COMMENT: Regional convergence continues apace in EU

By bne IntelliNews November 20, 2007

Kim Forkes of Moody's -

Europe's economy has been impressive recently, with the EU-27 growing 3.1% year on year in the first half of 2007. Growth was slower among the EU's original 15 members than for its newest 12; however; the older group, mainly in Western Europe, grew 2.9% in the same period. Faster growth in the newer EU countries of Central and Eastern Europe is hastening their economic convergence, a goal that would see incomes and opportunities distributed roughly equally across the continent.

Yet the picture grows more complex and interesting when we look beyond old-vs-new or east-vs-west. Regional growth patterns vary widely across the EU, offering clues to the forces behind its economic evolution. Although the latest available data come from 2004, the trends show consistency since the start of the decade. And adding in more recent GDP data at the national level produces an informative picture.

Income gaps, regional concerns

The EU's statistical body Eurostat divides the area into different levels in a system called NUTS (The Nomenclature of Territorial Units for Statistics), with GDP data provided at the second level, NUTS-2 regions, which are more like US metros or counties, rather than cities or states.

Large gaps in per capita incomes exist among the EU's regions. For example, adjusting for purchasing power parity, inner London had a per capita GDP that was thrice the EU-27 average, with Luxembourg and Brussels reporting multiples of 2.5. Meanwhile, regions in Romania, Poland, and Bulgaria had incomes less than half the average, with one Romanian region, Nerd-Est, reporting a per capita GDP less than 25% of the EU-27 average.

These massive gaps reflect more than income; they represent low levels of employment and wages, and probably low attainment of higher education. They likely also mean less ability to purchase investment goods or $100-a-barrel oil; however, these gaps also present massive opportunities for growth.

Regional disparities fell in the EU in 2004; the convergence process is under way. For example, Praha, the area that includes Prague in the Czech Republic, entered the EU's top-15 list for GDP per capita. Praha was the first NUTS-2 region from the new members' group to do so, and at 1.6 times the EU-27 average, is in impressive shape. Meanwhile, the Bratislava region, in neighbouring Slovakia, boasted a multiple of over 1.25. Praha's ascendance to the top-15 list broadens the list's already wide geographic scope, which covered regions in 10 countries.

GDP growth rates, not adjusted for purchasing power parity, were rapid in many cities in CEE and slowest in cities in Western Europe. In 2004, Bucuresti reported annual growth of 6%, with Bratislava, Praha, and Budapest not far behind. Lagging this group were Paris, Hamburg, and Madrid, all fairly wealthy regions in well-established national economies. Slower growth in Western European regions and rapid growth in Eastern European regions mimics patterns at national levels. In some cases, regional economies dominate the national economy; in others, macroeconomic forces are driven at a national level.

Eurostat measures the gaps between GDP per capita at the regional and national levels in its dispersion indicator. The higher the reading, the greater the variation in regional GDP per capita levels within a given country.

In 2004, the weighted average dispersion indicator for the EU-27 was 33.7. Latvia reported the greatest regional wealth variations with a reading of 52.9, while Sweden reported the least, at 15.7. Trailing Latvia were Estonia, Hungary, Poland, and Bulgaria. Nearer Sweden's end of the scale were the Netherlands, Finland, Denmark, and Spain. These latter countries have posted strong and stable growth in recent years and have benefited from their longer membership in the EU. Conversely, the numbers suggest that the EU's newer members have grown more rapidly but less evenly.

One-horse towns

The list of rapidly growing regions in CEE includes many well-known cities. For example, Prague has quickly become a tourist destination and a regional services hub; meanwhile, other regions of the Czech Republic have grown much more slowly, particularly where manufacturing and tourism are scarce.

A high dispersion indicator suggests a country has a few key sectors that benefit a few key regions. Other areas are still emerging markets, looking to find and exploit their comparative advantages. The fact that dispersion rates have fallen since 2003 is also promising; it may mean other regions are catching up and that national economies are diversifying.

Going forward, regional analysis will provide a useful lens for assessing the EU's overall development. Diversity offers benefits for the entire region; the more widely growth is spread, the less risk should one or two sectors fail. And as more and more regions catch up, private consumption and domestic investment will really begin to improve throughout the EU. Large regional wealth inequalities still exist, but they can also offer promising opportunities for future growth.

Kim Forkes is Associate Economist at Moody's

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