Territorial scenarios for Europe With special regards to Central European Countries

Territorial scenarios for EuropeWith special regards to Central European Countries

Roberto Camagniwith R. Capello, A. Caragliu, U. FratesiPolitecnico di Milano, ABC Department

Hungarian Regional Science Association, 11° MeetingKaposvàr, 21-22 November, 2013

Objectives of the presentation

To present results of some research works carried out within the ESPON Programme of the EU, namely:

- ET2050: development scenarios for European Regions (2013)- KIT: Knowledge, Innovation and Territory (2011-12)- Span: Spatial Scenarios for the Latin Arc Countries (2008-09)

To produce “quantitative foresights” (not forecasts) based on conditional scenario assumptions for all European regions up to 2030, with special reference to Central Eastern Countries

To present some early reflections on development policies

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Introduction

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Over the last few years, the world economy has gone through a severe period of economic downturn, the worst since the end of the second world war.

If the overall magnitude of the effects generated by the crisis is not yet fully understood, even less clear is the spatial distribution of these effects.

This explains the importance of the use of macroeconomic regional econometric and forecasting models.

Introduction

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Regions belong to different nations with different exposure to the crisis.

Regions have different industrial specialization, as well as different capacities to exploit untapped resources, or territorial capital assets.

Macroeconomic demand side effects have different impacts :- on national economies, according to their different level of public debt and deficit, and development potential,- on the different regions, according to their consumption patterns, type

of demand (public vs. private) and productive specializations.

Financial speculation determined a differentiated rise in the spread on public bonds in different countries, exacerbating the cost of the debt service, raising public deficits, generating huge effects on public spending at central and local levels.

Introduction

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A strong control on public expenditure and on its reduction was imposed by the EU, especially to “vicious” countries. The effects of such a reduction are expected to be stronger in those regions with a higher share of public demand with respect to the private one, being generally the poorer and less productive regions;- in “vicious” countries, private investments decreased as a

consequence of the increase in interest rates, penalizing private actors, and particularly productive regions;

- a credit crunch came as a consequence of the financial intermediaries’ decision to prefer financial investments on public bonds, when guarantees existed on sovereign default; the real sector and the most productive regions hosting it were once again penalized more than others.

In general though, is difficult to predict which regions were hit more.

The foresight tool: the MASST3 modelMASST is an econometric forecasting model. Previous versions of

MASST developed for ESPON 3.2; ESPON SPAN; DGRegio projects.

The ET2050 project is based on a new version of MASST, considering the economic crisis (two periods of model estimation), public budget constraints, innovation modes, the role of urban areas in regional growth.

The model is able to simulate effects on regional growth of:- the economic crisis;- macroeconomic elements (public budget constraints, sovereign

debt, spread in interest rates of public bonds, exchange rates);- territorial capital elements (innovativeness, trust, accessibility);- cohesion and infastructure policies.

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The model

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The logics of the model is at the same time Top-down & Bottom-up (i.e. distributive and generative):

- national growth (determined by macro-economic elements: demand side) is distributed among regions,

- but regions add a “differential” effect (determined by presence of territorial capital: supply side) able to feed-back on national performance.

Quantitative foresight is produced for all NUTS2 regions of all 27 EU countries (270 regions).

The MASST3 model:

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Policies: Structural funds

Accessibility: - infrastructure

FDIs/Population

Functions

Spatial and territorial structure: - spatial

spillovers

Sectoral component: Dynamics of

sectoral structure

in national GDP

Exchange rates

Inflation

Δ of FDI stock

Submodel 1: National component Submodel 2: Regional differential component

Macroeconomic elements

Differential shift

Regional differential component

Territorial capital assets

Spatial and territorial structure: - spatial spillovers

National growth

Regional growth as a result of MAcroeconomic Social, Sectoral and Territorial components

Final economic effect

Population growth

Migration flows

Birth rate

Mortality rate

Sectoral component: dynamics of sectoral structure

Localization economies: Hirschman Herfindahl Index

Legend:

Exogenous variables

Endogenous variables

Relations in estimations Relations in simulation

National component of regional

growth

Social component: - trust

Urbanization economies: LUZ population

Regional specialization

Functions

MIX effects

Territorial structure: settlement

Policies: Structural funds

Dynamics of sectoral structure

FDIs/Population

Human capital

R&D

Innovation

patterns

Regional innovation

Traditional urban benefits: - quality of life - creativity

Traditional urban costs: - cost of the city - social conflict

Nonconventional urban benefits: - city networks - high level urban functions

Nonconventional urban costs: - diffused urban form

Urbanization economies (LUZ population)

Innovativeness: - product/ process innovation

Inter-sectoral productivity: - infrastructure - skills - energy cons.

All equations are differentiated between periods of crisis and of no crisis Permanent income and long-run relationships are assumed and estimated

FINAL OUTCOME

internal consumption

investments

imports

exports

Δ public

expenditure Δ public expenditure

Public exp'enditure

Interest payments

Tax revenues

exports

Δ Exchange rates

Inflation

Δ Unit Labour Costs

GDP growth in USA, Japan and

BRICs

Unemployment growth internal

consumption

Tax rates

investments

Δ interest rates

Δ Unit Labour Costs

Δ of FDI stock

in national GDP

in national GDP

in national GDP

imports

Migration Flows

Settlement structure

Regional differential GDP

Unemployment rate

Scenario Assumptions

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a) structural breaks brought in by the crisis are considered, due to emerging global contradictions:

- Stop to demand based on debt in advanced countries,- Financialization of western economies and related risks,- China and BRICs supporting western real income (through low-price

exports) and financing the trade deficit of USA : persisting?

By consequence, in the future:- the balance of the geo-political game will be different;- winning assets will be different;- spread in interest rates proportional to sovereign debts;- necessary (but probably too high) austerity measures imposed on

public deficits by the EU.


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b) “Regionalized” globalization, with the large “triad” areas (Europe, America, East and South Asia) more independent and more internally integrated- BRICs enter progressively in the medium and high technology game- The growth of real income in Europe will be more modest;- “Regionalized” globalization processes will enable the recovery of manufacturing activities in Europe (and the US);- A number of new technologies will develop: nanotech, biotech,

transport technologies, new materials

c) More importantly: a new paradigm will emerge: the “green economy”, due to increasing energy prices and growing concern about climate change. Many sectors touched: manufacturing, energy, transport, building and construction, tourism, agriculture (zero-km)Provides a new demand source, new jobs and a reduction in dependency on fossil fuelsIt may boost a revival of endogenous growth in Europe

Scenario Assumptionsd) Regional disparities are likely to increase (two speed growth)- Metro regions will host the advanced activities and R&D- New manufacturing activities, benefiting from technological

progress, will also locate in metro and second rank cities

e) Austerity measures will endanger growth in “vicious” , mainly southern European countries: for some times, “internal devaluations”, severe cuts in public spending and difficulties in financing private investments will determine a cumulative divergence with respect to stronger countries.

All these elements can be easily accomodated into the MASST model, thanks to the new inclusion of sectoral regional structures and constraints coming from national sovereign debt and public budget disequilibria.


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Concerning Central - Eastern European Countries:

i) Catching up in productivity with respect to Old 15 Countries will continue, but possibly at a lower rate due to:

- FDI dependency: they will slowly redirect towards outer eastern countries and towards trade and commercial functions, in order to benefit from increasing internal incomes (in CEECs),

- Difficulty in keeping low levels of inflation, due to difficulty in keeping wage increases in line with productivity increases,

- Outflows of profits by multinational companies,- Slow taking-off of an endogenous accumulation of capital.

ii) Difficulty in finding a more advanced innovation “pattern” with respect to the present one (mainly an “imitative innovation pattern”, driven by FDI, with an internal dualist industrial structure).

Past trends in productivity

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40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Productivity per employee (2005=100)

European Union (27 countries)

Bulgaria

Czech Republic

Estonia

Croatia

Cyprus

Latvia

Lithuania

Hungary

Malta

Poland

Romania

Slovenia

Slovakia

Past trends in FDI inflows (absolute values)

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0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tot

al F

DI

infl

ows i

n cu

rren

t USD

(m

illio

ns)

European Union

Old15

NMS

Past trends in FDI (% on GDP)

15

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

FDI i

nflo

ws a

s a

% o

f GD

P

European Union

Old15

NMS

NMS

EU27

Old15

Trends in competitiveness

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40.00

60.00

80.00

100.00

120.00

140.00

160.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Bulgaria Czech Republic Estonia

Croatia Latvia Lithuania

Hungary Poland Romania

Slovenia Slovakia Equal relative competitiveness as in 2004

Slovakia

Czech Republic

Poland

Hungary

Real Effective Exchange rates for the NMS, 1994-2012

Assumptions of the Baseline Scenario

- the socio-economic and demographic trends of the past will continue, and no major change will come to alter the EU economy;

- economic policies will remain the present ones;- a general slow economic recovery will start in 2016;- a slight increase in competitiveness of European countries is assumed

in 2030;- By 2030 interest rates on bonds will return back to lower, pre-crisis

values, thanks to the end of strong speculation;- the stability pact remains the same, still imposing highly restrictive

public budget policies.

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RESULTS FOR THE BASELINE SCENARIO

(2030)

Aggregate results of the Baseline scenario

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Average annual GDP growth rate

Average annual population growth rate

Average annual employment growth rate

Average annualmanufacturing

employmentgrowth rate

Average annual service

employment growth rate

EU27 1.89 0.31 1.58 1.38 1.63Old 15 1.88 0.47 1.53 1.48 1.54New 12 1.93 -0.38 1.90 0.98 2.33

1. The New12 countries grow a little more than the Western countries.2. New12 countries increase employment in services more than in manufacturing, entering a new stage of development.3. Western countries have a balanced growth between manufacturing and services.

Baseline: annual average GDP growth rate

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Two speed Europe; Southern peripheral countries grow less than Northern countries.

Southern European countries discount the difficult present conditions on their future evolutionary trajectories.

Eastern European countries still grow more than the EU 15, but this is not enough to catch up the GDP per capita levels of the Western countries in 2030.

Overall intra-national regional disparities increase.

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Roma

Riga

Oslo

Bern

Wien

Kyiv

Vaduz

ParisPraha

Minsk

Tounis

Lisboa

Skopje

Zagreb

Ankara

Madrid

Tirana

Sofiya

London Berlin

Dublin

Athinai

Tallinn

Nicosia

Beograd

Vilnius

Ar Ribat

Kishinev

Sarajevo

Helsinki

Budapest

Warszawa

Podgorica

El-Jazair

Ljubljana

Stockholm

Reykjavik

København

Bucuresti

Amsterdam

Bratislava

Luxembourg

Bruxelles/Brussel

Valletta

Acores

Guyane

Madeira

Réunion

Canarias

MartiniqueGuadeloupe

0 500250km

Baseline March 18 2013Average regional GDP growth rate

< 0.000.01 - 0.900.91 - 1.241.25 - 1.491.50 - 1.781.79 - 2.092.10 - 2.472.48 - 2.94> 2.95

Regional level: NUTS2Source: Politecnico di Milano, 2013

Origin of data: - MASST3 model© EuroGeographics Association for administrative boundaries

© Politecnico di Milano, Project ET2050, 2013

Theil index in the Baseline scenario

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.05

.1.1

5

2010 2015 2020 2025 2030Year

Total Theil index Between Country Theil indexWithin Country Theil index

Total regional disparities

Inter-national disparities

Intra-national disparities

EXPLORATORY SCENARIOS(2030)

Summary of assumptions for the exploratory scenarios

“Megas” scenarioMarket driven scenario; welfare system fully privatized; financial debt repaid in

2030; budget reduced for cohesion policies; concentration of investments in European large cities.

“Cities” scenarioPublic policies mostly at national level; actual welfare system reinforced through

increased taxation; financial debt not fully repaid in 2050; budget maintained for cohesion policies; concentration of investments in second rank cities.

“Regions” scenarioSocial policies; strong public welfare system; financial debt repaid in 2050;

budget significantly increased for cohesion policies; concentration of investments in rural and cohesion areas.

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Aggregate GDP growth results for the exploratory scenarios

1. The “Cities scenario” is the most expansionary: territorial capital and the urban system are better exploited than in the other scenarios.

2. This holds also for New 12 countries.

3. New 12 countries are those that gain in the regions scenario with respect to the baseline.

Aggregates Baseline Megas Cities Regions Megas vs. baseline Cities vs. Baseline Regions vs. Baseline

EU27 1.89 2.22 2.31 1.82 0.33 0.42 -0.06

old15 1.88 2.22 2.31 1.81 0.34 0.43 -0.07

new12 1.93 2.22 2.23 1.98 0.29 0.30 0.05

0.135

0.140

0.145

0.150

0.155

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Baseline scenario

Megas scenario

Cities scenario

Regions scenario

Theil Index by Scenario: Total Regional Disparities

Theil Index by Scenario: Between Countries Disparities

0.084

0.086

0.088

0.090

0.092

0.094

0.096

0.098

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Baseline scenario

Megas scenario

Cities scenario

Regions Scenario

Theil Index by Scenario: Inside Countries Disparities

0.040

0.045

0.050

0.055

0.060

0.065

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Baseline scenario

Megas scenario

Cities scenario

Regions scenario

GDP growth rates in the Megas scenario: differences with respect to the baseline

In Western countries: - strong advantages to rich

and central regions;- rural areas of rich

regions gain relatively less;

- relatively poor countries (like Greece) take advantage of a general increase in demand.

In Eastern countries:- relatively more diffused growth, thanks to a general recovery of the EU economy.

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Roma

Riga

Oslo

Bern

Wien

Kyiv

Vaduz

ParisPraha

Minsk

Tounis

Lisboa

Skopje

Zagreb

Ankara

Madrid

Tirana

Sofiya

London Berlin

Dublin

Athinai

Tallinn

Nicosia

Beograd

Vilnius

Ar Ribat

Kishinev

Sarajevo

Helsinki

Budapest

Warszawa

Podgorica

El-Jazair

Ljubljana

Stockholm

Reykjavik

København

Bucuresti

Amsterdam

Bratislava

Luxembourg

Bruxelles/Brussel

Valletta

Acores

Guyane

Madeira

Réunion

Canarias


0 500250km

Megas March 18 2013Average regional GDP growth rate, difference w.r.t. baseline

< 0.000.01 - 0.120.13 - 0.200.21 - 0.260.27 - 0.310.32 - 0.370.38 - 0.420.43 - 0.49> 0.50




GDP growth rates in the Cities scenario: differences with respect to the baseline

In Western countries:- more widespread and diffused

growth at intranational level;- strong countries like Germany,

the Netherlands, Austria, increase less than Southern countries (catching-up).

In Eastern countries:- diffused advantages, relatively

less pronounced than in Western;

- similar increase in growth than in the megas scenario.

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Roma

Riga

Oslo

Bern

Wien

Kyiv

Vaduz

ParisPraha

Minsk

Tounis

Lisboa

Skopje

Zagreb

Ankara

Madrid

Tirana

Sofiya

London Berlin

Dublin

Athinai

Tallinn

Nicosia

Beograd

Vilnius

Ar Ribat

Kishinev

Sarajevo

Helsinki

Budapest

Warszawa

Podgorica

El-Jazair

Ljubljana

Stockholm

Reykjavik

København

Bucuresti

Amsterdam

Bratislava

Luxembourg

Bruxelles/Brussel

Valletta

Acores

Guyane

Madeira

Réunion

Canarias


0 500250km

Cities March 18 2013Average regional GDP growth rate, difference w.r.t. baseline

< 0.000.01 - 0.200.21 - 0.260.27 - 0.330.34 - 0.390.40 - 0.450.46 - 0.510.52 - 0.59> 0.60




GDP growth rates in the Regions scenario: differences with respect to the baseline

Central/core regions grow less than in the baseline scenario.

Rural or peripheral areas gain relatively more than in the baseline scenario.

This holds for both Western and Eastern countries.

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Roma

Riga

Oslo

Bern

Wien

Kyiv

Vaduz

ParisPraha

Minsk

Tounis

Lisboa

Skopje

Zagreb

Ankara

Madrid

Tirana

Sofiya

London Berlin

Dublin

Athinai

Tallinn

Nicosia

Beograd

Vilnius

Ar Ribat

Kishinev

Sarajevo

Helsinki

Budapest

Warszawa

Podgorica

El-Jazair

Ljubljana

Stockholm

Reykjavik

København

Bucuresti

Amsterdam

Bratislava

Luxembourg

Bruxelles/Brussel

Valletta

Acores

Guyane

Madeira

Réunion

Canarias


0 500250km

Regions March 18 2013Average regional GDP growth rate, difference w.r.t. baseline

< -0.22-0.21 - -0.17-0.16 - -0.11-0.10 - -0.06-0.05 - 0.000.01 - 0.110.12 - 0.220.23 - 0.42> 0.43




A sensitivity analysis on disparities

Several analyses on sensitivity of total disparities were to macro-economic assumptions in the baseline scenario were run.

The most relevant and interesting:Removing the assumption of a persistence of higher inflation rates in

CEECs with respect to western countries, a higher GDP performance appears in CEECs (mainly due to higher exports and lower imports) and by consequence a much lower increase in total regional disparities in 2030.

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Conclusions

1. Difficult times ahead for inter-regional disparities(due to centralization trends, macroeconomic constraints), confirmed by the recent DG Regio “webminar”

2. A scenario supporting “cities” (first, second and possibly third rank cities) looks the most desirable: in terms of growth potential (best use of “concentrated diffusion” of territorial capital) and in terms of territorial cohesion

3. Relevant policy tasks for CEECs: - keep wage and price increases in line with productivity growth- launch a wave of endogenous capital accumulation- Find a new “innovation pattern”, based on a “smart”

specialization and on selected inter-regional cooperations.

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THANK YOU VERY MUCH FOR YOUR ATTENTION!

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Documents

Territorial scenarios for Europe With special regards to Central European Countries