Monitoring European Integration 10

‘Growth and cohesion are not enemies; unless misguided policies determine otherwise, they are allies.’ This conclusion appears in the latest report from the Centre for Economic Policy Research in the Monitoring European Integration series. It emerges from a close analysis of the question of regional specialisation and the fears that the Single Market may lead firms to cluster together in certain areas, thereby creating new inequalities in the European Union.

The authors consider three possible outcomes for Europe:

• the Dispersion Outcome. There could be a broad dispersion of activity and considerable regional equality. This would result from specialisation, but with most regions able to specialise in something;
  

• the Concentration Outcome. There could be strong geographical concentration accompanied by high labour mobility, leading to depopulation of declining regions but not to great inequality of per capita income or access to jobs;
  

• the Regional Stagnation Outcome. There could be long-run polarisation of Europe into advanced regions with high incomes and low unemployment, and depressed regions with low incomes and high unemployment.

The second outcome is very unlikely. ‘Evidence from the investment behaviour of multinational firms suggests that agglomeration gains are significant but not overwhelming, and can be offset by the higher costs of operating in areas where labour and public goods are scarce.’ Moreover, ‘labour mobility is low in Europe and has even declined in recent years'. 

Whether we get the Dispersion Outcome or the Regional Stagnation Outcome, however, is much less certain. 'Misguided regional policies, which try but fail to freeze existing patterns of economic activity, can paradoxically increase the likelihood of the very polarisation they seek to prevent.’

The authors examine the cases of Ireland and the Italian Mezzogiorno and conclude that government policy can make all the difference. Furthermore, the Irish success has not been at the expense of the country’s neighbours. Government makes the difference at least as much by increasing a region's productive skills as by bidding for business more cheaply. It can do so through:

• public investment in a skilled and educated workforce;
  

• a tax and regulatory environment that encourages entrepreneurship;
  

• labour market policies that encourage wage flexibility in response to economic shocks (especially important within the Euro-zone);
  

• redistributive policies that diminish workers' fear of unemployment without acting as a disincentive for geographical mobility;
  

• acceptance and encouragement of geographical clustering by firms using related skills
  

• reduced reliance on policies to support existing firms in difficulty, or simply to compensate firms for operating in an adverse environment without attempting to improve that environment;
  

• policy consistency over time.

Notes for Editors:

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The Authors:

Pontus Braunerhjelm is Deputy Director of SNS, Stockholm and is also affiliated to the Research Institute of Industrial Economics (IUI), Stockholm. Riccardo Faini is Professor of Economics at the Università degli Studi di Brescia, is currently on leave at the International Monetary Fund, and is also a Research Fellow in CEPR’s International Trade and Labour Economics research programmes. Victor Norman is Professor of Economics at the Norwegian School of Economics and Business Administration, Bergen and is also a Research Fellow in CEPR’s International Trade research programme. Frances Ruane is based at Trinity College, University of Dublin. Paul Seabright is Professor of Economics at Churchill College, University of Cambridge and is also a Research Fellow in CEPR’s Public Policy, Industrial Organization and Transition Economics research programmes.