Year XXX, 1998, Number 1, Page 44

 

 

 

UNBALANCED GROWTH AND THE INTERNAL MARKET: THE CASE OF EUROPEAN REGIONAL POLITICS
 
 
The economic and social situation of the different parts of Europe at the beginning of the eighties is very different, as we can see from the second periodical report of the Commission on the subject.[1]
Considering the statistics on the regional problems, which take into account the levels of GDP per inhabitant and per employed person on the one hand, and unemployment rate on the other, it seems clear that the most backward regions at the very most reach only seventy per cent of the Community average. These are the peripheral regions, most of all on the North-West/South-East axis, which include most of Greece, Southern Italy, Corsica, Ireland, Northern Ireland and other regions situated in the North and West of Britain, in central Italy and Belgium, with a population of about fifty-two million inhabitants, nineteen per cent of the Community’s population. Greece apart, the greatest difference is between Hamburg and Calabria: the GDP indicators per inhabitant and per employed person in these two regions are 3 to 1, and the levels of unemployment are respectively about half and almost twice the Community average.
In the most general terms, then, the comparison between the ten most advanced regions and the ten most backward regions shows us the disparity between their levels of income (GDP per inhabitant) which are both 50 per cent above and below the EEC average, and between their unemployment levels which go from 5 to 20 per cent (1983 figures).
However the most worrying piece of data is quite different. We can see from the examination of the dynamics of income and employment since the first petrol crisis shock that the different levels of development within the Community are not evening out; in many cases they are becoming more pronounced. Thus, to come back to the example of the two regions at the extremes of the spectrum, between 1973 and 1979 the increase in GDP per inhabitant in the Hamburg region went up about twice as much as it did in Calabria (while the increase in the unemployment rate was roughly the same in both regions), so much so that in the period from 1975 to 1979 the relationship between GDP per head in the two regions went up from 5.1 to 6.4, if we measure it on the basis of constant prices and exchange rates, and from 3.3 to 3.9, if measured on the basis of standard purchasing power units.
In this way the indications contained in many studies about the effects of the structural crisis which hit all the European countries about the middle of the seventies, because of the increase in the price of petrol or because of the huge process of reorganization of traditional industries which is still going on, are confirmed.[2]
As regards the position of the regions, the restructuring and the crisis have meant a worsening in the differences in levels of growth and job creation, and therefore in the standard of living experienced in the different areas involved in the process of European economic integration.
All of this underlines the incapacity of the Community to manage its so-called phase of positive integration properly, after the completion of the removal of customs barriers at the end of the seventies, thanks to the elimination of duties on the transfer of goods within the Community. In this, as in other matters, the governments and the Commission have shown themselves unable to produce policies which meet the challenge of the times, and the different national reactions to the emergencies caused by the economic crisis and by the worldwide restructuring of industry have made the already striking regional differences within the Community even worse.
In fact, while in the fifties and sixties the regional disparities attenuated thanks mostly to the great increases in productivity recorded in the peripheral regions and by the harmonization of national economies, in the seventies this process has reversed, mostly because of differing exchange rate trends, productivity and sectorial prices. This happened even though the differences between the different regions within the countries concerned decreased.[3]
In other words, it would appear that the fundamental causes of the worsening of the inequalities between the European regions are the lack of unification achieved by exchange rate and policies concerning factors, and through the absence of policies designed to reduce the differences between the member states, which are at least as powerful as those employed by the individual countries within themselves.
This conclusion can at least be a useful point of departure when assessing the size of the task which faces the Community in the coming years, after the second enlargement which increased its population by a fifth, but its GDP by less than a tenth. The seriousness and intrinsic quality of the problem of making the economies more equal after the entry of relatively backward countries like Spain and, above all, Portugal can be seen if we remember the new context of an enlarged Community, in which twice as many people live in areas where the GDP per inhabitant is less than 30 per cent of the Community average, and the relationship between the GDP per head measured in Hamburg, the most advanced, and that of the least developed region, that of Vila Real in Bragança, Portugal, increases to 12 to 1.
In terms of this situation, we need to ask what will be the effect on the development of the inter-regional differences of the progressive creation of an internal market, which the ambitious and rather illusory Single European Act envisaged as taking place by 1992.
As is well-known, the provisions of the Single European Act, though predicting economic integration by the above date, make no change to the decision-making mechanisms which brought the Community to this state of paralysis and which prevent the emergence of autonomous European government will and capacity because they leave the individual members’ power of veto on the workings of Community politics intact.
There is no need to be a prophet to see that the objective of the creation of an internal market by 1992 will not be achieved, just as in the past the commitment made by the governments to reach economic and financial unity by 1980 and achieve the second phase of the EMS two years after its introduction were not respected.
As the many studies of the subject show us, and as the history of the Community’s functioning should teach us, for complete economic integration to be achieved, as well as the free transfer of goods and means of production, we also need monetary unity and unity as regards policies concerning factors and goods, which is impossible without a deep transformation within the EEC and the existence of a real government of the European economy, independent of the conditioning of the national governments.
To admit the impracticability of the final objective does not necessarily mean that the individual procedures which are meant to contribute to its achievement must immediately fail, and we will see what happens when measures crucial for this integration are adopted.
Let us suppose that common provisions are adopted in the field of monetary policy, for example the renunciation by the member states of the power to control their money supply and decide the exchange rate. The new obligations which the member countries would have towards the Community would create difficulties in the balance of payments both within the Community and vis-à-vis the rest of the world, while it would increase the difficulties involved in choosing the best balance between inflation and unemployment, if there is a relationship between these two (the Phillips curve).
If we instead consider the provisions for liberalization in the sector of the movements of capital, we have to take into account not only the difficulties involved in the balance of payments, but also the possibility of there being transfers of capital to the most developed areas.
This is just a rough analysis, but it is sufficient to show us what the completion of the internal market along the lines laid down by the Single European Act and without counter-measures would be like. It would cause a still further worsening in the disparities between the central regions and the peripheral regions of the EEC, which would make the latter resist shifting their powers to the European level.[4]
That this interpretation is not without foundation is shown, for instance, by the reactions of the monetary authorities of the countries with weak currencies to the prospect of taking away protectionist apparatus, which blocks the movements of capital with the rest of the Community. In particular, in Italy the Central Bank and experts who profess themselves to be pro-European had reservations about proposals aimed at moving towards the principle of the free transfer of capital within the EEC.
The fact is that, just as it was not in favour of Italy joining the European Monetary System, the Bank of Italy now fears the loss of its power to control monetary policy, and this has adverse consequences for the management of the economy of the country. Renouncing the rules that govern the movements of capital could perhaps make the participation of Italy and other countries with weak currencies in the EMS more difficult, given that — as Giavazzi and Giovannini have shown — the controls on the flow of funds between countries were specifically used to support the bonds towards the monetary system itself.[5] If that were true, the paradoxical situation would arise of progress towards a European currency being hampered in the name of maintaining the level of monetary integration which has been reached.
Like every paradox, the apparent contradiction simply shows a problem in the wrong context: in this case the efforts to create a European currency without the correct context of the unification of markets and policies.
Within a complete economic and monetary union, the difficulties which characterize the process of integration by stages disappear completely, or are much attenuated.
In our case, the difficulties of the countries whose weakness could be increased by the formation of an internal market, both as regards the management of their economies and the probable worsening of the differences in their internal development compared with more advanced countries, could be got over by means of an automatic redistribution of resources, connected to the existence of an adequate budget and Community fiscal system, as was suggested in the Mac Dougall Report.[6]
Naturally, the precondition to Europe developing a common fiscal system, able to run an efficient system aimed at a balancing between the different regions, is the transformation of the present Community into a European Union.
Beyond the palliative possibilities such as the increasing available resources[7] and widening the range of policies decided according to European and not national criteria, this is the real problem that has to be solved if we are to have a European regional policy capable of confronting the task of overcoming the problems inherent in the creation of an internal market, in a context in which a third of the European citizens lives in regions characterized by high unemployment and low income levels.
 
Franco Praussello
 


[1] EEC Commission, The Regions of Europe; the second periodical report on the socioeconomic situation and evolution of the regions of the Community, COM (84) 40 def., Brussels, 1984.
[2] On the regional effects of the restructuring of industry in Europe see D. Wadley, Restructuration régionale, OCDE, Paris, 1986.
[3] R. Camagni, R. Cappellin, “European Regional Growth and Policy Issues for the 1980s” in Built Environment, n.7, 1981. See also the work of Wadley and the seventh chapter of the Commission’s document, The Regions of Europe, quoted above.
[4] Those who drafted the Single European Act realize that the gradual establishment of the internal market would entail a special effort on the part of “some economies which have a different level of development” and they admit that the Commission gives them special dispensations. Their attitude is, however, completely in line with the original provisions of the Treaty, which do not propose an active policy to reduce imbalances, but stop at tolerating certain transitory exemptions to the principle of free exchange, which is one of the main inspiring philosophies of the Community. The last paragraph of Article 15 of the Single European Act lays down that if the particular statements proposed by the Commission “assume the form of exemptions, these must be temporary and entail the least possible blockage of the free market”. See EEC Commission, “The Single European Act”, E.E.C. Bulletin, Supplement no. 2, 1986.
[5] F. Giavazzi, A. Giovannini, “The EMS and the Dollar” in Economic Policy, no. 2, April 1986, maintain that the controls on the movements of capital within the EMS would have the function of allowing the EMS to work without great difficulty, and would thus at least guarantee its survival, even if it would hold back the process of monetary integration.
[6] EEC Commission, Rapport du groupe de réflexion sur le rôle des finances publiques dans l’intégration européenne (Rapport Mac Dougall), Brussels, 1977.
[7] It is as well to note that in 1987 the sum allocated in the Regional Development Fund totalled 3.3 billion ECU, or 9 per cent of the Community’s budget.

 

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