite fluctuations over the business cycle. Both are forecast to increase further in the future. Some 60% of trade was within the EU, illustrating the dependence of EU countries on each other, though, at the same time, interdependence with the rest of the world is also increasing.

The EU will continue to experience significant changes in the competitive environment over the next few years, which will affect the economy in general and cohesion in particular:

• continuing economic pressure from globalisation, increasing international competition and restructuring within particular sectors. Since sectors tend to be concentrated in particular regions and to involve particular social groups, restructuring is likely to pose a challenge to both regional and social cohesion. In addition, since globalisation tends to bring with it more standardisation and uniformity, it is important for the opportunities which it opens up to be balanced with the need to maintain cultural identities in different parts of the EU;
  
  
• enlargement and the challenge of integrating the applicant countries into the EU. Although enlargement will in the long-term be universally beneficial, it is likely in the short-term to bring pressure for restructuring, as firms in applicant countries face increased competition, in a context where their low income and output already pose challenges to cohesion;

• the information revolution. In a real sense, information technology is tending to reduce the physical isolation of peripheral parts of the Union and increase their 'virtual' isolation, insofar as the key to development is access to the technology, rather than access to markets. The key barriers are, therefore, low education and social factors, rather than transport costs. Although the change is as yet more potential than actual, it is likely to become much more of a reality in the coming years. It may well have a beneficial effect on regional cohesion, bringing the disadvantaged periphery closer to the centre, but it could be damaging for social cohesion. Education will become increasingly important to avoid a division of society between the technologically literate 'haves' and the technologically illiterate 'have-nots'.
  

Divergence and convergence in economic performance

Disparities between Member States remain despite strong convergence

The present EU can be divided into two groups of countries in terms of gross domestic output. (See Table A.1 of GDP and population growth rates, in Annex) There is a clear gap between Spain, Greece and Portugal, where GDP per head, measured in terms of purchasing power standards to indicate relative levels of wealth, is only 67-82% of the EU average, and the other Member States, where it is similar to or above average.

This is despite significant convergence achieved by these three countries over the past decade. As a group, their GDP per head rose from 68% of the EU average in 1988 to 79% in 1999. Individually, the gap between Spain and Greece and the EU average narrowed by 9-10 percentage points in each case, and for Portugal by 17 percentage points. Although the overall gap in GDP per head of the three countries with the rest of the EU was reduced by a third over this period, at this rate of convergence, it would still take another 20-30 years for it to be eliminated completely. This underlines the long-term nature of the convergence process, though whether it takes more or less time to achieve complete convergence depends on whether and to what extent there is a change in underlying conditions and in the context in which growth takes place.

An encouraging sign in this respect is the strong performance of Ireland, which 10 years ago was included in the least prosperous group of countries with GDP per head of only 70% of the EU average but now has a level 14% above average.

An important point to emphasise in this context is that convergence of GDP per head in terms of PPS depends not only on differential rates of output growth, on GDP growing faster in the cohesion countries than in other Member States, but also on relative price developments, which affect the PPS adjustment(see Box on GDP and other measures of the regional economy).

Disparities between regions have narrowed but by less

Disparities are even wider between regions in the EU 1. (See Map 1 of GDP per head per region and Table 1: The most and least prosperous regions in the Union, 1988-1998) The 10% of regions with the highest GDP per head consist largely of northern capital cities and the most prosperous southern German and northern Italian regions. Broadening this to the top 25% leads to the inclusion of many UK regions, some Austrian, Belgian and Dutch regions and Madrid and Rome (Lazio). The bottom 10% of regions consist predominantly of those in Greece and the French DOMs and also include some regions in Portugal, Spain and southern Italy, while the bottom 25% include many other Spanish and Portuguese regions, the remaining part of Southern Italy and Eastern Germany, as well as some peripheral regions in France and the UK.

The contrast between the top and bottom 10% is stark. The regions at the top have an average GDP per head 60% above the EU average, or 45% if regions where commuting is important are excluded,² while those at the bottom have a level nearly 40% below. In other words, in the top 10% of regions, GDP per head is around 2½ times that in the bottom 10%. Similarly, the top 25% of regions have a level twice that of the bottom 25% and account for a third of total EU GDP as against a sixth in the case of the latter.

However, there was significant convergence over the period 1988 to 1998 (see Map A.1, in annex). In the bottom 10% of regions, GDP per head rose from 55% of the EU average to 60%, though in the bottom 25%, it only rose from 66% of average to 68%. (These increases are not as dramatic as reported in the 6th Periodic Report, where the top and bottom regions were defined merely in terms of numbers of regions instead of the population they cover.)

Again, this underlines the long-term nature of convergence, since the gap between the bottom 10% of regions and the EU average narrowed by only 11% over these 10 years.

Regional disparities within countries are large, but may be stabilising

In addition to regional disparities across the EU as a whole, there are in many cases large disparities within individual Member States (see Table A.2 of regional disparities and Graph 1 of regional extremes). The divided economies of Italy and Germany are obvious examples, but in most countries, one region, or a few of them, have levels of GDP per head far above, or below, the national average. Capital cities, such as London or Paris (Ile de France), tend, in particular, to have levels much higher than average³, while in many remote and rural regions, such as Ipeiros in Greece, Calabria in Italy and Açores in Portugal, GDP per head is well below that elsewhere. This firmly demonstrates the fact that countries cannot be treated as homogenous economies and that it is important to consider regional as well as national features and trends.

The tendency observed in the First Cohesion Report, for regional disparities in GDP per head to widen over time seems still to hold in a significant number of Member States but in some others, disparities between regions have narrowed a little (see Table A.3 of disparities in GDP by region 1987-97 and Graph 2 on disparities in GDP per head, 1987-1998). Nevertheless, the recent reduction in disparities which has occurred in a few Member States may simply be cyclical, since lagging regions tend to converge more in periods of growth than during recessions ⁴. Moreover, substantial disparities remain, especially in some of the less prosperous Member States.

For example, while GDP per head does not differ much between regions in Greece, a gap has opened up in recent years between the main centres of economic activity around Athens and Thessaloniki and the rest of the country. Indeed, since the closure of land routes to the rest of the EU through the former Yugoslavia, the port and airports in Athens are the main entry and exit points for trade with the rest of the world. In consequence, the regions in the remote and mountainous interior remain the poorest in the EU mainland.

In Spain, the second largest country in terms of land area in the EU, the pattern of development is also varied. GDP per head remains relatively high in Madrid and Cataluña and has risen further over the past decade. Other regions in the north, notably Navarra and Pais Vasco, have also performed well, but those in the remote north-east and underdeveloped south have tended to do less well, GDP growing by less than the EU average in the former and hardly at all in the latter, which are among the least developed parts of the EU. Accordingly, regional disparities in Spain have widened further.

Disparities are also wide in Portugal, development being concentrated along the coastal strip, in Lisboa, Oporto and the Algarve, though disparities have narrowed over the past 10 years.

Migration has been a feature in Sweden and Finland, from the sparsely populated, remote regions in the north - as well as from the east in the latter - as economic recession hit hard in the early 1990s. Outward migration has continued since then, despite the partial recovery in GDP per head.

Disparities are both wide and long-standing between the north and south of Italy. Despite the economic upturn elsewhere, GDP per head in the Mezzogiorno has continued to stagnate at around 60-70% of the EU average. Only in Basilicata has growth over the past decade been significant and even here, GDP per head only rose from 63% of the EU average to 72% between 1988 and 1998.

GDP per head in terms of PPS in the new German Länder, where growth was very rapid in the first few years following unification, was also around 68-70% of the EU average in 1998.

Disparities double in scale with the inclusion of applicant countries

It is instructive to examine the disparities which would exist in the Union at present if all the applicant countries⁵ were considered together with the existing 15 Member States. However, it is recognised that by the time these countries actually enter the Union their GDP per head could be higher than at present, depending on their economic performance in the intervening period and the effect of accession itself on this.

It also has to be recognised that there are significant differences between the candidate countries, not only in terms of GDP per head but also in terms of their economic performance since the transition was initiated, which in part reflects the pace and extent of reforms during this period (See Box: Recent economic developments in the candidate countries).

Three groups of countries can be distinguished in the EU of 27 in terms of GDP per head instead of the present two (see Graph 3 of GDP per head by country). The existing EU Member States, apart from Spain, Greece and Portugal, form the first group with GDP per head 20% above the new average. These three cohesion countries plus Cyprus, the Czech Republic, Slovenia and almost certainly Malta (though no PPS figures are available) form the second group, with GDP per head between 68% (the Czech Republic) and 95% (Spain) of the EU 27 average, while the remaining 8 applicant countries form the third group, with GDP per head below this (and, on average, only 40% of the EU27 average, though 56-58% for Slovakia and Hungary).

Enlargement will, therefore, pose a challenge to cohesion in two ways (Table 2). First, it will more than double the population living in regions with GDP per head of less than 75% of the present EU average - EUR 20,213 per head - from 71 million to 174 million, or from 19% of the EU15 total to 36% of the EU27 total (or to 26% of the EU27 total if the EU average GDP per head is reduced to that of the 27 countries, ie EUR 16,504).

Secondly, it will increase the intensity, or scale of disparity. In 1998, GDP per head in the lagging regions of the Union averaged 66% of the present EU average. In lagging regions in the applicant countries, it was much less than this (around 37% of the present EU average), so that the two groups of regions together had a GDP per head of less than half (48%) the average.

On the basis of the present data, the statistical effect of including the 12 applicant countries is to reduce the EU average GDP per head by 18%. As a result of this hypothetical exercise, 27 of the regions in the existing EU with some 49 million inhabitants are raised above 75% of the average of the 27 countries. This, of course, does nothing in itself to resolve the development problems of the regions concerned, it just signifies that their relative position is improved by the entry of regions even worse off than themselves.

Given the present data and assuming that the EU were suddenly expanded by 12 Member States, the challenge to cohesion, therefore, in an EU27 can be said to be twice as widespread and twice as large in scale as at present. The challenge, moreover, is likely to persist for a long time. If the applicant countries were to experience the same rate of growth as the cohesion countries over the past decade, their present level of GDP per head implies a convergence process lasting for at least two generations. Even with the kind of growth experienced in Ireland over the past decade, it would take 20 years before they reached 90% of EU15 GDP per head.

Regional disparities also double with enlargement

The inclusion of the 12 applicant countries has virtually no effect on the identity of the regions with the highest GDP per head in the Union, 6 but completely changes the composition, and relative level of income, of the regions with the lowest level. The bottom 10% of regions (in terms of population) in an enlarged EU consist entirely of those in eastern Poland, Bulgaria and Romania together with Lithuania and Latvia. The 25% of regions with the lowest GDP per head comprise almost all the regions in the applicant countries and most of those in Greece, Açores and Madeira in Portugal and Andalucia and Extremadura in Spain.

It is noteworthy that very few regions from the current EU appear in the list of the least prosperous regions of an enlarged Union. It is also noteworthy how much GDP per head of the 10% of the bottom regions is reduced, falling from 61% of the EU average at present to only 31% of the average for an enlarged EU. Whereas at present, only Ipeiros in Greece has an income less than half the EU average, in an enlarged EU, some 79 million people would live in regions with GDP per head less than in Ipeiros.

As in the case of disparities between countries, the ratio of GDP per head in the top regions to that in the bottom in the enlarged Union is around double the ratio for the present EU. The top 25% of regions in an enlarged EU, therefore, would have an average level of GDP per head of 3.3 times that of the bottom 25% as against a ratio of 1.9 in the present EU, while the top 10% of regions after enlargement have a level 5.3 times the bottom 10% as compared with a ratio of 2.4 at present.

Trends towards convergence


The use of different economic models to explore trends in regional development can be helpful both in indicating the likely outcome in future years if these trends remain the same, and if regional economies continue to perform as in the past, and in identifying the key factors that need to change if convergence in GDP per head is to occur. Three main conclusions emerge from these models.

First, if past trends continue, it will take a number of decades for regional disparities in the present EU to be eliminated.

Secondly, there can be no guarantee that such an elimination will occur. More specifically, while regional economies might converge over time to their own equilibrium level of GDP, given the underlying conditions which prevail and their own factor endowments, there is no necessary reason why this process in itself should lead to a convergence towards the EU level of GDP per head and to a reduction in regional disparities in these terms in the Union. The only way to be sure of the latter is if there is a change in the underlying conditions themselves and in relative factor endowments (in terms of capital of all kinds and different labour force skills). The primary objective of regional and structural policies is precisely to bring about such a change.

Thirdly, it is of key importance for convergence of regions towards the average EU level of GDP per head that disparities in human capital endowment - ie in the skills of the labour force - are eliminated, or at least significantly reduced. This implies, in turn, a need both to improve education and training systems in lagging regions and to widen access to these, as well as a need for enterprises in these regions to use the potential skills available more effectively and to adapt more rapidly to changes in technology and in the organisation of work.

1. In the First Cohesion Report and in the Fifth and Sixth Periodic Reports, the top and bottom 10 and 25 regions were used to measure disparities. Since the NUTS regions vary in size, however, this is liable to give misleading results over time if the population covered by the regions in question changes significantly. This is all the more the case with the addition of the applicant countries, which increases the number of NUTS 2 regions to 260. The figures reported in the text therefore relate to the regions with the highest and lowest levels of GDP per head which account for 10% or 25% of population in the EU,
2. These are regions which are considered by Eurostat to have relatively high or low GDP per head largely because of commuting, which accordingly omits cases where GDP is produced to a significant extent by people living outside the region or where the people living in a region derive their income to a significant extent from elsewhere. See Eurostat (2000) 'Statistics in focus', Theme 1, 1/2000.
3. Some of this is due to commuting and the non-inclusion of people contributing to GDP in the population figures.
4. See the box in section 1.1 of the 6th Periodic Report for a fuller explanation of this effect.
5. These are Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Romania, Bulgaria, Cyprus and Malta.
6. The notable exception being the inclusion of Prague, where part of the high GDP per head is almost certainly due to commuting.

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