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Austerity and the slow recovery of European city-regions

The 2008 global economic crisis has been the most severe recession since the Great Depression. Notwithstanding its dramatic effects, cross-country analyses on its heterogeneous impacts and its potential causes are still scarce. By analysing the geography of the 2008 crisis, policy-relevant lessons can be learned on how cities and regions react to economic shocks in order to design adequate responses.

Focussing on key economic performance indicators for European city-regions in particular, it is possible to explore the links between post-2008 economic performance and pre-crisis factors (including macro-economic conditions) that may have exacerbated (or mitigated) the short-term contraction of the various regional economies.

The figure below depicts the geographies of the crisis across the European Union. The post-2008 regional economic trends show a core continental area, where the impact of the crisis on unemployment have been low or moderately low. This revolves around Germany, most of Poland, and partly stretches to neighbouring regions (such as most regions of Slovakia, and the Czech Republic). This ‘core’ is surrounded by a ring of more peripheral areas where the impact has been high or very high, and which include most of the regions of Ireland, Spain, parts of Italy, Greece, Cyprus, Lithuania, Latvia, and Estonia.

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Average regional unemployment rate during 2004/2007 (left), and average annual variation of unemployment rates during 2008-2012 (right) by Crescenzi, Luca, and Milio 2016 on Eurostat data. Used with permission.

When these spatially diverse post-crisis trends are linked to the characteristics of the corresponding regions, a significant divide between the regions of the ‘old’ Europe and the new EU member states becomes apparent. In the ‘new’ member states – and in particular in the regions of Poland, Slovakia, and the Czech Republic – the positive post-2008 economic performance seems to be driven by a process of structural and technological catching-up, while still benefiting from the relatively recent integration into the European Union. Such processes seem to be able to ‘balance’ the generalised downturn.

The key question then becomes, how are these regional level dynamics linked to the national macro-economic factors that take centre stage in the debate on the ways to react to crises and ‘shelter’ the EU economy from future shocks?

The link between the post-2008 regional economic performance and pre-crisis national macroeconomic factors highlights the importance of national trade patterns and government expenditure. A healthy current account surplus is associated with a stronger economic performance and better regional employment levels during the post-2008 recession. Conversely, regions belonging to countries with a higher initial government debt did not experience  poor economic performance in the short-run, both in terms of economic output and employment. Of course, these are suggestive correlations with no causal interpretation, and they do not necessarily suggest a sustainable long-term pattern. Yet, they provide preliminary evidence on the importance of active government policies before the crisis in mitigating the short-term impacts of subsequent recessionary shocks.

What can regional governments and mayors do to increase the resistance of their cities and regions to global economic shocks?

When examining regional resistance factors, human capital emerged as the single most important regional factor associated with a better resistance to economic shocks. What matters is the capability of the regions to identify short-term innovative solutions to a changing (and more challenging) external environment. This capability does not necessarily derive from technology-driven processes supported by Research & Development (R&D) investments, but is more likely to be boosted by a skilled labour force that enhances rapid processes and organisational innovation. While over the 2000s the European Union has invested conspicuous resources in trying to raise R&D expenditure to 3% of GDP in all countries and regions, an increasing body of evidence has now shown that local R&D investments have a weak association with regional innovation and growth, while human capital is a stronger predictor of that in the long term. Such contrast is magnified when looking at short-term cyclical reactions to the economic crisis; human capital is also key  to short-term resistance, while regions with high investments in R&D are not necessarily in the best position to face the crisis. In Europe, it is possible to identify several cases of ‘cathedrals in the desert’ where large (often publicly funded) research infrastructure remain completely disconnected from the needs of the local economic environment.

More academic research is definitely needed in order to answer the many questions raised by this simple discussion of the key facts and figures of the regional consequences of the crisis. In order to identify the regional resistance factors that will be able to positively influence recovery, it will be necessary to wait for more updated data on economic performance, and employ more sophisticated statistical techniques. Research in this area — at the intersection between macro-level dynamics and regional and city-level outcomes — is of paramount importance in order to provide European, national, and regional policy makers with insights on the capabilities of their cities and regions to react to economic shocks and design adequate responses.

A 360-degree public debate on how to re-launch local growth and employment beyond austerity measures is now a priority. The resistance of European cities and regions to economic shocks, and their capacity to find a pattern of sustainable economic growth are premised on a combination of enabling macro-economic environments and balanced regional and urban policies. Whether current EU and national policies (from the macro to the regional level) can provide Europe with adequate answers to these challenges remains to be seen.

Featured image credit: world europe map connections by TheAndrasBarta. Public Domain via Pixabay.

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