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The convergence in economic development is a prime policy goal of the European Union. Various regions were hard hit by industrial restructuring and the successive waves of enlargement involved countries and regions whose per capita income was far below the average. Per capita GDP has tended to converge between countries, but evidence of convergence across regions is mixed. This slow pace of convergence may partly reflect the timid pace of integration, while the evolution of human and physical capital endowments was uneven across countries and regions, with a north south divide in skills and technology diffusion being prominent. Moreover, ill devised labour market policies tend to trap labour in lagging regions. Many of the obstacles to stronger convergence can be overcome. However, trade offs can arise if agglomeration gains are large as some regions will win and some will lose, although there is little evidence for increased specialisation so far. Therefore, to maximise the welfare gains from economic integration, while keeping a diversified industrial base, regional policies should seek to raise the attractiveness of lagging regions in a cost effective way.
The single market strategy is the Community’s core instrument for product market policies, and it has largely achieved the creation of an integrated market for goods. However, there are numerous barriers to the integration of service markets, including impediments to cross border establishment, posting of workers and service provision. Commission initiatives to cut red tape and enforce the mutual recognition principle are welcome, but the implementation will take considerable time and some sectors are excluded. Therefore:
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The removal of cross border barriers for services should be speeded up and the risk that the proposed measures will be watered down in the negotiations between the Commission and the member countries needs to be contained.
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Sectors for which the Commission’s proposals foresee derogations or that are already covered by EU legislation should be included as far as possible in the liberalisation efforts. The coverage of the proposed services Directive should cast its net as wide as possible, taking into account the fact that certain sectors, among which financial and transport services, are already covered by EU legislation. For some other services, derogations may be foreseen as more analysis is needed before issuing a proposal.
By eliminating exchange risk on the bulk of financial flows within the EU, the advent of the euro has been an important factor in fostering the integration of financial markets, although the degree of integration varies from market to market. The interbank market is now fully unified, while bond markets are substantially integrated. However, cross border equity investment is still relatively costly and retail markets, including mortgage markets, have remained segmented. While cross border mergers of financial institutions are not widespread, there have been examples of regional consolidation e.g. in the Benelux and Nordic countries, and several significant pan EU financial conglomerates have emerged. The bulk of the Financial Services Action Plan (FSAP) - the Community’s central tool to foster integration of financial markets - has been largely completed at the EU level, with a deadline of end 2005 for transposition of the various legislative measures into national law. While it is too early to assess overall progress in transposition, the Commission has opened several infringement procedures against member states. Political agreement has not yet been reached on three proposed Directives relating to cross border mergers, aspects of company law and capital adequacy. Looking forward, the Commission has launched a process to take stock of progress in financial integration, to address the need for effective implementation and enforcement of the measures agreed in the FSAP and to identify remaining barriers to further integration.
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At this juncture, the key issue is to achieve fast and consistent implementation of the Directives at national level so as to reap the gains from integration.
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The Takeover Bid Directive, which was finally passed by the European Parliament last December, risks favouring national champions. It allows countries to opt out and fails to address issues that allow a minority of (national) shareholders to keep control over a company. This is unfortunate.
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The European Union has adopted the Regulation on International Accounting Standards (IAS) in 2002. Accordingly, all European securities issuers will have to respect IAS standards as from 2005 (with a few exceptions as from 2007). Another measure of the FSAP - the Transparency Directive which has been agreed at political level in spring 2004 - covers inter alia third country securities issuers, which will have to prepare financial statements either under IAS or under third country generally accepted accounting principles provided the Commission recognises the latter as equivalent in the meantime. That directive will not be applicable before autumn 2006. On the IAS Regulation, member states should also facilitate timely change to IAS for EU companies. On the future Transparency Directive, the Commission is invited to ensure legal certainty for third country issuers on the equivalence issue at the earliest possible stage.
A broad range of indicators measuring innovation and the diffusion of new technology reveal a considerable gap for the area and the best performing OECD countries. In addition, within the area there appears to be a “north south” divide - with the southern European countries lagging. In any event, the aim of policy should not be to ensure that all regions can contribute equally to innovation, but rather to ensure that all regions can take full advantage of innovation by encouraging them to implement ambitious innovation strategies. There are three levers for policy: improving (tertiary) education, raising research and development (R&D) investment and fostering business creation. Community action - aside from serving as a platform for mutual learning and exchange - concentrates among others on enhancing supply and mobility of researchers and mobility of students, fostering cross border research projects and co-ordination of national and regional research programmes, as well as implementing mutual recognition of diplomas and the Community Patent. There is scope for improved settings for each of the three policy levers:
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Investment in higher education should be raised by seeking a more balanced mix between public and private funding to facilitate the development of first grade institutions.
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Bankruptcy laws should be streamlined and restrictions on individual debtors of a pecuniary or criminal nature should be eased to encourage business creation. Early insolvency procedures should be developed and rescue and restructuring proceedings simplified.
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Private funding of R&D, which is well below that in the United States, should be encouraged by improving framework conditions, including pursuing the Community Patent, applying the provisions for cross border public procurement to research as well and establishing a single market for research that favours the emergence of centres of excellence.
With the exception of certain areas where economic integration is already high, labour mobility in the euro area is low. Several peripheral regions have a high proportion of the least mobile low skilled workers with unemployment staying stubbornly high. Regional differences in employment and unemployment persist partly because of low interregional and (a fortiori) cross country mobility of workers, while wages are often not in line with local labour market conditions. The fact that local wage costs are usually bound by a national wage floor deters capital flows within countries, making it difficult for lagging regions to take off. While the Community has only limited competence on labour market policies, the 2000 Lisbon European Council and the 2001 Stockholm European Council set ambitious targets for the Union as a whole. Making progress towards achieving the targets depends to a large extent on progress in creating more flexible labour markets at the regional level. Specifically:
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Wages should be made more responsive to local conditions.
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Overly strict employment protection legislation, which tends to limit the geographic mobility of insiders while unduly raising their bargaining power, should be reformed.
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Tax and benefit systems that simultaneously hamper labour mobility and trap workers in inactivity should be recalibrated to strengthen incentives to search for a job.
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The portability of occupational pensions should be promoted, in particular regarding the acquisition and preservation of pension rights in a fund and the transferability of pension capital between funds. Wherever there is scope to improve the cross border portability of other benefit entitlements, this should also be facilitated.
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To foster mobility, tax incentives for owner occupation that squeeze the rental market should be reduced, high transaction costs for property lowered and re queuing requirements to qualify for access to social housing in another region eased.
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Finally, once the transaction cost of mobility has been reduced, unemployment benefits should be administered on the basis of a mutual obligation whereby beneficiaries receive benefits and job search services while showing readiness to accept a job in other locations.
The Community’s cohesion policy aims to speed up regional convergence and competitiveness, with structural and cohesion funds topping up national or regional development programmes. Regions mainly become eligible to EU funds if their level of per capita income falls short of the EU average by a certain margin or if they face problems with economic restructuring. There appears to be considerable scope to raise the effectiveness of this policy. A number of changes could be instrumental in this regard:
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Given the limited financial scope within the EU budget and the need to raise efficiency, it might be better to allocate the structural funds and the cohesion fund to those countries and regions that most need them. This better focus appears especially pertinent with the enlargement of the European Union and the wider disparities it entails along with the persistent backwardness in other regions of the Union.
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It is important that regional development orientations and programmes be focused on real convergence in line with the EU priorities for sustainable growth and be consistent with the EU economic policy framework and the Broad Economic Policy Guidelines. The Commission has proposed to base regional policy on three major goals: cohesion, competitiveness and co operation.
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EU spending on regional development should be conditional on the capacity of the region or country to properly channel and absorb the funds and there should be more adequate evaluation of the costs and benefits for the region and beyond - capacity building is important in this context. Sunset clauses, making the funds’ availability limited in time should be introduced.
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The Common Agricultural Policy (CAP) has a regional dimension. An important reform of the CAP has been agreed by the Council in June 2003 involving a significant further step towards decoupling support from production decisions. Support will remain linked to farms’ historical entitlements and significant levels of price support will remain in some sectors, although for some products which were not included in the reform measures were agreed in April 2004 (tobacco, cotton, hop and olive oil) while the revision in the sugar sector is still ongoing. The continued pursuit of the ambitious goal set with the 1992 reform of the CAP, namely to increasingly expose agriculture to foreign competition, would heighten efficiency and lower prices.
Regional dispersion in the euro area
1. NUTS1 as a ratio of the euro area average, except for Italy, NUTS2.
Source: European Commission/Eurostat.
Innovation indicators
1. For Canada and the United States post secondary non tertiary education is included in the data for higher education. For Belgium, data for higher education only include direct public expenditure. 1999 for Belgium, Denmark and Greece.
2. 1998 for Austria and United Kingdom. 1999 for Belgium, Canada, Denmark, Greece and United States. 2000 for the euro area, France, Ireland, Italy and the Netherlands.
3. Patents filed at the European Patent Office (EPO), the US Patent and Trademark Office (USPTO) and the Japanese Patent Office (JPO).
Source: OECD, Main Science and Technology Indicators, June 2003, Patent database.
Geographic mobility, unemployment rates and unemployment insurance
in selected OECD countries
1. Ratio of the total number of persons who changed region of residence to the total population over one year.
Source: OECD (2002), Employment Outlook; OECD (2002), Benefits and Wages.
Summary results of the medium term effects of structural reforms
Deviations from baseline, percentage points, average 2003-10
Source: OECD.
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The full edition of the OECD Economic Survey for the Euro area is available from:
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Government officials with OLISnet accounts
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A printer-friendly Policy Brief (pdf format) may also be downloaded. The Policy Brief contains the OECD assessment and recommendations, but does not include all of the charts available from the above pages
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