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
Regional disparities within countries are large,
but may be stabilising
Disparities double in scale with the inclusion of
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
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%
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 2Ż 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 Ašores 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
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 Catalu˝a 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
GDP per head in terms of PPS in the new German Lńnder, 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
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%)
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,
Ašores and Madeira in Portugal and Andalucia and Extremadura in
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.
- 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
- 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.
- Some of this is due to commuting and the non-inclusion
of people contributing to GDP in the population figures.
- See the box in section 1.1 of the 6th Periodic Report
for a fuller explanation of this effect.
- These are Estonia, Latvia, Lithuania, Poland, the
Czech Republic, Slovakia, Hungary, Slovenia, Romania, Bulgaria, Cyprus
- The notable exception being the inclusion of Prague,
where part of the high GDP per head is almost certainly due to commuting.