What are the Reasons for the Lack of Overall Convergence in the EU? A Structuralist View

by Claudius Gräbner and Jakob Hafele

With its recently proposed €750bn recovery and resilience facility the EU aims to tackle the adverse economic impacts of COVID19. Since the impact within the EU are highly asymmetric, to the disadvantage of countries that are already struggling economically (see also here and here), the commission highlights economic, social and territorial cohesion as the objective of the facility. This puts cohesion high on the agenda of the EU.

However, to tackle economic polarization effectively it is important to understand the underlying structures that have led to the current state of economic polarization. Only if we identify and directly addresses these underlying causes, rather than only the symptoms, we can hope to make progress with regard to one of the central promises of the Union – that of socioeconomic convergence.

Searching for the reasons of polarization in Europe – a structuralist view

The reasons for economic polarization remain subject to debate. While some prominent explanations consider the austerity policies after the 2008 financial crisis as a major source for these polarization patterns, others stress that polarization has its roots in the decade before the financial crisis. In a recent paper we look for deeper structural reasons for the ongoing polarization dynamics, taking into account the events since the 1960s. The paper is built around the theoretical framework of economic structuralism, combined with methods from complexity economics. It comprises a network analysis to shed light on the development of international trade in the EU since the 1960s and relates it to the development of the manufacturing sector. Already in the 1980s structuralist scholars such as Musto (1981) warned that the concentration of economic activities in Europe will lead to permanent structural crises in the European Union. In a similar spirit, recent contributions argue that that the de-industrialization of the European peripheries in the 1970s followed increased international competition and market saturation for peripheral exports in core countries. One of the underlying reasons for this is an unequal distribution of technological capabilities which are the main driver for non-price competitiveness and thus drive the exports of European countries. To improve this, active industrial policy was said to be necessary. However, in the 1970s this was impossible for European peripheries because of the liberal integration process of the EU.

The financial liberalization policies since the late 1980s aggravated this trend of polarization. In particular they have had negative effects on the development of Southern European periphery countries, whose national control mechanisms were comparably weak and speculation had been amplified over-proportionally if compared to the core countries. These dynamics implied unsustainable debt driven growth in the peripheries that covered up the underlying structural problems and subsequently culminated in the Euro crisis.

Ongoing polarization and unequal technological exchange

Building on these contributions, we find that while there were (short) periods of convergence in Europe, mostly before the 1970s, the existence of core-periphery relations and a divergence of living standards has been the rule rather than the exception. This divergence has its reason not only in individual country characteristics, but also in the relationships between countries.

The results of our analysis particularly highlight the relevance of asymmetric trade structures regarding the technological complexity of traded goods between European cores and peripheries:

while complex goods are manufactured and exported from the core, simple goods are manufactured and exported by the peripheries. We argue that this unequal technological exchange is the result of a ‘vicious specialization’ and is effectively hampering the development of the peripheries. It thereby adds to the dimensions of ‘unequal exchange relationships’ already discussed in the literature – the vicious exchange of primary goods and of environmentally harmful goods.

Methodological challenges for structuralist analysis in macroeconomics

Our paper shows how a structuralist approach, using dependencies among countries and their reproduction as a central explanandum, sheds light on dynamics that would have otherwise remained undiscovered.

The analytical distinction often made by structuralists that allows for these insights is that between ‘core’ and ‘periphery’ countries are considered to follow different self-reinforcing development trajectories. Although some structuralist contributions sometimes may use more than two country groups, the idea that countries can be separated into groups that follow different trajectories and between which we can identify explanatory dependencies is a key element of structuralist research.

The fact that the dependencies themselves are used as an explanandum (in contrast to a mere outcome) distinguishes it from approaches based on endogenous growth theory or the varieties-of-capitalism view.

Illuminating as this may be, in our study we also identified several challenges and limitations of the core-periphery categories. More precisely, we find that there are three main challenges for the structuralist approach of using country taxonomies:

a) The challenge of dynamics: Countries might switch from one group to another over time, like Ireland which switched from being a periphery, very depended on the UK, to a financialized country with considerable GDP growth throughout the 1990s

b) The challenge of ambiguity: Some countries might belong to the core in one sense, and the periphery in another sense. France, for instance, is a politically important player, yet features some typical economic characteristics of peripheries.

c) The challenge of granularity: There might be cores and peripheries within countries. Within Spain, for example, the North plays the role of a core, the South the role of a periphery.

These three challenges illustrate that any fixed country typology must be used carefully. Developing techniques and methods to directly address these challenges is one avenue of future research suggested by our work. Striving for more pluralist endeavours, where structuralism gets complemented with other research approaches is another.

Conclusions

Considerable effort is needed to bring about convergence within the EU. A lot can be done based on existing EU legislation, like adding resilient industrial development as a core dimension to the Annual Sustainable Growth Survey.

Changes to some existing rules and regulations are also necessary to allow individual member states effective vertical industrial policy. At the moment, the Stability and Growth Pact is effectively hampering peripheral economic development by limiting necessary investments due to its restrictive fiscal rules. State aid rules prevent the direct support of specific industries. Given the political promise that the EU would bring about socio-economic convergence, these challenges are worth taking.