the eu core-periphery divide in the new … · languedoc-rousillon 86 sterea ellada (mainland...

I J A B E R, Vol. 10, No. 2, (2012): 233-254

* Department of Economics of the Athens University of Economics and Business, Patission 76,10434 Athens, Greece, E-mail: [email protected]

THE EU CORE-PERIPHERY DIVIDE IN THE NEWREGIONAL AND GLOBAL SETTING:

A Reflection of the New Economic Geography Paradigm?

Helen Caraveli*

Abstract: This paper attempts to examine uneven geographical development in the EU byrelating it to factors such as globalization, economic integration, structural changes, economiccrises and the adopted economic policy model. In this context the possible future role ofspatial/structural policies under the 2020 strategy is assessed. Concerning the theoreticalframework which would be suitable in interpreting the above, the contribution of the neweconomic geography paradigm is evaluated. Due to the multiplicity of factors involved inthe analysis, a qualitative, multidisciplinary methodology is adopted.JEL classification: F01, FO2, F15, F59, R58.Keywords: core-periphery structure EU, convergence-divergence, economic crisis, spatial/structural policies, new economic geography, 2020 EU strategy.

1. INTRODUCTION

Researchers of the spatial allocation of resources and production usually aim toanswer questions like the following: (a) how unequal this allocation is and to whatdirection and extent it has changed in the course of regional and global integration?(b) Which factors have mostly influenced changes? (c) What will be the impact oncountry-regional specialization? (d) How efficient has economic policy been ininfluencing the above developments? (e) What is the most appropriate theoreticalapproach to interpret the above picture? The EU, so far the most integrated regionaleconomy, has been the object of substantial empirical research on these issues (seefor example: Tondl, 2001; Puga, 2002; Dall’ Erba 2003; Martin 1999, 2004; Caraveliet al., 2008; Caraveli & Tsionas, 2009, 2011).

Given the severity of the current economic crisis for the European economy, itsimpact on the core-periphery divide in the eurozone and the EU as a whole isincreasingly a topic of research and academic debate, at the centre of which are thetwo types of ‘accumulation regimes’ that have emerged in the post ‘70s era as aresult of structural and economic policy changes (see for example: Dunford, 1994;Beger & Jager, 2010; Schmidt, 2010; Stockhammer, 2011; Hadjimichalis, 2011). Twoimportant questions arise with respect to cohesion policy: to what extent has itcontributed to the achieved reduction in regional disparities? And can it besustainable under the current crisis and the austerity measures that it imposes?

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On the question of the theoretical framework, the New Economic Geography(NEG), originally developed by Krugman (1991a, b) and further elaborated byKrugman and Venables (1995) and Venables (1996, 1999), has been recently subjectedto criticism concerning its ability to explain contemporary economic structures andfinancial flows, given its focus on old-type regional (industrial) concentrations.How effective can it be in explaining the regional structure of the EU under currentdevelopments?

This paper attempts to examine the above issues by: first presenting the pictureof inequalities in Europe and the degree of convergence which has been achieved,which is the object of the second section; overviewing, in the third section, part ofthe literature on the sharpening of the core-periphery divide as a result of theEuropean monetary union and the current crisis; examining the possible futurerole of spatial/structural policies, as they develop under the 2020 strategy and theproposed multi-annual financial framework – the object of the fourth section; finally,evaluating the contribution of the new economic geography paradigm ininterpreting the above picture, which is done in the fifth section; summing up andconcluding in the 6th section.

2. CORE AND PERIPHERY IN THE EU: CURRENT SITUATION AND TRENDS

2a. A Picture of Inequalities in Europe

The nation-states of Europe differ significantly in the size and strength of theireconomies, so that a core-periphery structure has been established on a countrylevel. This is shown in Table 1, which gives per capita GDP in relation to EU-27average in Member-States, candidate and EFTA countries. Although the divisionin ‘core’ and ‘peripheral’ in the table is an indication of economic performance2

rather than of geographical location, geography continues to be an importantdeterminant of the c-p divide. The EU core still consists more or less of the former‘industrial’ powers of Europe, whereas the periphery has been enlarged with theinclusion of the 12 Central and Eastern European Countries (CEECs) in early 2000s,which has accentuated regional inequalities in the EU, and has expanded from thesouth towards the north-east. Both of these tendencies will be strengthened withthe accession of the candidate countries (see Table 1).

Disparities are also substantial within member-states (MS), largely due topolarization of key occupations and functions in metropolitan city areas. In 2007,the share of large metropolitan areas in population, on the average, accounted for60% of the EU population, while their share in GDP accounted for 68%. In theperiod 2000-07 however, growth in metropolitan regions has been negligible inEU-15, where it has probably reached its limits, but has been quite substantial inmost EU-12 countries.

Regional disparities at an EU level are shown in Table 2 for year 2007, whichgives regional per capita GDP in relation to EU-27 average by order of magnitude

The EU Core-Periphery Divide in the New Regional and Global Setting... 235

for selected (representative) regions of the core and the periphery. Again, while thecentre-periphery division is not based on geographical criteria, geography entersthe scene, as ‘central’ regions occupy areas with high levels of accessibility andconnectivity within the European market. In particular, in 2008, 43% of the Union’sGDP was produced in only 14% of its territory, within the geographical areacomprising the dynamic urban centres, i.e. London, Hamburg, Munich, Paris andMilan, where one-third of the population live and work (Caraveli, 2009;Hadjimichalis, 2011). At the same time, ‘peripheral’ regions occupy, largely, thesouthern and, in the last decade, the southern-eastern and north-eastern parts ofthe Union’s territory. This geographical structure will be strengthened with furtherenlargements towards the East3

2b. Convergence or Divergence?

The extent to which convergence (the catching-up process in which Less Developed(LD) EU regions and states grow faster than highly developed ones) has been

Table 1Core-periphery at a Country Level

Per capita GDP in PPS* in EU-27, candidate countries and EFTA countries**(EU-27 = 100), 2008

Core countries Peripheral countries

Luxemburg 276 Greece 97Ireland 146 Cyprus 92Denmark 120 Slovenia 92Netherlands 132 Chech Republic 82Austria 126 Malta 76Belgium 118 Portugal 73United Kingdom 115 Slovakia 71Sweeden 125 Estonia 70Finland 116 Hungary 63Germany 112 Lithuania 63France 109 Latvia 59Spain 110 Poland 55Italy 99 Rumania 42EU-27 100 Bulgaria 39Norway 181 Croatia 57Switzerland 138 Turkey 42Iceland 125 FYROM*** 30

* PPP = Purchasing Power Parities.** Candidate countries: Croatia, FYROM and Turkey. Countries of the European Free Trade

Area: Iceland, Norway and Switzerland. No data is available for Liechtenstein.*** Former Yugoslavic Republic of Macedonia.

Source: Eurostat, the Statistical Office of the European Communities, 2008.

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Table 2Core-periphery at a Regional Level

Per capita GDP in PPS* in representative EU-27 regions (EU-27 = 100), 2008

Regionas Per Capita GDP

CORE INNER LONDON 334LUXEMBURG 275BRUSSELS 221HAMBURG 192ILE DE FRANCE 169OBERBAYERN 165STOCKHOLM 165WIEN 163PRAHA 162BREMEN 159UTRECHT 155NORTH-EASTERN SCOTLAND 153NORTH HOLLAND 150STUTTGART 141COMMUNIDAD DE MADRID 137PAIS VASCO 137EMIGLIA-ROMANA 128DÜSSELDORF 128ATTIKI 128LAZIO 122VENETO 122LISBOA 105PROVENCE- ALPES- COTE D’ AZUR 103BERLIN 98MIDI-PYRENEES 97PERIPHERALCYPRUS 94NORTHERN IRELAND (UK) 93LANGUEDOC-ROUSILLON 86STEREA ELLADA (MAINLAND GREECE) 84ANDALUCIA 81SARDEGNA 78Ì ALTA 76CORNWALL 75VSHODNA SLOVENIA 73WEST WALES 73ALENTEJO 72ÅXTREMADURA 72IPEIROS 68CALABRIA 66SICILIA 66CENTRO 64WESTERN GREECE 60LATVIA 56PODLASKIE 40LUBELSKIE 37

Source: Åurostat, the Statistical Office of the European Communities.


achieved in the course of European integration is a topic of particular importancefor economic and political analysts. This is so, as it lays the foundations for theefficient application of common policies and partly reflects the success/failure ofthe integration process itself as well as of the Cohesion policy, implemented throughthe Structural Funds.

For a number of years, evidence from official EU statistics, which was confirmedby many empirical studies, led to the conclusion that real convergence had beenachieved on the country level but not (or to a much slower pace) on the regionallevel (see for example Tondl, 2001; Puga, 2002; Dall’ Erba 2003; Martin 1999, 2004;Caraveli et al., 2008; Caraveli & Tsionas, 2009). Thus, that the lagging countriesachieved higher growth rates in real per capita GDP than rich countries, initiallybetween 1960 and 1973 and, in a second step between 1986 and 1996 (Tondl, 2001),so that a catching-up process set in. On the other hand, during more or less thesame periods, per capita income differences widened between regions withincountries (Dall’ Erba, 2003; Martin 1999, 2004) and some researchers found thathalf of the income inequalities existing between EU regions are attributed toinequalities within individual countries (Puga, 2002; Martin, 2004). It would besafe to argue that “whereas convergence is observed on the European level,divergence is more often observed at the national level” (Petrakos et al., p. 4). Thisfinding in turn suggests that gains from economic integration have mainly benefitedthe richest regions of the poorer EU countries (including their dynamic metropolitancentres), so that a trade-off between growth (in terms of real per capita GDP) andequity (measured by the degree of regional income disparities) seems to have takenplace. Furthermore, a Europe of ‘two-speeds’ has been identified in a number ofstudies. For example, Petrakos et al. (2011) estimated empirically, through a non-linear model of regional growth, the relationship among level of development andregional convergence/divergence for the period 1990-2003 and found thatconvergence was evident at the early levels of development and divergence at moreadvanced levels (p. 5). This implied the “formation of two clubs at the Europeanregional scale: a convergence club comprising regions with a low to medium-highlevel of development and a divergence club comprising advanced and veryadvanced regions4” (ibid, p. 6).

Yet, evidence from the European Commission for the period 1995-2007, suggeststhat real convergence has been achieved at both the national and the regional scaledue mainly to the higher growth rates of the EU-12 group in both scales (EuropeanUnion Regional Policy, 2007; Caraveli, 2009; European Commission, 2010).

Table 3 places the growth performance of the EU MS (member-states) in a globalcontext, by comparing the growth rates of GDP per head in real terms in all broadcategories of EU regions (highly, moderately and less developed) to those of otherdeveloped and dynamic developing economies. It can be seen that growth rates inthe highly developed EU MS were almost identical to those in the US, Canada and

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Japan, while the growth rates of the less developed MS was similar to those inBrazil, Russia, India and China – the group of countries which have come to beknown as BRIC. The much higher growth rates in LDMS (less-developed member-states), but also the higher growth rates in MDMS (medium-developed member-states) contributed largely to regional convergence in the EU5.

Table 3Eu Growth in a Global Context

Growth of GDP per head in real terms: 2000-07 (Annual average change, %)

Brazil 3,1Russian Federation 7,7India 5,2China 9,9Mexico 0,6USA 1,4Canada 1,4Japan 1,5EU-27 1,8Highly developed MS 1,4Moderately developed MS 2,9Less developed MS 5,2

Source: Reproduced from 5th Cohesion Report, 2010.

The rising share in world trade mainly of the LDMS must be one importantfactor for the much higher growth rates of this group. Thus, while the share oftrade value in GDP in the last 10 years has grown by a little more than 15% in EU-15, it has grown by over 30% in the EU-12, as these countries faced both aglobalization and a Europeanization challenge. Of course, while the EU as a wholehas become less competitive in traditional sectors (e.g., textiles, metals and electric/optical equipment) due to geopolitical changes from the late 1980s onward6, whichhas led to an overall negative balance of trade, losses in employment in vulnerablesectors tend to be concentrated in less specialized regions. On the other hand, tradein services has been growing, showing a positive trade balance, which indicatesthe strong global position of the EU in this area. Again, specific regions mainly incore countries, but also cities in some of the EU-12, tend to benefit from this sector’scomparative advantage. Within this context, the relocation of different parts ofproduction of EU firms globally (i.e. the dispersal of the production process)increases the demand for logistics which in turn favors major cities and regionswhich host these services. It is likely that these cities are increasingly located inCEECs. This is because the productivity growth that has taken place at nationaland regional level7 - the combined effect of improvements in productivity withinsectors (broadly defined innovation) and restructuring (i.e. shifting to higher value-added sectors) - appear to be stronger in LDMS and to favour their metropolitancentres (European Commission, 2010).


Disparities at the regional level are measured by the coefficient of variation –which is a common measure of income disparities. Regional disparities have overalldiminished from the mid-90s to 2007 in both the EU-15 and the EU-12 MS, with thelatter showing a more marked decrease. As a result, for the EU as whole, thecoefficient of variation fell from 42.7 in 1996 to 39.1 in 2007 and 11 regions movedfrom the group of regions with a GDP per head below 50% of the EU average to thegroup between 50% and 75%. For the EU-15 this coefficient fell from 33 to 28.3 inthe same period, while other dispersion measures (e.g. the Gini index) showedpretty much the same reduction (European Commission, 2010). Yet disparities haveincreased in a number of MS (e.g. in Greece, from the group of EU-15, where thecoefficient of variation increased from 10 in 1996 to 27 in 2007 and in Romania,from the group of EU-12, where the same index increased from 15 in 1995 to 44 in2007, reflecting the relative concentration of growth in one or two regions). Theunderlying factors for regional growth must be productivity growth in particularsectors (mostly innovative sectors) in LDRs (less-developed regions), as discussedabove. The growth of productivity through restructuring and a shift to higher value-added sectors – from agriculture to industry and services – has been most markedin Convergence regions (CONV), since in Regional Competitiveness andEmployment Regions (RCE)8 (which have on average a higher level of productivityin all sectors of economic activity and a larger share of employment in high value-added sectors) very few employment shifts took place within sectors (i.e. from lowto high-tech industry or form industry to services which occurred in areas wheredeindustrialization is still an on-going process).

Despite the achieved convergence, the persistence of the core-periphery dividein the EU9 and, more importantly, the pressures that are exerted on this divide bythe current crisis – which threaten the sustainability not only of the Eurozone butof the EU itself - demand continuous adjustments on the EU’s Cohesion or regionalpolicy, including the latter’s alignment and coordination with other macro-economicmeasures. These issues are discussed in the sections which follow.

3. THE GEOGRAPHICAL DIMENSION OF ECONOMIC CRISES ANDSTRUCTURAL CHANGES IN THE EU

3.1. The Geographical Implications of Structural Changes and Crises in the EU:A Recent History

European economies have passed from a period of high growth and regionalconvergence (from 1945 to about mid-seventies10) to a period of slow growth andregional divergence (from 1975 to about the mid-90s). In the high growth period,resources were available for the development of LDRs of the union, which facilitatedtheir convergence with more developed EU regions. This was due to the applicationof Keynesian-type policies in the 1950s and 1960s, i.e. macro-economic mechanismsoriented towards boosting output and productivity in domestic industry and

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ensuring a high level of domestic demand and full employment. These policiesalso involved: a welfare state which improved the general standard of living of thepopulation; and a credit system, which, in combination with the relatively highmoney wages, led to the expansion of demand for durable consumer goods. Suchconditions permitted the transfer of funds to the periphery through national regionalpolicies, directly (e.g. the granting of subsidies to help less competitive firms inLFRs grow), and, indirectly, through taxation mechanisms and state expenditure(investments). The high employment rates in urban centres also permitted theabsorption of migration flows from less to more developed areas (Dunford, 1994;Amin and Tomaney, 1995).

The slower growth period from mid-seventies onward (following the outbreakof the first oil crisis and marking the entrance into a long period of subsequenteconomic crises), witnessed a rise in regional disparities and divergence in Europeaneconomies. The following factors have been identified as the main causes for thisphenomenon (ibid and Petrakos et al., 2011): structural changes which strengthenedmigration trends to the cities and agglomeration economies in the urban(metropolitan) centres; globalization/European integration and weakening of theability of national governments to use traditional economic measures to boost thedomestic economy (which involved an erosion of traditional welfare states andreduced funds for regional development), in combination with the transferring ofpower to global economic institutions11; the financialization of economies in thepost-1971 era12, which marked the transition to floating exchange rates and‘deregulation’ in activities of the financial banking system – processes thatstrengthened concentration trends to large urban centres nationally andinternationally; a divergence, as a result, in growth rates between agglomeratedcentres and peripheral regions which led to the establishment of a theoreticalcorrelation between growth and inequality13 (the famous in the literature ‘growthversus equity’ debate). At the same time, the relocation of firms to distant lower-cost areas, in search for international economies of scale, resulted in falling wagesand rising unemployment rates in both big urban centres and smaller locations,putting a barrier to migrants from LFRs. Falling wages were also the outcome of adeflationary policy of wage reductions and high interest rates and, generally, ofthe so-called ‘supply-side’ initiatives for the attraction of international flows. Thispolicy was used as an instrument for the reduction of increasing deficits, but led toshrinkage of investments and demand (including regional demand) and a more orless permanent state of recession (Dunford, 1994; Amin and Tomaney, 1995;Hadjimichalis, 2011).

In addition, the global recessions characterizing this period, which reducedinternational demand for many sectors where peripheral European countries/regions specialized, and geopolitical changes from the late 1980s onward, whichraised competition from emerging powers (CEECs, Turkey, India and China), hadadverse impacts on a number of peripheral regions, mainly in the southern


periphery, while from the mid-90s onward the same factors affected negativelyeven successful, dynamic, regions in the ‘Third Italy’, northern Greece, northernSpain, etc., “based on the performance of small and medium enterprises and on thecombination of diffused industrialization, specialized agriculture, cultural tourismand a polycentric system of small historical urban centres” (Hadjimichalis, 2011, p.258).

The deepening of European integration in the post-1993 period strengthenedthe position of more competitive regions and firms (i.e. core regions and biginternational corporations) - benefiting from economies of scale and agglomeration,flows of FDI and R&D14 funds – thus consolidating the core-periphery pattern.And while most EU policies were conducive to this process (e.g. industrial policy,competition policy, technology policy), regional or cohesion policy was criticizedfor inadequacy in improving the position of LDRs so that the cumulative growthmechanisms in advanced regions would be counterbalanced (Amin and Tomaney,1995; Petrakos et al., 2011). The formation of the Eurozone in 2001 consolidatedfurther the uneven geographical structure of the EU for a number of reasons: (a)the removal of exchange rate flexibility deprived (mainly weaker) member-statesfrom the ability to face external shocks – e.g. economic crises – having negativerepercussions at the regional level; (b) the establishment of ‘national convergencecriteria’ imposed by the Stability and Growth Pact15 (e.g. low inflation and interestrates, stable exchange rates and limits on the budget size) put further pressure toLFRs, most of which were located in countries with severe fiscal problems, andincreased emphasis on competitiveness in relation to spatial cohesion issues; (c)the application of such criteria to dissimilar economic and social structures, givenlow rates of geographical mobility of labour and absence of ‘automatic fiscalstabilizers’ to compensate for negative impacts in weak countries and regionsgenerally aggravates the situation of the latter (Amin and Tomaney, 1995;Hadjimichalis, 2011).

3.2. The Current Crisis and the Core-periphery Divide

In 2009 the EU economy experienced the worst recession since the Second WorldWar, with its GDP shrinking by 4% and unemployment rising to over 10% in mostMS. Despite the stimulus plans adopted by national governments, the crisis becameendemic in the Eurozone, turning into a sovereign debt crisis, which threatened thestability of the world economy. In 2009, all MS had budget deficits (in Ireland,Spain, Greece and the UK exceeding 10% of GDP) and most of them incurred publicdebts far exceeding the levels of the Stability and Growth Pact. The adoption ofrestrictive macro-economic (or austerity) measures within the framework of Stability& Convergence (national) Programmes adopted by most governments did notimprove the situation, as the reduction in public investment which they broughtabout once more exerted a negative impact on the economy’s revival and growth16.

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Given the established pattern of uneven geographical development within theEU, the present crisis did not affect the whole of the EU territory in a uniform wayand policy responses even within the eurozone have differed accordingly. Asubstantial number of economists attribute in particular the roots of the crisis onthe two types of economic models or ‘accumulation regimes’ that have developedwithin the EU-27, as well as the EU-17 of the eurozone, which express the unequalincome distribution in the Union (Beger & Jager, 2010; Stockhammer, 2011). Thefirst type can be described as an ‘overproduction’ or ‘export led’ growth model,comprising countries with trade surpluses (e.g. Germany, Sweeden and Austria);the second type can be described as an ‘overaccumulation’, or ‘credit led’ growthmodel, comprising the ‘highly financialized’ countries with high debts and currentaccount deficits (i.e. core countries, like the UK, as well as peripheral countries,like the former communist countries, Ireland, where the crisis has ‘hit’ its bankingsector, Spain, where a ‘real estate crisis’ emerged and Greece, where a public debtcrisis of immense dimensions burst). Member-states characterized by the formertype of model, follow anti-cyclical policies, which take the form of a wage restrainedand aggressive export policy. Countries belonging to the second type of model,adopt, to the most part, pro-cyclical measures (i.e. restrictive wage policies, incombination with welfare cuts and taxes, mainly targeted to reducing currentaccount deficits). Strong tensions have emerged between surplus and deficitcountries mainly in the Eurozone, as the highly export-oriented economies areunwilling to abandon their export-promotion strategies, and/or to continueburdening their taxpayers with supporting indebted countries. Yet, they benefitfrom the increased private debt of the highly ‘financialized’ economies (e.g. the UKor Spain), or the public debt of structurally weak economies of the southernperiphery, like Greece. Moreover, with the outbreak of the crisis, “an aggressiveattack by international financial speculators began increasing the cost of borrowingfrom financial institutions” (Hadjimichalis, p. 256). So, to a substantial degree, theroot of the crisis of the Euro system is not the “toxic combination of fiscal profligacyand an underlying lack of competitiveness” of the countries of the EU periphery(which came to be known as PIIGS – Portugal, Ireland, Italy, Greece and Spain)17,but “German export-boosting policies and the reinvestment of surpluses in southernEuropean economies of the Eurozone…via European banks which were doing thelending” (Stockhammer, 2011). Moreover, under conditions of increased worldeconomic integration, stagnation “combined with rising debt, speculation andrecurrent financial crises”, which are transformed into “fiscal crises of the state”, itis impossible for peripheral countries to escape from their “peripheral position”(Schmidt, 2010). However, these observations should not obscure the severe internalstructural weaknesses and particular characteristics of individual, mainly peripheralcountries. In the case of Greece for example, the ‘toxic combination of lowcompetitiveness’ (due to specialization in low value added sectors) and ‘fiscalprofligacy’ (due to the development of an inefficient and clientelist state),


alternatively stated, “corrupt local political and social behaviour…and misuse ofEU structural funds” (Hadjimichalis, p. 257) are most certainly among the causesexplaining this country’s structural weaknesses and debt crisis18. Furthermore, it isprobably that the ‘Keynesian’ model of operating the existing economic systemreached its limits under conditions of increased globalization (i.e. in open economies)and mounting debts.

A picture of countries with trade surpluses and deficits in the internationalarena is given in tables 4 and 5 below.

Table 4Major Surplus Countries in The International Scene (2010)

Magnitudes China Germany Russia Japan Brazil

GDP per head (current US $) 7,519 36,033 15,837 33,805 11,239Public Debt as a % of GDP 18.9% 47.2 % 8.6% 157.7% 61.0%Trade Balance (billion US $) 303,6 240 104,6 94,6 43,6

Source: The World Bank

Table 5Major Deficit Countries in the International Scene (2010)

Magnitudes USA UK Spain India

GDP per head 47,284 34,920 29,742 3,339Public Debt as a % of GDP 67.1% 73.2% 46.5% 53.0%Trade Balance (billion $) -847,0 -180,0 -110,8 -83,3

Source: The World Bank

Thus both groups of comprise countries of the international core and theperiphery. The ‘surplus’ group, whose growth depends on high competitiveness,comprises Germany and Japan from the core and China, Russia, Brazil from theperiphery. The ‘deficit’ group, whose key source of demand growth has been credit-financed consumption and residential investment or the accumulation ofinternational capital flows, comprises USA & UK from the core and Spain & Indiafrom the periphery.

Given the situation described above, Europe faces the challenge to reduce itsinternal imbalances through a change in macro-economic policies adopted by corecountries, as well as a revision of some rules of its major treaties – currentlyunderway. This means that its macro-economic strategies should incorporate awage/employment policy and a coordinated at an EU level fiscal policy, both beingsignificant tools in reversing many of the existing negative trends (Stockhammer,2011).

3.3. Impacts of the Crisis at the Regional Level

The sharpening of the core-periphery divide at the country level as a result of thecurrent crisis has indirect territorial impacts. The crisis affected regional

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development negatively, at both the core and the periphery, through cuts in publicinvestments and other government expenses - although cuts in regional and localgovernments were overall, according to the European Commission, smaller thancuts in central governments (European Commission, 2010). The negative impactdiffered among regions, with those specializing in manufacturing and constructionbeing more severely hit due to international competition, followed by metropolitanregions with a large share in financial and business services. Among Less DevelopedRegions (LDRs), the EU-12 Convergence regions appear to have been less severelyhit than those in the southern EU-15 periphery (for reasons explained in 2b). On theother hand, regional specialization in innovatory and/or highly competitive sectors,or those with high value added, was either not affected by the crisis or likely toresume quickly from it. How successful has the EU’s cohesion policy been so far intackling regional disparities and what are its prospects for the future?

4. THE SIGNIFICANCE OF THE EU COHESION POLICY

4.1. The Necessity of a ‘Regional’ or ‘Cohesion’ Policy

Two fundamental processes, which form part of European integration itself, haveexerted pressures on and have augmented regional disparities within the EU overthe years. On the one hand, the application of a number of Common Policies witha (direct or indirect) territorial impact has had a regressive effect on regional resourceand income distribution in the integrated European economy (the most characteristicexample being the Common Agricultural Policy which has favoured the moreefficient countries, regions and production units19). On the other hand, the successiveenlargements of the European Community since the beginning of the 1970s and ofthe EU later on, towards countries of an overall lower level of development and/orwith sharp internal regional/spatial imbalances, increased, as was previouslymentioned, regional disparities. The latest enlargement to the East changed theexisting geopolitical equilibrium by expanding the periphery eastward, revealingthe dynamic character of the core-periphery divide. At the same time, the old north-south divide was maintained, revealing the strength of a historically establishedstructure. All the above asymmetries necessitated the adoption (officially in theSingle European Act of 1986) and strengthening (in the EU or Maastricht Treaty of1992) of a common regional or structural policy20. The term ‘cohesion’ policy wasadopted in the 1992 Treaty of the European Union, which introduced the CohesionFund (CF), a new structural fund21 aimed at supporting the infrastructuraldevelopment of Greece, Spain, Portugal and Ireland (the four cohesion countriesuntil the 2004 enlargement to the East), whose per capita GDP was below 90% ofthe EU average. Promoting the development of the weakest EU regions and reducingregional disparities, cohesion policy allows the EU to function as a single economicspace thus promotes its harmonious development (article 174 of the Treaty). Itsimportance is reflected in its substantial share in the EU budget (see Table 6), which


almost equals that of the Common Agricultural Policy – the most significant up tonow European policy.

4.2. The Effectiveness of Cohesion Policy

Cohesion policy support appears to have contributed to the narrowing of disparitiesamong more and less developed countries of the EU shown in section 2. This isreflected in the trend of both overall public expenditure and public investment(which accounts for a relative small share of total public expenditure in Europeancountries) in the decade of the 2000s: In the period 2000-08 the largest increases inpublic expenditure per head occurred in MS with per capita GDP below the EUaverage, while public investment tended to be higher relative to GDP in the lessprosperous EU countries. In the same period, there was a gradual convergence ofboth total public expenditure and public investment per capita in Cohesion countriestowards the EU average. The positive effect of investment financed by Cohesionpolicy in infrastructure, education and R&D on economic performance (i.e. growth)has been confirmed in estimates of the European Commission. The structure ofpublic expenditure is then very important for achieving the convergence objectiveon a country level. Currently, about 55% of public expenditure is used forenvironmental protection, over 25% of that on transport, telecommunications andenergy and around 10% on human capital development (European Commission,2011).

However, there have been differences in the regional breakdown of publicinvestment22 among countries, at least in the period 2002-06. In Spain, Greece andthe UK, public investment was relatively evenly distributed across regions, whilein the Chech Republic, Slovakia and Hungary there was significant concentrationin capital city regions, which explains the continuous growth of these cities in theCEECs. At the same time, private investment tends to be distributed unevenlyacross regions, tending to be concentrated in the most competitive and affluentregions both at national and at EU level (ibid). Cohesion policy has thereforenot been so successful at the regional level, an observation already made inprevious sections, having perhaps helped to maintain or strengthen existingimbalances and leaving many regions ‘unprotected’ against EU and global marketpressures.

Yet, CP assumes even greater significance after the outbreak of the economiccrisis and the poor prospects for domestic public investment: though publicinvestment has increased dramatically in some Cohesion countries it declined inreal terms in those with high levels of public debt (e.g. Greece, Hungary, Malta,Portugal and Slovakia), i.e. those with the greatest needs. So there seems to be anegative correlation between changes in public investment and changes in publicdebt levels, indicating that attempts to limit expenditure have affected mostly publicinvestment.

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4.3. Adapting the Cohesion Policy to Current Developments and FutureChallenges

The latest report on this policy, the 5th Cohesion Report, is the first one designedunder the renewed Lisbon Treaty which added Territorial Cohesion to the twin goalsof Economic and Social Cohesion, thus introducing a geographical dimension in theshaping of the long-term programmes (European Commission, 2011). Within thiscontext, local development approaches are to be reinforced, which means that ruraldevelopment policy (an increasingly important part of European agricultural policy)and rural-urban linkages assume increased significance. However, the Europe 2020Strategy underlying the 5th report has set a new framework to which CohesionPolicy needs to adapt under the budget constraints (aimed at reducing budget deficits)which are likely to limit increasingly public expenditure (and public investment inparticular) over the next years. A central element is establishing better coordinationand mutual reinforcement of different policies23, and, most importantly, closer linksbetween cohesion policy and macroeconomic reforms24. Targeting public investment(which is significantly more decentralized than public expenditure in almost allMS) to regions most in need (i.e. with relatively higher levels of unemploymentand potential for growth) ensures its most efficient allocation, as limited publicresources have to be used to maximum effect. Such an approach reflects the increasedemphasis on the convergence [to the EU average] objective (i.e. of reducing the gapbetween national GDP per head and the EU average) and the gradual shift frompolicies aimed at reducing internal disparities (i.e. of cohesion policies) towardsthose aimed at strengthening regional and national competitiveness. Of courseexploiting the regional potential25 can contribute both to regional growth (thus toconvergence and cohesion) and to national growth.

In drawing the proposal for the next Multiannual Financial Framework (MFF),the Commission has taken account of the MS’ need “to bring deficit and debt into amore sustainable path…” and of all the above considerations (EuropeanCommission, 2011). The allocation of resources in the 2014-2020 MFF, presented inTable 6, reflects these efforts. In other words, more emphasis is given on theconnection between results and performance (i.e. concentrating programmes on alimited number of high profile priorities and actions that achieve a critical mass),with stronger ‘conditionality’ of cohesion policy and greening of direct paymentsto farmers. Priority areas which demand a reallocation of resources are:infrastructure, research and innovation (as the EU faces a significant innovationgap with other developed and emerging developing economies), education, securingEU’s external borders and external relations, as well as environmental protection.For the more efficient implementation of structural programmes, the Commissionproposes to introduce a new category of regions ‘transition regions’ to replace thecurrent phasing-out and phasing-in system26. This category will include all regionswith a GDP per capita between 75% and 90% of GDP of the EU-27 average. Of the


376 billion for promoting cohesion, the Commission proposes the followingallocation among the different categories of regions and programmes: 43,2% forconvergence regions; 10,3% for transition regions; 14,1% for competitiveness regions; 3,1%for territorial cooperation; 18,3% for the Cohesion Fund and 40 billion euro for theConnecting Europe facility (CEF). The ESF (European Social Fund) will represent atleast 25% of the cohesion envelope, not taking into account the CEF.

Table 6Multiannual Financial Framework: 2014-2020

(Euro million-2011 prices and percentages)

Commitment Approptiations (CA) Total 2014-2020 Shares of each categoryin total CA (%)

1. Smart and Inclusive Growth 490.908 47,8of which: Economic, social and 376.020territorial cohesion (76,6%) 36,7

2. Sustainable Growth: Natural Resources 382.927 37,4of which: Market related expenditure 281.825 27,4and direct payments (73,6)

3. Security and Citizenship 18.535 1,84. Global Europe 70.000 6,85. Administration 62.629

Total Commitment 1.025.000 100Appropriationsas percentage of GNI 1,05%Total Payment Appropriations 972.198As a percentage of GNI 1,00%

Total Outside the MFF 58,316Total MFF+Outside MFF 1,083,316As a percentage of GNI 1,11%

Source: European Commission, 2011.

5. THE RELEVANCE OF NEW ECONOMIC GEOGRAPHY PARADIGM

To what extent can the NEG model explain the European core-periphery modeland the developments affecting it? Based on the older theories of development andgrowth, but mainly on the geographical concentration approach of the ‘cumulativecausation’ school (e.g. Myrdal, 195727; Kaldor, 1972, 197528), this model, initiatedwith the works of Krugman 1991a,b), describes the process of regional polarizationwithin a country, resulting from the interaction among economies of scale, transportcosts and market size, assuming inter-regionally mobile labour and product variety.Accordingly, an important analytical question is how the above factors affect spatialcompetition and location under conditions of increased economic integration(regionally or internationally). It is proved that in intermediate stages of theeconomic integration process, i.e. when ‘transport costs’ (in the broader senseincluding all kinds of impediments to the integration process) are at an intermediatestage, growth will be accentuated in one or a few regions, as a result of concentration

248 Helen Caraveli

of economic activity and the attraction of factors of production from other regions(mainly skilled labour and capital driven by higher rates of return) – a process ledby market forces. Thus, a dualistic setting or a core-periphery pattern will beestablished, in which agglomeration economies generate cumulative growthprocesses leading to further growth and diverging growth rates between core andperipheral regions. In this theoretical framework then, the driving force of spatialagglomeration are the cumulative (or circular) causation procedures (‘history’according to Krugman), rather than ‘first nature’ (e.g. natural endowments)characteristics. International polarization was further explained by the ‘verticallinkages’ model developed by Krugman and Venables (1995) and Venables (1996,1999), which assumes mobility of labour only between sectors of production (e.g.agriculture and industry), but not between countries and regions, so that wagedifferentials are maintained. ‘Demand and cost linkages’ (backward and forwardlinkages) are the basis of specialization and the creation of ‘Marshallian-type’industrial clusters, so when introduced to the model it can also interpret regionalspecialization. When transport costs are sufficiently low (i.e. in more advancedstages of economic integration), centrifugal forces set in, due to increasingdiseconomies of scale or de-agglomeration forces in central regions, outweighingcentripetal forces. At this point, the attraction of lower wages in the periphery leadsto a new migration of factors of production (capital and labour) to peripheral areas.Divergence gives way to convergence, an outcome similar to that predicted in theneoclassical framework (Caraveli et al. 2008, Caraveli & Tsionas 2009).

Though it has been criticized for being part of the mainstream (see for exampleBhattacharjea, 2010) in the sense that it is broadly neoclassical, with micro-foundations, the NEG model has contributed in reinstating space issues intomainstream economic theory and ‘bringing back to life’ the ‘disequilibrium strand’– the theoretical strand interpreting regional inequalities. In addition, it is criticalof the mainstream as it is not based on the assumption of perfect competition andefficient markets, but on the assumption of imperfect competition and multipleequilibriums (Krugman, 2011, p. 4). It has further been criticized, among others byKrugman himself, on the grounds that it can interpret old-type (19th century)industrial zones29 and production clusters (e.g. “Marshallian industrylocalizations”30), but not contemporary concentrations which are more informationspillovers type, thus increasingly dominated by intangibles rather than tangiblegoods (ibid, p. 5; Storper, 2011, p. 12). For the same reasons, it would be inappropriateto interpret financial flows and the two types of accumulation regimes, which explainthe core-periphery structure in the EU under the current crisis.

Yet, NEG’s significant contribution lies not only in its grasping unequaldevelopment in space and the emergence of ‘catastrophic agglomeration’, undercertain circumstances, but in the fact that it entails the possibility of change and theemergence of ‘catastrophic de-agglomeration’ and‘re-agglomeration’ with thedevelopment of new core-periphery patterns. The model in particular explains: the


persistence of old core-periphery pattern in Europe and the limited convergencethat has taken place at the current ‘intermediate’ stage of European integration; thedeepening of the north-south divide under conditions of a dramatic external shocksuch as the current crisis, given the political impediments in the further deepeningof European integration; the emergence of new ‘centres’ in the old and new Europeanperiphery and internationally (China, India); the new (upgraded or degraded) rolethat southern European periphery can potentially play - depending on thedevelopments in the Arab world - in the Mediterranean or the Middle East areas.As Storper remarks, after certain adjustments to take into account currentdevelopments, the NEG model “could become an avant-garde field in dealing withthe astonishing geographical changes that we are experiencing today” (Storper,2011, p. 10).

It should finally be noted, that ‘intangible concentrations’ are implicit in theNEG model, as knowledge spillovers might be important in forming localizedexternal economies and industrial clusters which can give a region a long lastingcompetitive advantage over other regions. Therefore, wealthy regions tend tostrengthen their relative position the more they invest in research and development(R&D) activities, and the end result can be long-term divergence in growth ratesand income levels among regions. On these grounds, a recent theoretical approachcombines economic geography with elements of endogenous growth (Baldwin 1999,Martin and Ottaviano, 2001). Implicit in NEG models is also the strength ofgovernment policies to direct the movement of factors of production, e.g. towardsdynamic regions in order to boost national growth or towards the periphery, throughregional or Cohesion policies, in order to reduce regional imbalances. In regionalor global trade (e.g. in the EU or the world), the adoption of protectionist policies(e.g. through tariffs) to protect some types of regional specialization will result in adeterioration of the terms of trade and increasing trade deficits in peripheral areas,preventing convergence. Thus the model might indirectly point to the adoption oravoidance of government policies in certain circumstances. In the literature wefind important efforts in relating NEG’s conclusions with economic policy (see forexample (Ottaviano, 2003; Baldwin et al., 2005).

6. CONCLUDING REMARKS

This paper has examined the core-periphery pattern of Europe under the impactsof economic integration and enlargement to the East as well as the current economiccrisis. Statistical evidence from the European Commission shows that the old centre-periphery divide of Europe (the north-south divide) shows a remarkable persistenceover time, despite the convergence achieved at both the country and the regionalscales. In recent years, convergence appears to be largely the result of the muchhigher than average growth rates of less developed EU regions, most of them locatedin the newest 12 MS. This again was the result of productivity increases in specificsectors, indicating perhaps that some newly specialized centres are being developed

250 Helen Caraveli

within the new eastern periphery of Europe. The current economic crisis appearsto have seriously affected the core-periphery divide in the EU, mainly through thedifferent ‘accumulation regimes’ and the different policies followed by each groupof MS.

Regional or Cohesion policy has contributed to a very limited extent if at all tothe achieved reduction in regional disparities and the correction of the distortingeffects of common policies with a territorial impact in the course of economicintegration. Its significance is however likely to rise under the current crisis andthe curtailments in national budgets that it entails, although it needs to beincreasingly coordinated with sectoral policies and overall macroeconomic reforms,as is clearly stated in the 2014-2020 multi-annual financial framework. This emphasisof CP in reinforcing competitiveness has been considered the major cause for itsinefficiency in helping many LFRs escape from their ‘lagged development’ trapand in ameliorating the established core-periphery pattern. It remains to be seen ifthe adherence to this strategy under the increasingly restricted macroeconomicenvironment of the EU and acute international competition will further sharpenimbalances or provide an opportunity for the strengthening of competitive elementsin a wider range of LDRs.

Among the ‘disequilibrium theories’, the New Economic Geography (NEG),subject to a number of adjustments to take care of developments in contemporaryeconomies, can be a good analytical tool for the interpretation of the Europeancore-periphery pattern – i.e. the strength and persistence of this pattern as well asthe changes that it has undergone and is likely to face in the future, under theinfluence of a multitude of internal and external pressures.

Notes2. This is a rather arbitrary division, in the sense that it is based on whether a country’s GDP is

above (or very near) or below the EU-27 average. For example, both Ireland and Spain areusually considered to be part of the EU’s periphery rather than its core, but on the basis of thisclassification and data for 2008 they can be both classified in the core countries.

3. This will be the effect for example of Turkey’s accession to the EU. The large regional inequalitiesin the country are likely to aggravate the regional imbalances in the EU after the country’saccession. Its much higher growth rate however (real GDP growth is on average above 8%)might strengthen the trend towards convergence at a country level.

4. In the sense that the most dynamic regions grow faster and therefore they diverge from theaverage or the rest of the regions.

5. The BRIC countries, just like the NAFTA countries, have much higher internal regionalinequalities than the EU. The Commission has therefore signed a Memorandum with each ofthese countries in order to assist them develop the proper regional strategies in the lines of theEuropean Cohesion Policy.

6. Such changes are manifested in the rising competition of dynamic LDCs in these areas in theinternational market. The share in total world trade in GDP in emerging countries (China, Indiaand to a lesser extend Brazil), has increased from below 40% to above 50%, dramatically speedingup in the next decade. In the large developed economies like the US the increase is more limited


and the share of trade in GDP remains below 30%. A similar dramatic increase is also recordedby the share of FDI in capital formation. The question is then how EU’s main competitors – theUS, Japan, China and India – are expected to evolve over the next decade (European Commision,2010; Dunford, 2011).

7. Productivity growth was responsible for 80% of the overall EU growth in the last 10-15 yearswhich makes it a major determinant of EU competitiveness (European Commision, 2010).

8. These are the regions of the first and second objective of the EU’s Structural Funds (SF), for theprogramming period 2007-13, respectively. In particular, the first objective, ‘Convergence’(CONV), is applied to less-developed, mostly agricultural, regions, whose per capita GDP islower than 75% of the EU average. The CONV objective absorbs over 80% from the SF, due to itssignificance in promoting ‘territorial cohesion’ in the EU. The second objective, ‘RegionalCompetitiveness and Employment’ (RCE) is applied to regions in industrial decline due to thechanging international environment, whose per capita GDP is over 75% of the EU-15 average.The RCE target absorbs about 16% of the SF, aiming at promoting innovation and sustainabledevelopment. A third objective, European territorial-border cooperation, absorbs only 2.5% ofthe EU budget (European Union Regional Policy, 2007).

9. From the application of a globalization vulnerability index by the European Commission(measuring the impact of globalization on most vulnerable EU regions) it emerges that the existingcentre-periphery pattern remains to the largest part unchanged between 2005-2020 and thatprospects for Less Developed Regions are generally gloomy: (a) Many regions located in thenorth-west periphery of the EU improve their position globally due to their workforce with ahigh level of education levels, a high share of employment in advanced sectors and a high levelof labour productivity. These are largely in Finland, Sweden, Denmark, the UK and Ireland. (b)Many regions located in the southern/north-eastern periphery (stretching from Latvia, EasternSlovakia, Hungary, Bulgaria and Romania to Greece, Italy, Spain and Portugal) are likely to bemuch more exposed to the challenges of globalization in this period. The persistent vulnerabilityof these areas is mainly due to the relatively large share of low value added activities and thelow levels of labour force qualification and productivity, which may deter investments and jobcreation. (c) An unclear pattern emerges for the geographic centre of Europe (western and centralcountries), with some regions attaining a less-favourable position (e.g. in the north of Germany)and some others improving their position, due to improvements in education levels andproductivity (e.g. parts of Austria, Germany and France). (d) In many MS, regions with majorurban centres and metropolitan areas will benefit from highly dynamic sectors and educatedcitizens, but the agglomeration of economic activities will eventually create negative externalitiesand induce transfers to peripheral areas (European Commission, 2009).

10. A period called the Fordist golden age by some social scientists.

11. Such a transfer of power (e.g. to multinational corporations, transnational banks or internationalorganizations) means securing “rules of economic governance which facilitate accumulation ona global rather than a national scale”…In this framework “governments and global firms bargainfor a favourable position within the international division of labour, rather than pursue nationaleconomic interests…” (Amin and Tomaney, 1995).

12. A process which has come to be known as ‘neoliberalism’ due to the deregulation of financialflows that it entailed and has given rise to a finance-dominated accumulation regime, wherecapital flows grow much more rapidly than ‘real economic activity’. According to this critical(to the mainstream) school of economic thought, these conditions have been responsible formacroeconomic imbalances globally and regionally – i.e. within the euro system (Harvey, 2004;Stockhammer, 2011).

13. Stiglitz (2003, 2005) remarks that in post-industrial, high-income economies, dominated bytechnological innovation and high finance, geographical concentration and inequality tend torise with income.

252 Helen Caraveli

14. FDI = Foreign Direct Investment; R&D = Research and Development.

15. This pact was initially proposed by Germany in the mid-1990s and adopted in 1997 with thepurpose of imposing fiscal discipline to the 17 MS that took part in the Eurozone so that theEMU (Economic & Monetary Union) could be enforced. Under this pact, MS adopting the eurohave to meet the Maastricht convergence criteria, i.e., an annual (public) budget deficit no higherthan 3% of GDP (including the budget for municipalities, regions, etc.) and a national debtlower than 60% of GDP. The Pact consists of fiscal monitoring of MS by the European Commissionand the Council of Ministers. The Lisbon Treaty has reaffirmed the fiscal criteria that wereoriginally established in the Maastricht Treaty (in a less rigid way).

16. Economists generally agree that reducing public investment (e.g. in infrastructure and education)is likely to worsen efforts to reduce government borrowing levels over the long-run because ofits depressing effects on growth which may more than outweigh the short-term reduction in thebudget deficit.

17. A statement made by J.C. Trichet (Bickerton, 2011).

18. For more details on the long-term relationship between public debt, structural problems andeconomic policy in Greece see, among others, Caraveli & Tsionas (2011).

19. Other policies were mentioned in section 3.1.

20. It is called ‘structural’ due to its implementation through the Community’s Structural Funds (SFs),which are the basic financiers of long-term development programmes. The three SF are: theEuropean Regional Development Fund (ERDF), the European Social Fund (ESF) and the CohesionFund (CF). The SFs function on the basis of three ‘priority objectives’, which are applied on specificregions and localities (see footnote 8). The reforms of structural or regional policy in each of thesuccessive programming periods (1989-93, 1994-99, 2000-06, 2007-13) were accompanied by thedoubling of the SFs and their greater geographical concentration to areas in greatest need.

21. Though established in the EU Treaty of 1992, the CF became officially part of the SFs in theprogramming period 2007-13. In the current period, ‘Cohesion countries’, i.e. those eligible forCF support are the 12 MS that joined the EU in 2004 and 2007 plus Greece and Portugal.

22. ERDF and Cohesion Fund account for a significant share of public investment in LDR across theUnion. In the programming period 2000-06 they accounted for 40% of public investment inConvergence regions in Portugal, for over 30% in most regions in Greece, 20-25% in the SpanishConvergence regions, around 15% in the Italian Mezzogiorno and around 10% in Eastern regionsin Germany. In the current period of crisis, these amounts are going to be larger, as in manycountries Cohesion Policy is likely to be the main source of financing public investment.

23. This means that public investment policies aimed at reducing territorial disparities need to bemore coherent with sectoral policies. The latter (e.g. transport policy, employment policy,education and R&D policy, agricultural policy, etc.) may have an important effect on cohesiondirectly or indirectly.

24. This implies that structural reforms are not only important for growth but to tackle regionaldisparities. MS have already implemented a number of structural measures as part of theirNational Reform Programs (NRPs) in recent years – the second set for the years 2008-10 beingformulated under the renewed Lisbon Strategy and focused on growth and employment. Yetthe pace of implementing reforms has been slow and uneven. (European Commission, 2011).The principle of ‘additionality’ of the SFs is critical to maintaining the structural nature ofCohesion Policy, to preventing MS from diverting the finance received from public investmentto other non-structural purposes and to ensuring that it results in higher rates of growthenhancing investments.

25. In a number of countries, e.g. France, Greece, Cyprus etc., special measures assist the developmentin rural and mountainous areas, while an important feature of regional (and rural development)


policy over the past years is its shift towards ‘development from within’ or ‘endogenousdevelopment’ (i.e. based on the exploitation of local (natural and human) resources.

26. These are regions ‘phasing-out’ from the Convergence objective and ‘phasing-in’ to theCompetitiveness objective, due to changes in their income position.

27. Myrdal, G. (1957). Economic Theory and Underdeveloped Regions, Duckworth, London

28. Kaldor, N. (1972), ‘The irrelevance of equilibrium economics’, Economic Journal, 82: 1237-55;Kaldor, N. (1975), ‘What is wrong with economic theory’, Quarterly Journal of Economics, 89: 347-57.

29. The model has for example been used to interpret the emergence of the US manufacturing beltand Europe’s ‘bananas’ (i.e. zones of concentration of economic activity taking the shape ofbananas), which look more like 19th century concentrations (ibid, p. 5).

30. I. E. specialized regions or localities.

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