An accident waitng to happen
To explore where we stand now, it is useful to remember how we got here. The idea of reducing regional disparities was identified as far back as the preamble to the Treaty of Rome (1957). From the early 1970s it was recognised that monetary union could not be achieved if there continued to be wide regional differences in economic performance. Thus a regional policy was seen to be an essential part of building the union. However, the scale of funds invested was always dwarfed by those put into subsidising farmers.
Social and economic cohesion have been aims of the EU since the Single European Act of 1986. This was because it was recognised that the creation of the single market would widen economic inequalities unless countervailing actions were taken. So the probabilty that opening up the economy would carry risks for weaker regions was foreseen and familiar.
Territorial cohesion was added in the Lisbon Treaty (2007) to the existing aims of economic and social cohesion. As demands are made for Greece to extend debt repayments, unemployment and poverty into an indefinite future, it is worth recalling what the Lisbon Treaty says that the EU is about:
“The Union shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and with a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.
It shall combat social exclusion and discrimination, and shall promote social justice and protection, equality between women and men, solidarity between generations and protection of the rights of the child.
It shall promote economic, social and territorial cohesion, and solidarity among Member States. It shall respect its rich cultural and linguistic diversity, and shall ensure that Europe’s cultural heritage is safeguarded and enhanced.” (Article 3).
How can remorselessly sucking money out of an economy already suffering catastrophic levels of unemployment be described as “aiming at full employment”? Is cutting pensions the way to “social progress” or a step towards combatting social exclusion? How is Europe’s cultural heritage safeguarded by pushing Greece into penury? What happened to "solidarity"?
Article 174 of the Treaty says:
“In order to promote its overall harmonious development, the Union shall develop and pursue its actions leading to the strengthening of its economic, social and territorial cohesion.
In particular, the Union shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions.
Among the regions concerned, particular attention shall be paid to rural areas, areas affected by industrial transition, and regions which suffer from severe and permanent natural or demographic handicaps such as the northernmost regions with very low population density and island, cross-border and mountain regions.”
One of the “reforms” being demanded of the Greeks in the current round of demands is that they end the VAT subsidy afforded to some of their many islands to compensate for the extra costs of importing essential goods into these places. This is precisely the kind of fiscal measure that is consistent with addressing the “severe and permanent natural handicap” faced by remote island communities.
Ironically, the lyrical opening words of the 2008 Green Paper on territorial cohesion said: “From the frozen tundra in the Arctic Circle to the tropical rainforests of Guyane, from the Alps to the Greek islands, from the global cities of London and Paris to small towns and villages dating back centuries… Territorial cohesion is about ensuring the harmonious development of all these places and about making sure that their citizens are able to make the most of inherent features of these territories.”
Common currencies and regional disparities
It has been widely remarked that the Eurozone was flawed from the outset by locking very different national economies into a single currency. Furthermore, the argument goes, Greece should never have been allowed to be part of the currency union, and its government of the day, using Goldman Sachs as consultants, “fiddled the books” to massage the failure to meet entry criteria, a misdemeanour that others were prepared to overlook.
If we shift the scale from Europe/national to national/regional, we see national economies in which poorer regions have scant influence over exchange rates and fiscal policies geared to the conditions in their richest regions. The UK is an outstanding example, a country in which all regions bar one have below national average Gross Value Added per capita. The point, as recognised back in 1986 with the creation of Cohesion Policy, is that outcomes depend on what policy makers are prepared to do about regional differences within a currency union.
In respect of the Eurozone, the answer to that question was “not enough”. Even at the outset of the Euro, it was the prospect of enlargement and the accession of the new members that dominated thinking and action about cohesion. Furthermore, it is now recognised that too much of the investment undertaken through cohesion policy has been ill-directed and/or mismanaged. This critique underpins the current emphasis on “smart specialisation” in the 2020 round of funding.
What obscured the enduring weaknesses within the Greek economy (and that of some other member states) was the long boom, during which banks fell over themselves to lend money. Even sober German bankers emulated the bravado of their peers in New York and London, lending to high risk borrowers in the confident expectation of high returns and huge bonuses.
Construction-led convergence and bust
While innovation has occupied a totemic place in cohesion policy throughout this period, the pursuit of innovation is a long haul, with uncertain returns. It is especially challenging for many of Europe’s weakest regions which typically lack universities, high levels of spend on R and D, have high rates of early school leaving and suffer a haemorrhage of talented young people.
In contrast, tourism based on regional environmental qualities was the quickest fix. Invest cohesion funds in infrastructure, trigger a construction-led injection of money into the local economy and lever in private investment - it was a popular formula with politicians and financiers alike. Behind the ghost villages and half-completed hotels there were banks saved from going bust only by taxpayers borrowing more money to pay banks' debts.
There is a small but fascinating ESPON report on “The success of convergence regions”. It looks at 4 such regions, Valencia in Spain, Campania (Italy), East Macedonia-Thrace (Greece), and Podlasie (Poland). Of the four, Valencia had been the most successful on conventional economic measures, but that success was built on an unsustainable and unsustained construction boom.
One predictable, but nonetheless striking finding of this ESPON research, is that EU funds only add to economic growth in regions where there is an absence of corruption. Similarly, the quality and skills of the public sector staff were found to be critically important to economic performance. It is necessary not only to do the right things (investing in appropriate sectors) but also to do them in the right way.
Greece, like the rest of us, was forced to convert private debt into public debt after the collapse of Lehmann Brothers triggered the international banking meltdown in 2007. Since then it has been lent more money in successive bailouts, but on conditions that directly depress the economy and undermine morale and capacity, not least in the public sector, without delivering the kind of restructuring in skills and governance needed to remedy chronic shortcomings. Not surprisingly the result has been that things have got worse rather than better. However, so much political momentum has been injected into the story that national austerity is the only moral and efficient way forward that the failure of the prescription to deliver recovery no longer matters.
Territorial cohesion as an alternative strategy
Territorial cohesion is not necessarily a vacuous piece of “Eurospeak”; it has been rendered such by a set of actions that have sacrificed the ideals of solidarity between peoples to solidarity between lenders. Instead, backed by evidence and taken seriously, it could be the basis for reconstructing regional economies.
Great blog, really enjoyed reading it – I hadn’t thought much about the issue from the perspective of the Territorial Cohesion principle, perhaps because, at least in the political mainstream, the principles of Europe have taken a backseat to politics (especially with the likes of Wolfgang Schauble seemingly hell-bent on getting a deal that he can show punishes Greek citizens in order to satisfy BILD and the populist press).
As Varoufakis has pointed out many times, macroeconomic fundamentals mean the Greek economy should be ‘ready to fly’ (it WAS predicted to grow 2.9% this year – not anymore of course). It is purely political grandstanding which is holding back the Greek economy now.
But the fact that individual member states and external influences like the IMF are in control of the outcomes all points to an obvious lack of institutional strength within Europe.
This is where I start to despair. Given the strength of anti-treaty change sentiment across the continent (presumably responding to general anti-EU sentiment) I don’t know how long it will be before anyone is able to seriously propose the kind of institutional structures that could ensure that principles like Territorial Cohesion can be driven by committed institutions rather than held back by the politics of member states.
As you know I've been making the point continuously (since my 1964 Edinburgh thesis on"Regional Planning and European Integration") ...and there is still little effective relationship between regional policies in Europe and the management of the EU countries' economies.
Indeed in 2006 you kindly posted me copies of my 1964 thesis "Regional Planning and European Integration" from Heriot Watt - which spelt that out. You then said it was "30-40 years ahead of its time" but sadly it now seems... 51 years ahead of its time.
As a Winston Churchill Fellow in the USA I used to quote Churchill's magnificent Strasbourg speech. (You know the one....."I hope to see a Europe where men and women of every country will think as much of being European as of belonging to their native land .... and wherever they go in this wide domain, will truly feel here I am at home"). I'm afraid he didn't really mean it.
But I do!!