Territorial Scenarios and Visions for Europe ET2050 Eastern & Danube Region ,

1. Territorial Scenarios and Visions for Europe ET2050 Eastern & Danube Region, GÁL, Zoltán (PHD, Dr habil.)galz@rkk.hu Centre for Economic & Regional Studies,Hungarian Academy of Sciences University of Kaposvár, Faculty of Economics ESPON T-2050 Brussels, 18/02/2014

2. Background document/outputs by HAS RKK (Regional Research Institute) • GálZ., Lux G., Illés I..eds: Danube Region: Analysis and Long-Term Development Trends of the Macro-Region. Szerk.: Gál Z., Lux G., Illés I. Pécs: Institute of Regional Studies Research Centre for Economic and Regional Studies, Hungarian Academy of Sciences, 2013. 59 p. (Discussion Papers, 90) (ISBN:978-963-9899-62-9) • Scenarios/baselinetrendsintheDanubeRegionfortheSecondInterimReport • PaperonDifferentiated industrial development and economic convergence • ShortpaperontheHungarianpolycenricity and FUAs • PaperonModernization slope: Long-term path dependent analysis of Central and Eastern Europe – catching up or loosing behind? • Comment s onthevisionfromEasternregions’ perspectives

3. BASELINE TRENDS • Eastern European countries will hardly be able to sustain the strategy of growth of theprevious decade, when many industries were attracted, many from the Southern Europeanregions. While large cities and capitals may have agglomeration economies, rural areaswill tend to be depopulated. Migrations from East to West will continue. Social Welfaremay grow slowly, and the gap with Northern and Central regions may also grow.

4. Evulutionary economic approach • Europe as a whole, and Central and Eastern Europe is losing its share in the world economy because of the much faster rising new Asian and overseas economies. Historical datasets show continuous and sharp decline, which verifies our “steady European decline” expectation for a longer-term.

5. Catching up experiments in CEE • The CEE region became the periphery of a transforming West during the early modern Age (16-17th century). The nineteenth and twentieth centuries were characterized by 3 major periods (waves) of catching up with the West. • Turn of the 19th and 20th centuries experienced the most successful catching up • Modernization under the centrally planned economy • Post-communisttransformation and transition • Ingeneral, during the last quarter of the 20th century transition process CEE generally slowed down and started to decline. • One-, one-and-half decades of gradual catching-up period (spededupaftertheMillenium) with the West, faster growth rates and productivity increase, stopped in 2007-2009.

6. Changes in per capita GDP level Eastern Europe (7) in comparison with Western European Countries (EU 12 =100%) between 1870 and 2012

7. Economic trends • Economic trends: despite European catching-up processes, the large economic and territorial inequalities can not be eliminated in dependent economies due to constant capital scarcities • Catching-up in the region will take place, but with internaldisparities on the increase, particularly between metropolitan centres and peripheral regions • With the continuing dominance of FDI amonginvestments, the role of domestic capital and markets will receive more emphasis than previously, • CEE economic differentiation and strong integration into EU-wide ransnational corporate networks: zones alongside the main corridors in CEE are heavily linked to FDI and to Western European industrial networks (automotive) • More ambiguous mixture of FDI-driven reindustrialisation and the surviving domestic industrial capacities with rapid deindustrializing (CEE vs. SEE) • Weak innovation:R&D investment relative to GDP funded by the business sector – except in Austria and the Czech Republic – was low (moderete or weak innovators)

8. Peculiarities of the transition model in CEE • CEECs followed the pattern of a dependent market economy (DME) type of capitalism which is characterized by high dependency on imported foreign capital. • Foreign investors not only contributed to the modernisation of the economy, but also increased its structural and spatial segmentation created by the “dual economy”. • The strong correlation between higher FDI increase and higher growth can not be proved in the CEECs. • Camagni’s sensitivity analysisfound the same since new investments generate higher imports. (increasing tax rate in correlation with indebtedness) • Rajan found that developing/emerging countries that relied more on foreign finance have not grown faster in the long run and typically have grown slowly. • Low-income-based competitiveness represents a development trap that counteracts the accumulation of financial and social capital, hinders upgrading to high value-added production, and encourages migration to higher-wage regions. • CEE is falling behind its peers in other emerging markets. The global financial and economic crisis exposed the weaknesses of the post-socialist neo-liberal economic development model in East-Central Europe. • Wage differences will remain significant in comparison with the Eastern regions (Wegener)

9. Risk of Increasing National Disparities. In CEECs • According to G. Kolodko (2001), there is not one single future growth prospect for CEE. He differentiated four long-term growth path. • Our graphs verifies the increasing disparities between CEECs. Sustainable catching up process is jeopardized by the dualistic feature of the transition economies unveiled the weakness of indigenous (domestic) sectors. • Less developed countries may grow in the short-term because of the reduction of the current unemployment levels, and a reduction of salaries in real terms. • Meantime income and intraregional differences significantly increased.

10. Changes in per capita GDP level in CEECs in comparison with Western European Countries (12 =100%) between 1870 and 2012 Source: Zoltan Gal’s calculation based on Maddison database

11. Risk of Increasing Regional Disparities • At regional level, we may see disparities growing more than before; in new member states capital regions are the winners, while rural and eastern border regions may likely be the losers. • Clashes between growth- and sustainability-oriented policies are to be expected. (GMR model) • A net increase in the service sector is expected in Eastern regions, clustered in main cities, but growth in non-metropolitan regions will maintain a significant industrial element. • Industry will remain a backbone of competitiveness in non-metropolitan Eastern regions, shifting to deeper territorial embeddedness and higher local added value. • The concentration of advanced busi­ness services cor­responds to the urban network: it exceeds 50% in the capital regions of Slovenia, Slovakia, Bul­garia, Hungary and Croatia, is at 43% in the Czech Republic and below 40% in Roma­nia, where a more polycentric urban network is present.

12. Polarised development is one of the most serious problems of the CEE (Eastern) Region. • After EU accession the divergence of GDP per capita continued both between counties and within countries as well. The macro-region is also notable for its internal disparities. • The poorest region of the EU where the GDP per capita is less than 30 percent of the EU average (TOP 20 pooerest regions, Cohesion R) • Capital city regions (Praha, Közép-Magyarország, Zahodna Slovenija, Bratislavsky kraj, Bucuresti-Ilfov) have higher per capita GDP than the EU aver­age, in the case of Prague and Bratislava, double the average. • The location of FDI driven manufacturing industries: integration zone stretching from the Vienna–Budapest corridor to south-western Poland, with strengthening linkages to Western Euro­pean industrial networks, predominantly automotive industry. This integration is heavily linked to FDI, which, out­side capital cities, shows its highest levels in these industrial regions;

13. Development level by per capita GDP (PPP, % of EU27 average) Note: The numerical value in the upper box shows the ranking of the individual region within the sample. The value in the lower box shows the change in the region’s ranking between 2000 and 2008.

14. Development gap between the most developed and the least developed regions (GDP per capita in the percentage) in 2000 and 2007 Sorce: Gál-Illés-Lux (2013

15. Winners: Capital city regionsThe change of the relative development level of capital cities and capital regionsin the EU 1995–2009Source: Eurostat. Gál-Illés-Lux (2013)[1] • Convergence processes have been most beneficial for capital cities. It means that the overwhelming part of GDP is produced in the capital-city-regions (in Bulgaria 48%, in Hungary 48%, in Slovakia 60%, in Croatia 47%).

16. Differentiated industrial development and economic convergence (tertiarization paradox) • The degree of tertiarisation between the national economies of Central Europe does not correspond to development level. • Besides capital cities western border regions and gateway cities have become the most successful, becoming the main target areas of industrial FDIInvestment. • Economic development is only service-based in central regions • The differences of industrial decline and reindustrialisation are essential factors in regional competitiveness: cities and regions integrating into international industrial networks can count on a substantial increase of their competitiveness, while services on their own are unable to achieve this effect. Naturally, tertiary development is not independent from industry: • The question of endogenous development: The significance of ‘national champions’ was neglected under early post-socialism, and no attention was dedicated to the implications of different ownership.

17. Continuous “ladder” in the degree of tertiarisation between national economies (a reversal process Change in industrial employment in post-socialist economies, 1990­–2008 (%) Source: Author’s construction based on national statistical yearbooks and EUROSTAT • Countries that have been most successful at retaining a high level of industrial employment – via the successful adaptation of indigenous industrial milieus, but primarily through the attraction of FDI – have benefited more from. • The deepest decline was experienced in South-Eastern Europe, where destructive de-industrialisation was particularly prevalent.

18. Scenario relevance of economic development in Eastern regions • Baseline: • Industry can be expected to have a slowly diminishing share in employment and economic output, although its significance will stay above the Western European level, more closely resembling the German development path. Development will continue to be FDI-dominated, although the slow emergence of mid-tier companies in the EU12 is to be expected via capital accummulation.

19. The “MEGAs” scenario • Metropolitan growth offers little in the way of integration possibilities for a large share of post-socialist space. • Flows will orient even more towards national capitals, and resource concentration in mega-centres can be expected to encourage further de-industrialisation; a process that offers rather little to non-metropolitan zones. • Even though industry on the peripheries might stay competitive and maintain its current role for large cities, it can be expected to face a constant drain of human resources, and be unable to extend its networks to less dense hinterlands. • In contrast, leading services are unlikely to locate outside metropolitan centres. • Therefore, the disadvantages of this scenario can be seen as an opportunity cost to non-central regions.

20. The “Cities” scernario • The “Cities” might emphasise a higher significance of industry within the space economy. Large cities as integrators of industrial production and industry-linked business services, can serve as an anchor for large enterprises, and maintain spreading networks towards smaller centres. • In terms of knowledge production and transfer, this scenario might offer a favourable balance of concentration, which can contribute to the critical masses which are still weak on the European periphery. • However, the national differences of urban networks can pose a certain degree of risk in actual development.

21. The “Regions” scernario • This scenario offers the strongest vision of “spatial justice”, although at certain trade-offs. A more territorially balanced system of industry would be one favouring strong industrial districts and clusters, with high embeddedness but smaller individual firm size. • A vision of integrated rural and urban areas might be one of the most favourable policy environment to bring EU12 industrial milieus closer to Western Europe, since it would offer institutional incentives for the spreading-out of production and the reindustrialisation of the peripheries. • The conditions of technological change, particularly ICT, flexible production systems and CAD-based mass customisation can enable more dispersed patterns of manufacturing where certain industries can be dominated by highly flexible small and medium-sized firms. • Industry can retake its former employment share, but knowledge-intensive production can be more evenly spread, bringing with it further socio-economic advantages for smaller cities, towns and rural areas.

22. Baseline trends in Eastern region

23. Population and migration Demographic trends: still younger but rapidly ageing: The Danube Region and Eastern Europe is the only macroregionin the EU where the population is not increasing but decreasing. This ‘natural’trend is expected to be continue due to the deteriorating socio-economic conditions as aconsequence of the Crisis. The decrease has both natural and migratory reasons. (Hungary and Romania are the most affected) In Eastern regions, ageing combined with migration and limited savings will place a significant burden on national budgets; in the medium term, this will be compounded by a cohort of minimum-waged or ‘informal economy’ residents reaching pension age. Migration trends: internal: economic decline of factor supply via deskilling via internal, intra-regional (within the Danube region) and international migration. The international migration to other EU (East to West) countries started immediately after EU accession and it is triggered by the crisis.

24. Economic trends • Economic trends: despite European catching-up processes, the large economic and territorial inequalities can not be eliminated in dependent economies due to constant capital scarcities • Catching-up in the region will take place, but with internaldisparities on the increase, particularly between metropolitan centres and peripheral regions • With the continuing dominance of FDI amonginvestments, the role of domestic capital and markets will receive more emphasis than previously, • CEE economic differentiation: zones alongside the main corridors in CEE are heavily linked to FDI and to Western European industrial networks (automotive) • The unambiguous winners of the process are capital regions • More ambiguous mixture of FDI-driven reindustrialisation and the surviving domestic industrial capacities with rapid deindustrializing • Weak innovation:R&D investment relative to GDP funded by the business sector – except in Austria and the Czech Republic – was low

25. Employment • emergence from the crisis might result in alagging, mainly export-led recovery, with diminishing or even modest formalunemployment, but also a low activity rate and the lack (postponement) of labour market reintegration for periperies and disadvantaged groups. (core/periphery) • Wage convergence towards the EU average will stay below productivity gains, compounding theoutflow of the best qualified workforce, affecting even the centres. Only the strengthening of medium-sized and medium cities seems to offer a counter. • Services will increase their employment share, but an emphasison reindustrialisation and export-driven growth will influence the pace of structural change. • Wage differences will remain significant in comparison with the Eastern regions, where absolute poverty (a lack of resources for self-sustenance, as opposed to income inequality) will remain a pressing issue, concentrated in specific regions and social groups. Poverty, in contrast to western regions, is often concentrated in rural areas, and will pose a special development challenge.

26. Accessibility • Accessibility in the region mostly increases along TEN networks • and in major aviation hubs; the South-Eastern transport connection plays a tertiary role intransport compared to the North-Eastern German–Russian corridor and the globalintegration of Core Europe. The weakness of urban counter-poles (with the potentialexceptions of Poland and Romania) diminishes their individual transport roles, particularlywith the assumption of a Europe of MEGAs. • Highway investment projects may enjoy priority until the completion of adequate nationalnetworks; high-speed railways being restricted to a few select lines • Environmental In Eastern Europe CHG emission is stronglycorrelated by theeconomic activity and development level of a certain region. It can be stated that ScenarioB is even more likely than the Baseline. In which despite the general EU level decline CO2emissions will grow in the economically developing CEE regions.

27. Exploratory scenarios • Economic Growth (MEGAs) • in New 12 member countries the gain in GDP growth rate is more evenly distributed thanin western countries, and core and capital regions are indeed winners but not more thantheir respective countries. This is due to the fact that growth in these countries has beenconcentric in the past and continues to be concentric in the Baseline scenario, so that anincrease of demand and production as the one of the Megas scenario cannot be confinedwithin the core areas but needs to be spread elsewhere. • Cities • Regions in New 12 countries tend to benefit the most from the implementation of thisscenario, whereas the positive effects are comparable to those stemming from the more competitive “Megas” scenario. • Regions • On average New 12 grow faster than western countries;employment growth in this scenario takes place mostly infirst-rank and second-rank metro areas,

28. Development level by per capita GDP (PPP, % of EU27 average) Note: The numerical value in the upper box shows the ranking of the individual region within the sample. The value in the lower box shows the change in the region’s ranking between 2000 and 2008.

29. The change of the relative development level of capital cities and capital regionsin the EU 1995–2009

30. Polarised development and networks (urban, transport & energy network) External peripherization: CEE urban network traditionally oriented towards Western European urban system cyclical disintegrations increased peripherization within Europe Internal peripherization: A polycentric macroregional urban system constituted by monocentric national urban systems and a fragmented rural network, Danube a true axis of urbanisation: high concentration of population & MNCs Clear divide between capital cities and secondary centers The Balkans complex fragmentation on a national (ethnical) basis. Proximity/distance still matters: delayed network development, capital-centric in comparison with WE, historically influenced redundancies (due to changing national boundaries ) Political centralism preferred capital city-based monocentric national networks with limited border permeability Budapest-centric TENs, development- vis-á-vis environmentally motivated transport development (high share of highway investment ), hollowing-out of peripheries EU energy policy influenced by: secure supply, sustainability, market liberalisation  diversification, inherent contradictions South Stream, Nabucco and “Blue Stream” gas pipelines Increased energy consumption reliance on nuclear and fossil-based generation Renewable energy deployment motivated by EU targets

31. The European transport corridors (Trans European Networks) in the Danube region

32. Scenarios for the Danube region 1 The scenario of successful integration EU will overcome the current difficulties and the expansion will successfully continue Within approx. 15 years Serbia, Bosnia-Herzegovina, Macedonia, Montenegro, Kosovo and Albania may also become the members of the European Union. If the euro gets over the current difficulties, new countries from the regions are likely to join the euro-zone within 15 years The poorest regions of the EU member states receive considerable support from the EU Structural Funds. (Only three arecurrently ineligible for funding as convergence regions) Among the main challenges are to improve the north-south transport connections, increase border permeability (bridges) and improve the living conditions of Europe’s largest Roma community (8% of the total population) 2 The scenario of Central European cooperation In this scenario, it is assumed that EU enlargement will progress more slowly than previously assumed. It does not mean the disintegration of the European Union. Rather, more intra-regional cooperation (Visegrad countries) takes place, which partly compensates the slowing of EU enlargement. In this regional collaboration scheme the importance of the Danube will increase for landlocked countries. Energy security, the diversification of energy supply should also be achieved through cooperative within the region. Cooperation among former Yugoslav member states may gain a new momentum. Germany, Austria and Italy lead co-operation initiatives

33. Scenarios for the Danube region 3. ‘Worst case’ scenario, when the disputes and conflicts between the countries of the Danube region make cooperation and integration impossible Debates between the countries themselves make any kind of joint action impossible. Of course, this scenario is extreme in the current form, but draws attention to the recently more or less hidden dangers threatening the Danube region. Conflicts with neighbours related to the ethnic minorities Conflicts arising from realised or even not accomplished projects Debates over the delimitation of border (former Yugoslavian border zones) Conflicts of disguised protectionism

34. Key trends driving the 2010–2050 evolution Demography: The macro-region of our analysis has 56 million inhabitants; of them nearly 8 million live in a capital city (Budapest, Vienna, Bratislava, Bucharest andBelgrade). Several economically advanced regions have ageing population (Austria, Central-Hungary, West-Transdanubia and some of the neighbourhood of Bucharest). In the majority of regions in Danube macro-region the ratio of young generation overweighs the old-aged one. Economy: The ratio of economically active population within the total number of population is less than the European average. Rising unemployment is a serious problem especially for young people: in some countries youth unemployment rate may go as high as 40%. It is low-educated or professionally unskilled people who are the most badly hit by unemployment. On the demand side the following factors were increasing the ratio of unemployment: tensions in industrial structure, the shrinking size of internal markets, the transformation of firms, the new proprietary structure and privatization of firms. The contribution of agriculture to GDP and employment exceeds EU levels.

35. Key trends driving the 2010–2050 evolution Territorial patterns: Convergence processes have been favourable for the whole Danuberegion, but they have been most beneficial for capital cities. No region outside capital regions has experienced a significant improvement in development ranking. The favoured spaces of clusterisation lie in western border regions, with gradual expansion along main transport corridors. The Danube has become the axis of urbanisation; commercial-industrial activities related to the river have contributed to a strong concentration of population on the upper and middle sections of the Danube. : a polycentric macroregional urban system constituted by monocentric national urban systems and a fragmented rural network, a high level of industrial employment in cities compared with European core regions, a high concentration of companies of international and national importance in capital cities, the weakness of the urban bourgeoisie and civil society outside Germany and Austria, an increase in poverty and in degenerating social strata, the poor condition of the built heritage and the slow disappearance of infrastructural weaknesses.

36. Key trends driving the 2010–2050 evolution Energy: The European Union is determined to increase energy security, diversification of the purchase, to avoid one-sided dependency. Important energy transport infrastructures cross the macro region: From 2020, the region’s nuclear power plants will deliver electricity supply to Germany as well having closed down its similar facilities. Transport. Mono centrism, centred in capital cities, became natural in structuring the long-distance highway/ motorway network and rail network in the 20th century – degrading decentralization and regional development efforts drafted in the documents of the various political systems following each other.

37. Key trends driving the 2010–2050 evolution Land-Uses: Land-use is expected to move towards stronger urbanisation in selected urban areas (capital cities and cities with good growth prospects), especially in the Western Balkans, where urban sprawl has already been observable, and metropolitanisation is proceeding at a brisk pace. Suburban growth is comparatively limited at the moment. Rural areas undergo the loss of population and sometimes a reduction in land-use intensity, especially in distant (mountainous) areas, with potentially accelerating instances of the complete abandonment of settlements due to depopulation, but gain relevance as second homes in attractive locales and suburban growth areas in the proximity of developing agglomerations. Unlike Western Europe, selected rural areas undergo a form of ghettoisation due to the increasing concentration of disadvantaged groups. Another factor shaping rural land-use patterns is EU policies encouraging specific forms of usage (energy, forestation, recreational and reserve areas). A specific issue of the Danube region concerns river management and flood control, as along the length of the Danube, Drava (the Hungarian–Croatian border river), and especially the Tisza in Hungary, flooding is commonplace and the area of land where flood prevention is required is larger than the equivalent in the Netherlands.

38. Key trends driving the 2010–2050 evolution Environment. Those dependent on the Danube will need to prepare for direct climate change impacts including more frequent flooding and longer periods of drought. Indirect effects can include worsening water quality, loss in diversity of flora and fauna, including fish species as well as other environmental benefits and services that we have come to take for granted. Governance. In the whole Danube region the EU has become the dominant factor, the operator and financing agent of external and partially of the internal integration. The Euro-regional initiatives and the different EU funding programmes directly convey the expectations and reactions for the outsiders. There is no region in the area which is not linked somehow to the EU programmes, not receiving some kind of institutional, technical and financial support.

39. Danube region SWOT