New Europe’s old regions

Some regions of the European Union are now poorer than parts of sub-Saharan Africa, according to this new study from the Institute of Economic Affairs. For example, GDP per head in Botswana is higher than in large parts of Poland, Romania and Bulgaria.

The author defines 'New Europe's Old Regions' as those areas of the EU that are very poor, have high levels of unemployment, low productivity and are dominated by agricultural and manufacturing industries. Nearly all these regions are in the newly-admitted countries of the EU or in former East Germany.

The richest regions of the EU have twelve times the income levels of the poorest regions in New Europe and twenty times the productivity levels. Swathes of Poland and the former East Germany suffer from official unemployment rates of over 20%, compared with under 4% in the best-performing areas. Income differences between the richest and poorest parts of the EU are greater than those between Britain and parts of Africa.

The report argues that conventional regional policies, such as those that have failed in the former East Germany, cannot close this gap. Policies of ‘picking winners’ or subsidising industries in which a region does not have a comparative advantage have only exacerbated existing problems by keeping economic resources employed in inefficient industries.

Instead, the author argues, governments should focus on market liberalisation, particularly within labour markets. This can be achieved through the devolution of power, which would enable regional governments to reduce impediments to employment. They could adjust minimum wages, benefit rates and regulations to suit local conditions and boost employment.

At the national and EU level, regional policy should draw lessons from the ‘new regionalism’ by focusing on raising productivity through improving education and infrastructure provision rather than attempting to subsidise inefficient industries directly. The EU itself should decentralise and allow countries to opt out of new legislation and regulations. The policy needs of different parts of the EU are now so great that a "one size fits all" approach will no longer do.