Regional Policy in Europe: Addressing Disparities and Business Opportunities

1. MGTECON 580: Class 5 Regional policy in Europe - Regional disparities: country, regional level - Regional Policy is core EU policy - Four examples: business opportunities - Why are regional differences a problem for policy ? - Are regional differences a problem for business? - Does Regional Policy achieve its goals ? - Did integration favor the core ? - The next “regional” problem: accession countries

2. Regional policy in Europe Disparities across countries: per capita GNP 2000 (in PPP) Greece 15.600 Euro 69% EU average 22.500 Euro 100% Denmark 27.300 Euro 121% Poorest regions 50% (French & Portuguese Isles, Dessau, Isperus, Algarve Richest regions 160% (Hamburg, Ile De France, Vienna) Disparity of unemployment within countries Italy: Campagnia 4.4 times Vall d’Aosta UK: Merseyside 3.2 times Surrey Sussex Belgium: Hainut 2.2 times Vlaams Brabant

3. Regional policy serves important EU objective • Six founding members rather equal in GDP/head • Regional fund for southern Italy • 1973: UK, IRE, DK joined • Fear of intolerable disparities North UK and North Ireland, Ireland • 1981: GR, 1986 SP, P large disparities • The policy answer 1975: Creation of Regional Funds • Plus social cohesion funds (for SP, P, GR, IRE, per capita GDP, <90% of EU • The fear 1986 that by Single European Act of 1992, even more favoring the core • Subsidies depending on per capita income and unemployment • Objective 1: Regions where GDP per capita less than 75% of EU average • Objective 2: Areas with structural difficulties (rapid change, rural, depressed urban) • Objective 3: Education, training

4. Four examples: opportunities for business • Sachsen East Germany: “productive investment to create and safeguard jobs” • - Objective 1 area • - Chemical firm in 31% of 25 Mill Euro finances employees • Novi Technology Science Park in North Jutland Denmark • - “Development of endogenous potential” • - Objective 2 area • - Costs of Science Park: 4.9 Mill Euro of which 695 k Regional Fund • North East England • - Transformation of heavy industry area into knowledge bases • - Infrastructure development, research facilities, training center • - Combined use of regional fund and social funds for training • - Today 34 companies, among them Nokia, advanced applications and wireless application protocol (WAP), • Ericsson • IT-Bridge Sweden Denmark • - Electronic infrastructure • - Enterprise contact • - Partner twinning meeting • - 200k Euros, of which EU paid 50% Interreg Program Amount of money between 0.2 and 0.5% of EU GDP, but significantly higher share of investment and GNP in Objective 1 areas

5. Why are regional differences a problem for society? • Goal of equal distribution of chances (political goal) • Equity, equal chances, equal education • Income differences lead to migration pressure • Migration has political, economic costs • Nation-wide wage (bargaining) leads to cost differences • Differences in unemployment is a resource cost Are regional differences a problem for business? Problems: - Deprived areas - Unskilled, “non-industrial labor” - Non-attractive market for selling Advantages: - Low wages, log congestion costs - Outsourcing of simpler stages • Best: low wages, common productivity

6. Was Regional Policy in Europe successful? Cohesion countries are catching up 86 - 91 4.1% vs. 3.0 (EU 15) 91 - 96 1.7% vs. 1.5 96 - 99 4.1% vs. 2.8 Regional differences smaller Poor 10 regions 1986 41% of EU average, 1996 50% Strong catching up in sixties, seventies Stagnation of convergence in eighties Further catching up across, but not within countries 90 ties Specific: regions of Spain and Italy are falling behind furtherSome regions may use EU integration, Others do not Basic human capabilities, skills? Non-material preferences? Importance of leisure? Blockades for entrepreneurship and upward mobility

7. Did integration favor the core? The fear: - Core will win at expense of periphery - Full working economies of scale - Headquarters in core - Spillovers, linkages in the core - R&D, education, interesting services in the core The facts: - Big (core) countries do loose shares in GDP, trade - Core countries possess interesting resources, but to slightly decreasing extent The reason: - Small peripheric countries lose disadvantages of small markets - Small cost differences more important than decreased transportation costs Concentration of industries Europe is now less concentrated Countries are more specialized - Core in large industries - Nordic periphery in electronics - Small country inroads in biotech - Medical devices

8. The next “regional” problem: accession countries • High agricultural input • Substitutive in low wage industries • Large income gap • Large income differences (the eastern the lower) • Competition for regional funds and agricultural subsidies • Dynamic market • Chances for vertical splits (outsourcing) • The regional funds are diverted • - Specifically cohesion countries are defending interests • - Farm regime too costly to be extended to countries with high agriculture share