December 15, 2017
Two sources of tension in EU cohesion policy
Daniel Gros analyses the state of regional convergence within the European context. He finds that different country groups have had quite different experiences following the financial crisis and that in most cases there has been little convergence across regions within countries. More importantly, the seemingly permanent differences in regional per capita income are for some countries mainly the result of differences in occupation ratios.
This contribution has analysed convergence across Member States of the EU and across regions within them. The main finding for convergence at the national level is that the New Member States from Central and Eastern have converged strongly; whereas the euro periphery to the South has fallen behind. Outside Germany there seems to have been little change in regional cohesion within the larger Member States. Furthermore, we find that inter-regional differences in GDP per capita far exceed those in terms of productivity (or GDP per employed person). This higher variability of GDP per capita across regions is particularly pronounced in countries like Spain and Italy, because in these countries regional employment ratios are tightly linked to regional productivity levels, with much higher employment in the more productive regions.
The results underline the importance of two issues:
- The interplay between the national and regional dimension in economic growth and convergence.
- The difference between the conventional measure of GDP per capita and productivity.
EU cohesion policy has always been subject to tension between the national and the regional level. This tension arose first when Portugal and Spain joined, with the latter being characterized by strong regional diversity, whereas Portugal represented the case (alongside Greece) of a country which was entirely at a lower level of development.
With the enlargement towards the East the national dimension came again to the foreground as all of the NMS qualified for support under the Structural Funds and entire countries had a lower endowment in basic infrastructure.
However, given the strong progress made in terms of East-West convergence it is likely that the country averages of a number of NMS will surpass the existing thresholds for eligibility for Structural Funds. This would tend to reinforce the regional dimension.
By contrast, the euro area peripheral states have fallen back in terms of GDP per capita, and most of their regions have shared this tendency. However, this might have been due mainly to the financial crisis whose impact has been at the national level. In principle, one would expect that impact of the financial crisis to be temporary, thus leading to a reduction in the importance of the national dimension in economic growth. In the NMSs the impact of the financial crisis had been stronger in the short term, but this seems to have been overcome by now. The recovery in the ‘old’ euro area periphery has been more hesitant and incomplete so far.
Productivity versus GDP per capita
Another source of tension, which so far has received little attention, concerns the difference between productivity and GDP per capita. The data presented in this study shows that for some countries the regional differences in GDP per capita are much wider than the differences in productivity, as measured by GDP per worker (or rather employed person). Differences between income per capita and per worker are of course a function of differences in the proportion of the population, which is employed.This raises a key issue for cohesion policy, which traditionally has focused on drivers of productivity, such as infrastructure (‘tangible’ capital) and education/innovation (‘intangible’ capital). This does not appear adequate when the key source of differences in GDP per capita are differences in employment patterns. Efforts to reduce differences in productivity might thus encounter diminishing returns. Effort to reduce differences in income per capita might thus be directed better at reducing differences in employment ratios.
The fundamental question for cohesion policy is thus: “What should be the focus of cohesion policy when differences in employment ratios are the key drivers of differences in per capita income levels?”
The question should concern both European and national policy makers.
At the national level more thought should be given to finding the reasons for existing large differences in employment levels. Not all Member States are affected by this phenomenon, but in some key countries, like Italy, differences in employment rates seem to be responsible for a larger part of the long-standing North-South differences in income levels than differences in productivity.
Should cohesion policy thus switch from investment in tangible and intangible capital to active labour market policies? This would appear to be difficult for the EU since the responsibility for social and labour market policies remains squarely at the national level. But some re-allocation of funding away from the Structural Funds towards the Social fund, possibly coupled with ex-ante conditionality regarding reforms which facilitate employment should be considered.