Regional policies and differences in economic structures

In a globalising world, resources need to be continuously reallocated according to changes in demand for products, changing competitive positions and production methods. As technology has developed and economies have opened themselves up to trade, reallocation has taken place in much larger regional entities than earlier. There has also emerged a tendency for people and firms to cluster together with those that share their particular know-how and skills. Europe’s economic geography is changing because of these trends and pressures known popularly as 'globalisation'. These regional developments do not originate from European integration, but are likely to have been strengthened through the increased competition it has brought about. At the same time integration – through increased trade, financial market integration and more similar macro economic policy frameworks – should have a synchronising impact on the economic performance of countries participating in the EU and in particular on the EMU.

In general, assessments regarding performance of the monetary union during its first three and half years are positive. Alexander Italiener also concluded his illuminating presentation on differences in macroeconomic performance in the EMU by expressing 'moderate optimism'. Based on the Finnish experience, one can agree with the sentiment. Finland, as a small open economy with specialised industrial structure - paper and electronics (Nokia) - was generally regarded as most prone to asymmetric shocks. However, since the early years of the 1990s when the policies aiming at joining the EU and the EMU were adopted, the economic cycle has been more synchronised with the average cycle in the euro area, albeit with higher amplitude. Even during the last half of the 1990s, when GDP growth in Finland clearly exceeded the average growth in the EU, inflation remained rather close to that of the euro area average. Moreover, the recent rapid slowdown of demand in the IT-sector, which hit the Finnish economy more heavily than other euro area countries, did not significantly change the situation. The ECB monetary policy reaction to a decrease in interest rates was largely taken as being well-suited to the Finnish IT –sector and the economy as a whole, while a credible common monetary policy prevented the difficulties of the IT-sector from spilling over into other sectors in the economy.

In the following, I am going to focus on differences in regional structures, questions of specialisation, and regional policies. I do not even try to answer the difficult question of how much divergence in structures is sustainable, posed in the title of this panel session - I refer to the 'common understanding' that polarisation is bad and should be avoided.

According to recent studies, clustering and specialisation need not lead to polarisation, because – as it is argued – 'most regions should be able to specialise in something'. However, risk of polarisation cannot be ruled out, if policies try to freeze existing patterns of economic structures although they are no longer competitive. Therefore, issues of regional and cohesion policy have become increasingly important on the policy agenda in the EU, in the wake of enlargement.


The accession countries are much poorer than the existing EU countries. The planned enlargement of the EU into a union of 25 member states will therefore necessarily entail a dramatic increase in economic and social inequality in the Union, both between Member States and between regions. Even though this increase in inequality is, in a sense, only a notional consequence of the change in boundaries, the political consequences for the EU are by no means notional.

Increased differences will be duly reflected in political agenda. The allocation of the EU structural and cohesion funds is where the conflict of interest will be seen at its clearest, but similar tensions have arisen or are likely to arise in other fields, such as agricultural policy, freedom of movement, incomes policies etc.

There is, I expect, a broad consensus about what could be called the two-pillar approach for cohesion policy in the EU. The first pillar is the recognition by less prosperous nations and regions that they bear the primary responsibility in tackling their own poverty, which is crucial, for it is not only good economic policy, but is key to good governance. The second pillar is that the EU must provide support for its least developed regions. The distinction between these two pillars is of course clear only in theory. In practice national and community policies are highly interrelated, especially as far as regional policy in its strictest meaning is concerned. But nevertheless, it is conceptually and politically important to clearly bear this separation of responsibilities in mind.

With regard to national policies, in a welfare state well-developed public services and high level, highly progressive taxation tend to reduce inequality in society in general and consequently reduce regional inequality. In Finland, for example, the poorest of the country's 20 regions contribute, in the form of taxes to the central government budget, less than 70 % of what they receive from the budget in the form of expenditure, whereas some other regions pay some 50 % more than they receive. The effect of this redistribution of income on regional income differences is substantial. I doubt whether many accession countries at their present level of development could benefit much from an immediate adoption of a full-scale welfare-state and it is likely that they have to tolerate much greater regional differences than most of the present member countries. But there may be something to be learnt from the underlying ideology of the (efficient) welfare state and some of its features could perhaps be adopted in the new member states without too heavy a budgetary burden. In particular, in view of the high level of unemployment and rapid ageing of the population, one of the main challenges for the accession countries is to increase labour force participation and employment. This requires supportive infrastructure and services to be provided by a welfare state, notably such as facilities for childcare and care of the elderly that particularly support the participation of women in the work force.

Wage moderation and increased wage differentiation according to productivity and skills are both essential ingredients in any policies targeted at higher growth and higher employment. Wage flexibility will remain important even after the elimination of fundamental labour market imbalances, especially for countries which aim joining the euro area in the relatively near future. In the monetary union each country has to live up to the goal of price stability. Countries joining the monetary union must have institutions, economic structures and policy discipline suited for specifically that. Meanwhile it should be stressed that for less prosperous accession countries, the main policy priority is to adopt an over-all policy framework that is strongly oriented towards high and sustainable economic growth. This will entail encouraging new activities and combinations of activities, but regional policy objectives should be subordinated to aggregate economic policy objectives.


At the European Union level, one of the key issues in the policy debate is the establishment of a financial framework for the enlargement process. It is vital that some of the issues are solved for the period 2004-2006, but the main problems seem to lie with the next financial perspective 2007-2013. It seems that the continuation of present community policies after enlargement would imply substantial budget pressures. There is a risk that the current limit of 1.27% of GDP for the Community’s own resources would be exceeded and by the end of the period this could be an excess that is more than merely marginal.

Instead of increasing the European citizens' tax-burden, efficiency of the Community’s policies should be more in focus. The main targets for improvements are the Common Agricultural Policy and Cohesion Policies, by the simple fact that they together take up some 80 % of total Community expenditure.

It is generally accepted that the Community Cohesion Policy should continue to target the least developed regions. After accession into the EU, the least developed areas will be in the new member countries and thus structural and cohesion funds will be redirected to these countries. This will imply substantial transfers from the EU budget to the new member countries.

Great attention is needed to ensure that the recipients have the capacity to absorb them. Under the current rules for the period 2000-06, transfers from the Structural and Cohesion Funds are limited up to a maximum of 4 % of national GDP a year in all Member States. In view of the limited administrative and absorption capacity of most of the new EU-countries, the Commission proposal in the recent information note Common Financial Framework 2004-2006 for the Accession Negotiations, confirming the same ceiling for overall structural financial support for 2004-2006, is a step in the right direction. This ceiling would seem appropriate even after 2006. Strict application of limits without exceptions would help prevent misunderstandings and the culture of rent-seeking in the new member states. In this regard one might question whether it is helpful to refer possibilities of additional financing in exceptional cases, such as 'projects of a particular Community interest in relevant circumstances', as suggested by the Commission in its First progress report on economic and social cohesion.

To avoid the risk that cohesion policies freeze existing patterns of economic activity and thereby increase the likelihood of the polarisation they seek to prevent, refocusing of cohesion policies would be needed to contribute to the objective of increasing regional growth prospects and competitiveness. Instead of resisting inevitable changes, the authorities should perhaps even aim at speeding up the adjustment of the economy to the new economic-political environment. The experiences of some countries suggest that rapid adaptation to changing circumstances in the form of even large migration flows is feasible and in the end may even be optimal.

One approach to regional policy, that has sometimes been successful, is to favour viable growth centres. As an example, much of the northern part of Finland has become or is in the process of becoming very sparsely populated. At the same time, the main centre of the area, Oulu, has successfully transformed itself, over only a couple of decades, from a stagnant smokestack-industry town into a dynamic business metropolis specialising in mobile and other information technology as well as biotechnology. This transformation has, without doubt, been helped by active regional policies that focused on the relatively rich local centre and not on the whole area. A decisive move was probably the establishment of the University of Oulu, which started its operation in 1959. In particular, the faculties of technology and medicine have played a central role as promoters of local growth and have close connections with the local high-tech companies.


In my contribution to the debate I have highlighted some aspects of regional policies in preventing polarisation in economic structures and performance. It is important to avoid policies that would freeze existing structures of economic activity if they were not viable. Let me finish my contribution by referring to recent discussions on institutional reforms: We need more transparency and efficiency, also in the administration of the community’s regional policies, which is very complex. At the same time, very little is known of the effects of different programmes. It is important to recall the need for transparent and efficient programme evaluation, detection of fraud or non-conformity with financial rules, and harmonised application of sanctions in the different Member States in the case of shortcomings. More effective use of regional policies also requires greater synergy with other Community policies in the areas of research, innovation and education.