1. 1 - 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 Regional policy in Europe MGTECON 580: Class 5

2. 2 Regional policy in Europe Disparities across countries: per capita GNP 2000 (in PPP) Greece15.600 Euro 69% EU average22.500 Euro 100% Denmark27.300 Euro121% Poorest regions Richest regions 50% (French & Portuguese Isles, Dessau, Isperus, Algarve 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. 3 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 Regional policy serves important EU objective

4. 4 Four examples: opportunities for business 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. 5 Why are regional differences a problem for society? 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? 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. 6 Was Regional Policy in Europe successful? 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 further Some 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. 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. 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