Wednesday, July 18, 2018

Inside EU economic space Ex-post convergence vs EMU-OCA challenges

Martino Lo Cascio and Massimo Bagarani

The work hereby presented can be included in the stream of research that aims both at i) moving further forward the understanding of the main determinants of economic growth in a strongly interrelated global economy and ii) providing evidence for a sounder policymaking at any level in the EU.

To test and estimate the convergence/divergence patterns in the context of EU regional policy, a model is developed in the “Complexity-Meso Economics” framework.

The introduction in the model of the Total Factor Productivity Transfers (TFPT) variable (as one of the determinants of the relative growth), measuring productivity and purchasing power transfers among regions, contributes to a better explanation of the role of economic, political and structural components in the process of searching for transitional steady state conditions. The steady state condition, assumed as continuously shifting, represents the result and a new impulse for a platea of adapting decision makers.

In the following graph, the comparison of the results between complete model specification (Model 4 including investment shares and TFPT variables) and nested model based on absolute convergence, allowed to cluster the EU Regions in five groups (where Model 1 is assumed as the nested model of absolute convergence):

Roughly speaking, since the relative position of GDP growth is better explained by (non-linear) investment shares, productivity transfers and fixed effects, the plot in a plane of the two solutions makes apparent the clustering in five groups of regions.

The dimension of EU regional policy (ERDF and ESF commitments), directed for both industrial and cohesion policies objectives, accounted, in terms of shares on both total commitments and total increase of GDP in the period 2004-2013, for:

i)                    40% of the total commitments and 28% of the GDP increase in “East EU non euro” cluster;

ii)                  24% of the total commitments and 99% of the GDP increase in “Core EU Low” cluster, that includes Portugal, Greece, Malta, Cyprus and the most part the Eastern landers of Germany;

iii)                28% of the total commitments and 7% of the GDP increase in “Core EU Middle” cluster, that includes, among others, “Sud” and “Isole” in Italy;

iv)                6% of the total commitments and 8% of the GDP increase in “Core EU High” cluster, that includes, among others, “Centro”, “Nord-Ovest” and “Nord-Est” in Italy;

v)                  0.9% of the total commitments and 1% of the GDP increase in “High revenue regions” cluster, composed by Hamburg, London, Île de France, Luxemburg and Bruxelles, characterized by the highest benefits from purchasing power transfers, agglomeration’s economies partially reduced by negative externalities (stemmed from fixed effects estimates).

The model captured the positive effects of the territorial EU policies, including the industrial policies but also the capacity building policies oriented to improve the local administration efficiency.

The question is: have these effects been counterbalanced by the negative effects of a restrictive fiscal macroeconomic policy?

The fixed effects are accounted for a negative impact on the convergence path and this would call for a policy action aimed at supporting the improvement of social and structural (context) conditions in less developed EU regions.

Lo Cascio and Aliano put the subject under question: “Is the Euro-zone at a turning point? The descriptive diagnostic and the statistical model carried out do not prevent us to reply: yes”. The EU faces three alternative scenarios: i) Myopic Currently Policy (M.C.P.), ii) High Risk scenario and iii) Opportunity of Recovery (O.R.). “Starting from the turning point, it is more than an opinion that small institutional changes and a limited set of operators can shift the overall trajectories of the EU system from one to another options”.

Here is the room for the political statements of the very new “Towards a European Pillar of Social Rights” report. Pushing knowledge improvement in a “labour market” (where the labour is considered as a product and not anymore as a production factor) with an active role of public policies, instead of leaving the task to the market, may induce a rental position for unemployed persons, à la Schumpeter, even with opportunistic behaviour, but it can also play a decisive role in supporting the growing path of the regions and in achieving better conditions of convergence.

Furthermore, there is a strong implication that numbers solidly confirm: fiscal policy and industrial policy have to be conceived, designed, implemented, monitored and evaluated in an integrated fashion.

Industrial policy at national level is often based on the fiscal tools (see for instance fiscal credits in the Italian plan for Industria 4.0).

Regions can play a role in directly investing resources in businesses following a specialisation path. This is the case of Lazio Region, that has concentrated the resources for business support of the ROP ERDF 2014.2020 into 8 thematic calls for innovation projects that are consistent with the regional smart specialisation path and are mainly addressed to the re-manufacturing of regional economy.

At the same time, the Region has been gathering a consortium of 11 EU regions, coordinating a project under the H2020 programme to define a novel policy approach to support the transition to a circular economy in the EU Regions.



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