Original publication: June 2014
Authors: Simona Milio in cooperation with: Riccardo Crescenzi, Waltraud Schelkle, Niccolo Durazzi, Elitsa Garnizova, Pawel Janowski, Agnieszka Olechnicka, Davide Luca and Maria Fossarello
Short link to this post: http://bit.ly/2FFaKSo
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– Study:
– Annex I:

Impact of the Economic Crisis on Social, Economic and Territorial Cohesion of the European Union

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The impact of the economic and financial crisis that started in 2008 is still being felt.

In November 2008, the European Commission launched a European Economic Recovery Plan with a view to coordinate Member States’ action in response to the crisis.

In this context, the Study uses a combination of quantitative and qualitative methods in order to provide an overview of the impact of the crisis across Member States and regions, in terms of economic, social and territorial cohesion, and to assess the responses of cohesion policy to counteract the crisis.

Context and Aim of the Study

The impact of the economic and financial crisis is still being felt. It started as an acute crisis of the banking system, but then quickly affected the real economy, causing a substantial slump in business investment, household demand and output. European Union economies were deeply affected: in 2009 the EU GDP fell by 4.1% and industrial production by 20%.

In November 2008, the European Commission launched a European Economic Recovery Plan (EERP) with a view to coordinate Member States’ action in response to the crisis. Among other things, the Plan stressed the importance of the role of cohesion policy in mitigating the effects of the crisis. Indeed, the Structural Funds, especially the European Social Fund, proved to be a remarkably flexible instrument, and the speed with which its procedures allowed for a re-direction of the funds has been praised. Nevertheless, its ability to adjust to widely diverse national and local contexts that have been impacted differently by the effects of the crisis, and to support the different patterns of economic growth that will result from it, is yet to be seen.

Conceptual Framework and Methodology

The conceptual framework that guides our research draws on relatively recent literature on how regional and local economies have been affected by, and responded to, disasters such as a major recession. The guiding question of this literature is why such macroeconomic shocks have a particular geography, i.e. why do they affect sub-national socio-economic spaces differently? The follow-up question is whether this geography has a discernible pattern, which is determined by certain economic features and political capacities.

There are three major transmission channels of the crisis to sub-national economies: (i) credit availability and interest rates; (ii) trade; and (iii) domestic/local demand. Once the crisis is transmitted from national to regional level, the diversity of sectors and economic activities is supposed to be an advantage. This refers to the sense of raising resistance, as different sectors exhibit different sensitivities, for example to interest rate shocks or a credit crunch. However, this may be counteracted by sectoral inter-relatedness which increases the transmission of a shock in a particular sector to all others. Indeed, along with the transmission factors, a second set of factors that shape the national/regional ability to innovate, as well as to adapt to shocks and change, are the so-called resilience factors. In particular, three key (quantitative) dimensions are relevant with reference to regional resilience: (i) regional sectoral specialisation/diversification patterns; (ii) human capital and skills; and (iii) innovation efforts.

Under the constraint of data availability, the quantitative analysis develops a broader picture of the link between the crisis and national and regional transmission, and resistance factors. Conversely, the case studies’ analysis draws a more accurate qualitative picture of all these processes. This is achieved by making use of both literature reviews and desk research, but enriching the general information with a more in-depth analysis through conducting interviews with key actors.

Main Findings

Impact of the economic crisis on Member States and regions

First, compared to common belief channelled by media, the exploratory analysis carried out suggests a territorial picture which cannot be captured by simple North-South metaphors. Overall, while pre-crisis patterns are more complex and depend on whether attention is paid to economic or social variables, the picture that emerges analysing post-2008 trends is rather one resembling a centre-periphery spatial pattern.

It is possible to identify a core continental area where the impacts of the crisis have been low or moderately low. Such an area is centred on Germany, most of Poland, and partly extends to neighbouring regions (such as most areas of Slovakia and the Czech Republic) in a less homogeneous regional pattern. It is then circled by a group of more peripheral areas where the impacts have been high/very high and which include most of the regions of Ireland, Spain, parts of Italy, Greece, Cyprus, Lithuania, Latvia and Estonia.

Second, in terms of cohesion the analysis suggests overall that two contrasting trends are occurring. While within-country variation has shrunk, variation across the Union as a whole has increased overall both in terms of unemployment and of urban/rural economic inequalities.

Out of eight explanatory variables[1] that can describe the crisis transmission factors and regional resilience factors, and which were considered empirically in the Study, four are correlated with the outcome variable at a statistically significant level, meaning that they do explain post-2008 economic trends in the European regions. These four variables are: current account balance and foreign direct investments’ stock net balance (crisis transmission factors) as well as specialisation in manufacturing & energy and in construction (regional resilience factors).

In Italy, where the crisis was driven by both private debt and sovereign debt, the initial impact of the crisis had an equalising effect. However, more recent developments of the crisis brought about changes in the opposite direction. Richer regions, where resilience factors are stronger, partially managed to reverse the trend, whereas the social and economic outlook kept worsening in Southern regions, where features in term of resilience and performance factors are very low.

In Germany, the crisis was transmitted through the trade channel. It had experienced the first wave of the global financial crisis primarily as a steep decline in exports in 2009, resulting in a decline in GDP. However, Germany was able to mount a strong recovery, which was to a large extent fuelled by trade with non-EU markets. The recovery was also accelerated by strong resilience factors in Germany, where innovation and human capital skills score above the EU average. This is confirmed in Bavaria and North Rhine-Westphalia.

Poland felt the crisis less and through different channels compared to developed economies such as Italy or Germany. Indeed, the financial institutions in Poland did not suffer from direct effects of the collapse of the mortgage market in the United States. Also, the Polish economy is less dependent on export markets, having the largest internal market among all of the Central and Eastern European Countries. The reduction, in 2006, of pension contributions and taxes supported domestic consumption. The depreciation of the Polish zloty supported advantageous export terms. Also, the resilience factors in the examined regions show a moderate score and resisted the crisis because of the limited exposure to transmission channels.

The Bulgarian economy’s performance is strongly interconnected with the performance of its trading partners and thus the crisis was channelled through the external (drop in exports and FDI) and real sectors (output contracted especially in construction, metallurgy, mechanical engineering, chemical and textile industries). However, the effect of the crisis has to some extent been limited due to the immaturity of its financial sector.

Responses of cohesion policy to counteract the crisis

The crisis has led to two main consequences that mainly affected the management of EU cohesion policy, which changed in order to favour spending and absorption of funds. In this respect, the Structural Funds (SFs), in the slowdown period, turned out to be effective as they helped to maintain the level of investments in the private and public sectors, and to implement some non-investment projects.

In convergence regions (such the two Italian regions as well as the two Polish regions), interviewees agreed that cohesion policy had a role in preventing an escalation of the social and economic consequences of the crisis.

The main constraints posed by the crisis – and determining a consequent adaptation of regional strategy – seem to be twofold:

(i) A shift away from long-term developmental objectives of the region in order to tackle the most immediate needs posed by the crisis;
(ii) Simplified measures and reduction of co-financing requests, due to the worsening financial situation of the beneficiaries, primarily enterprises and local government entities.

A common trait in underdeveloped regions is that regions with wider contextual problems tend to have a more complex strategy with strategic goals that are wide-ranging. This can be imputed to the region’s considerable developmental backwardness and the need to design a ‘broad-based economic development’ strategy. Such a strategy tends to remain unchanged during the crisis, mainly because it already touches upon several alarming issues (this is the case in the Campania, Podlaskie, SC and NW regions).

Conversely, cohesion policy in competitiveness regions (such as Bavaria) was less relevant in reacting to the crisis. Indeed, these regions seem to be equipped with strong resilience factors that have made the impact of the crisis milder. Also, in these regions, cohesion policy does not address large and long-term problems, but instead focuses on specific problems that have not suffered from any change in strategies. This is a similarity that can also be found in more-developed convergence regions (such as Dolnośląskie).

Structure of the Report

The structure of the Draft Final Report is as follows:

The Introduction describes the key concepts and definitions of social, economic and territorial cohesion.

Chapter 1 provides a description of the conceptual framework used for answering the ToR’s research questions.

Chapter 2 offers a detailed description of the methodology used for each of the three main parts of the Study – Description, Assessment, and Conclusions.

Chapter 3 presents the main findings of the literature review concerning the impact of the economic crisis on regions and the responses of cohesion policy to counteract the crisis.

Chapter 4 delivers the quantitative analysis, which draws a broader picture of the impact of the crisis on both the national and regional levels.

Chapter 5 summarises the main outcomes of the work carried out in the eight regional case studies.

Chapter 6 provides conclusions.

Chapter 7 offers recommendations.

The report concludes with a bibliography and a number of annexes (Section 8).

[1] Current account balance, foreign direct investments’ stock net balance, government debt, sectoral specialisation in manufacturing & energy, sectoral specialisation in construction, sectoral specialisation in market services, university attainment, total R&D expenditure.

Link to the full study: http://bit.ly/529-066

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