EU economies have converged since last elections

Next week hundreds of millions of European citizens will go to the polls to elect a new parliament that will reflect the many different countries and political groups across the continent — but, in an economic sense at least, the bloc is converging.

Differences between countries have narrowed in the past decade as eastern European economies, which joined the EU more recently, have made progress in catching up with their western European peers. And most countries in the eurozone periphery are bouncing back from the bloc’s debt crisis, narrowing the gap with northern Europe.

However, poor rural regions within some countries have underperformed compared to European urban areas — a trend that poses an increasing political challenge for the bloc’s institutions.

EU economies are converging . . .

Since the last European Parliament elections in 2014, the EU’s 28 countries have become more similar.

Differences in inflation rates have shrunk to their lowest level in 20 years, while the gap in unemployment rates has narrowed, although it is still higher than it was before the crisis.

Growth rates have also converged: in 2014 the 28 nations’ economies were growing at a wider range of speeds than is the case this year.

And on the most closely-monitored measure of economic disparity — gross domestic product per capita — the EU’s 28 countries are more similar now than at any point in this century. Differences in national per capita incomes are comparable to those across the states of the US, a recent study showed.

. . . as eastern European nations catch up . . .

The long-term trend is largely explained by faster growth in central and eastern Europe.

There were 13 countries — including Poland, Slovenia and Romania — that joined the EU between 2004 and 2013. Their hopes that EU membership would help boost their economies have largely been borne out. All of these countries have seen their per capita income — measured at purchasing power parity — rise faster than the bloc’s average, helping them to converge with western EU member states.

For example, in Romania, GDP per capita was less than half of the EU average back in 2007, but it has now risen to two-thirds. Meanwhile, output per person in Poland increased from 53 per cent of the EU average in 2007 to a forecast 74 per cent this year, according to data from the European Commission.

. . . and periphery countries recover . . .

The financial crisis and its repercussions dealt a blow to European economic convergence; countries in the periphery in particular lagged behind due to the depth of the contraction they experienced.

Greece and Portugal were already poorer than the EU average in 2007 and continued to fall behind after the crisis. Spain and Italy were higher-income countries in 2007, but Spain’s GDP per capita dropped below the EU average in 2010 and Italy followed three years later.

The European Central Bank has blamed rigid product and labour markets, which “significantly lengthened the process of reallocating labour and capital from crisis-hit sectors to faster-growing sectors”.

But Christian Odendahl, economist at the Centre for European Reform, said that restrictive monetary and fiscal policy and fiscal austerity were contributory factors.

“It was only in 2012, when Europe threw some dogmas out of the window, that the eurozone stabilised,” Mr Odendahl and colleagues wrote in a recent paper.

Portugal started to edge back towards the EU average from 2013 onward and Spain began to gain ground in 2014.

Even Greece — by far the hardest-hit — began to make progress in 2018, although its path to normality will be long.

. . . apart from Italy . . .

In contrast, Italy’s GDP per capita has continued falling relative to the EU average since the last European Parliament elections. It has been falling almost uninterruptedly — with the exception of 2016 — since 1995, when its people were 23 per cent wealthier than the EU average.

This year Italy’s GDP per capita is set to be 5 per cent below the EU mean. This is in sharp contrast with other peripheral EU countries which, before the crisis, were getting richer.

. . . and there are large regional differences

The national economic convergence across the European Union obscures a gloomier — and politically worrying — problem at regional level.

In many central and eastern European countries “an outstanding growth performance of capital [city] regions drives up the national average, hiding very poor growth in other regions,” said Cinzia Alcidi, senior research fellow at the Centre for European Policy Studies.

In southern Europe, some parts of Greece, Italy and Spain saw their GDP per capita drop by 20 to 30 percentage points in the 10 years to 2016, relative to the EU28 average.

The regional divergence, driven by the tendency of service-based economies to concentrate in cities, is “the most important part of the economic explanation for populism”, said Mr Odendahl.

Industrialisation has historically been the means by which poorer countries and regions caught up with richer ones, but that might not be so easy in services-dominated economies.

“Poorer countries and regions of Europe may struggle to attract, train and retain the skilled people they need to build highly productive services and technology clusters,” said Mr Odendahl.

This could have political consequences, he added, as “we are just at the start of that development”.