Europe grapples with regional economic divides | Business | Economy and finance news from a German perspective | DW | 28.03.2022

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Business

Europe grapples with regional economic divides

Eastern Europe's impressive growth means it's catching up with Western neighbors. But divides within countries threaten the EU's prosperity.

Controlled explosion of an old factory in Lünen, Germany

The loss of industry from EU economies has led to more regional inequalities

The European Union's economy is growing again — well, some of it is. After the pandemic lurched the 27 member states into disarray in 2020, the recovery in 2021 made up the lost ground and then some. But, even aside from the economic shock of the war in Ukraine and the accompanying spike in energy prices, the European Union's growth is not as it appears. Pre- and post-pandemic, it's unbalanced on a much deeper level.

The difference between eastern and western EU nations has been shrinking, though. Poland and Hungary might often make the headlines for their perceived democratic backsliding, but they are economic success storiesof the former East bloc. Before COVID, Poland grew by over 4% a year on average since it joined the EU.

Poland's soft zloty fuels export boom

A big chunk of that is because of EU cohesion funds, whereby money is pumped into regions below certain thresholds of gross domestic product (GDP) per capita. The lower a region is below the threshold, the more cash for businesses, education and infrastructure it receives. Between the Balkans and the Baltics, growth has comfortably outstripped that of western and northern Europe in recent years.

Mind the gap

It is the disparities within countries that are a quiet threat to the European Union's prosperity. They are neatly hidden behind reasonably healthy GDP figures, which are primarily buoyed by growth in regions surrounding major cities. But some regions — particularly rural regions or those which used to be industrial powerhouses — are losing out.

Take France, where GDP per capita in the Paris region grew by a steady 1.2% on average in the two decades leading up to the pandemic. In contrast, many regions in the northern half of the country were almost completely stagnant. A few others even contracted.

Reshoring on the rise in France

Similarly, the Lombardy region around Milan, Italy's richest region, has increased the GDP gap with the rest of the country over the same period. There are also regions in the Netherlands, Luxembourg, Spain and Greece that are showing near-zero improvements in GDP per capita over two decades. In short: regional inequalities within countries are on the up.

EU cohesion funds flow to less-prosperous regions in all EU member states, not just the eastern nations. But so far, they haven't been as successful in boosting performance of rural regions.

A magnet for urban growth

Policymakers have been slow to grasp that the shift from production to services has a highly regional dimension. In the days where industry represented a far greater share of employment, plants and factories offered a more even spread of jobs throughout the country.

Now that such jobs are waning, posts in IT, consulting and finance are overwhelmingly created in large cities, acting as a magnet for investment and skills in urban centers. Innovation — the creation and use of new technologies, a known determinant of long-term regional growth — is also unevenly split.

A recent report by the European Commission found that, in almost all member countries, innovation was strongest in capital cities and their surrounding areas. Innovation sucks in more investment to already successful regions and drains resources from others, contributing to the upward circle for large cities and a downward spiral for rural regions.

'A very sad future'

 "If we let diverges become too strong, then economically this is absurd," European Commissioner for Cohesion and Reforms Elisa Ferreira told DW . "Even more developed poles start slowing down because they cannot cope with congestion."

She said divides within countries were also fueling demographic change, with people leaving regions that cannot offer them enough opportunities. "If we don't manage to counter this trend, [these regions] will have a very sad future," she said.

Stagflation in Europe 'to hit real incomes'

It also has social and political consequences. Social scientists are increasingly highlighting a so-called geography of discontent, where people in stagnant regions are unhappy about the regional unbalances that hit jobs, opportunities and well-being in their communities. Far-right parties can be quick to jump on this frustration and try to harness it to their own advantage.

Ferreira considers the danger to be real. "By the end of the day, we find that the whole project of Europe can even politically break," she said. But there is no one-size-fits-all policy. "We have got to go into the vision for each area, how to combine the different instruments available to take regions out of stagnation into a more prosperous future," Ferreira said.

Edited by: Hardy Graupner

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