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Journal ArticleDOI

How will EMU affect cohesion

01 Nov 2002-Intereconomics (Springer-Verlag)-Vol. 37, Iss: 6, pp 300-314

Abstract: The new policy environment of EMU affects economic, political and social cohesion in different ways: the policy mix and menu will be reconfigured; it will provide for more macroeconomic stability in cohesion countries; economic competition will intensify and change patterns of specialisation; and comparison of living standards will become easier, which puts pressure on policymakers to reduce inequalities. This article assesses the significance of these effects and their likely consequences in the short, medium and long run. Then the salient cohesion issues as regards eastern enlargement are discussed. Finally, policy conclusions are drawn, mindful of the considerable uncertainties that warrant further research.
Topics: Policy mix (54%), Cohesion (linguistics) (51%)

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Ardy, Brian; Begg, Iain; Schelkle, Waltraud; Torres, Francisco
Article — Published Version
How will EMU affect cohesion?
Intereconomics
Suggested Citation: Ardy, Brian; Begg, Iain; Schelkle, Waltraud; Torres, Francisco (2002) : How
will EMU affect cohesion?, Intereconomics, ISSN 0020-5346, Springer, Heidelberg, Vol. 37, Iss.
6, pp. 300-314
This Version is available at:
http://hdl.handle.net/10419/41142
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COHESION
300 Intereconomics, November/December 2002
E
conomic and monetary union (EMU) is of poten-
tially fundamental importance to cohesion. On the
one hand, the adoption of the single currency and of
the new macroeconomic policy regime affects the
socio-economic performance of euro area member
states, their regions and peoples. On the other, EMU
is likely to affect the perception of cohesion, not only
by making cross border comparisons easier, but also
by influencing expectations of what inequalities are
acceptable.
The EU has directly and indirectly acquired consid-
erable responsibility for economic policy in EMU, and
the continued political support for this arrangement
will be dependent upon its success. Our approach is
to treat political support for, and wider social impacts
of, EMU largely as repercussions from the evolution of
socio-economic cohesion, and to review only
research on the latter in any detail. This focus seems
to be justified given that EMU was designed as an
economic means to a political end.
The effects of EMU on cohesion will be analysed
over varying time horizons:
Short-term acclimatisation requires member states
to adopt the new policy framework and cope with a
new pattern of asymmetric shocks. This process of
acclimatisation has been ongoing since the
Maastricht Treaty stipulated nominal convergence
as a prerequisite for entry into EMU. Thus, we can
draw on evidence of the effects of the convergence
process for the Cohesion countries (Greece,
Ireland, Portugal, Spain) over the 1990s.
Medium-term adjustment is characterised by the
impact of greater macroeconomic stability and
more openness on growth. The analysis will in
particular look at the evolving synchronisation of
business cycles and the adjustment capacity of
commodity and labour markets.
Long-term restructuring will imply a re-location of
industries and potential effects on innovation and
technologies used in Cohesion countries.
Obviously, here research mostly does not deal with
EMU and cohesion directly, so that our inferences
are somewhat speculative.
Brian Ardy*, Iain Begg**,Waltraud Schelkle*** and Francisco Torres****
How Will EMU Affect Cohesion?
The new policy environment of EMU affects economic, political and social cohesion
in different ways: the policy mix and menu will be reconfigured; it will provide for more
macroeconomic stability in cohesion countries; economic competition will intensify and
change patterns of specialisation; and comparison of living standards will become easier,
which puts pressure on policymakers to reduce inequalities. This article assesses the
significance of these effects and their likely consequences in the short, medium and long
run. Then the salient cohesion issues as regards eastern enlargement are discussed.
Finally, policy conclusions are drawn, mindful of the considerable uncertainties that
warrant further research.
1
* Research Fellow at the European Institute, South Bank University,
London, and Visiting Lecturer at the University of Reading, UK.
** Professor of International Economics at South Bank University,
London, and joint editor of the Journal of Common Market Studies.
He has just moved to the European Institute of the London School of
Economics and Political Science, UK.
*** Adjunct Professor of Economics at the Free University of Berlin,
Germany, and Lecturer of Political Economy at the European Institute
of the London School of Economics and Political Science, UK.
**** Professor and Head of Research at the Institute for European
Studies of the Portuguese Catholic University, Lisbon, and Senior
Economist at the Bank of Portugal. He is also Visiting Associate
Professor at the University of Aveiro, Portugal.
1
The authors gratefully acknowledge research funding by the
European Commission as an accompanying measure under the
“Improving Human Research Potential and the Socio-Economic
Base” programme for a larger study on this topic, forthcoming in
B. Ardy, I. Begg, W. Schelkle, F. Torres: EMU and
Cohesion: Theory and Policy, Cascais 2002, Principia, of which this
article is an outgrowth.

COHESION
The article starts with a consideration of the
concept and empirics of cohesion in the EU. Then the
ways in which cohesion may be affected by EMU in
the short, medium and long run will be analysed. The
challenges for cohesion of EMU enlargement will be
examined next. Finally what we see as robust policy
conclusions are discussed and the most urgent
research questions identified.
The Concept and Empirics of Cohesion
Cohesion in the EU is a counterpart to the setting of
long-term priorities that go together with participation
in the internal market and EMU. Article 158 views
cohesion as an issue of development: “In particular,
the Community shall aim at reducing disparities
between the levels of development of the various
regions and the backwardness of the least favoured
regions or islands, including rural areas.”
2
Since
poorer regions are concentrated in poorer countries,
this also implies a concern with national disparities.
However, cohesion does not refer to personal dispar-
ities, which are the concern of inclusion policies.
Over time the concept of cohesion has widened to
embrace inequalities more generally for example in
employment and in the environment, as well as in
income and living standards. In common with devel-
opments in welfare policy, it is opportunities as well as
outcomes that are regarded as crucial. Cohesion is
also dynamic, thus progressive reductions in inequal-
ities over time are more important than absolute
differences at a point in time. This article will focus on
differences in GDP/income levels and employment/
unemployment in different nations and regions. This is
where the effect of EMU will be most directly felt and
where public attention will be concentrated.
Economic cohesion is generally measured by real
GDP per capita because this provides an assessment
of the level of productivity of the region and of income
levels, which are related to other aspects of inequality.
GDP rather than GNP is used because statistics for
the latter are not available at the regional level. GDP
does, however, have the disadvantage that it excludes
net property income from abroad and outside of the
region.
3
As regards the national disparities in GDP, the
prospective EU 25 can be divided into three groups
(Figure 1):
The low income group contains 8 accession
countries which accounts for 16% of the
population of an enlarged EU and has an average
GDP per capita (PPS) of 48% of the average.
The moderate income group is made up of 5
countries, namely Spain, Greece and Portugal plus
Cyprus and Slovenia, which accounts for 13% of
the population of an enlarged EU and has an
average GDP per capita (PPS) of 81% of the
average.
The higher income group comprises 12 of the
current EU Member States which accounts for 71%
of the population of an enlarged EU and has an
average GDP per capita (PPS) of 108% of the
average.
There are clear signs of convergence of GNP at the
national level between 1960 and 2000. GNP per
worker of each cohesion country improved relative to
the EU average (Figure 2). The processes of national
convergence are, however, dissimilar as regards
performance after EU entry and in the run-up to EMU.
We will come back to the latter observation below.
Disparities in regional GDP per capita are inevitably
much wider than disparities in national GDP. In 1999,
the top 10% of regions had income levels 57% above
the EU average and the bottom 10% nearly 40%
below the average. In other words, the richest regions
had incomes per head 2.6 times larger than the
poorest regions. There is also a very wide gap
between the top and bottom 25% of regions. In
Intereconomics, November/December 2002 301
Figure 1
GDP per capita (PPS), 1999
Index EU-25 = 100
200.0
150.0
100.0
50.0
0.0
average group 3
average EU 25
average group 2
average group 1
L
DK
NL
IRE
A
B
D
I
S
FIN
UK
F
CY
E
P
SL
EL
CZ
MT
HU
SK
PL
EE
LT
LV
Applicants
EU 15
Source: European Commision: First Progress Report on Economic
and Social Cohesion, Brussels 2002, DG Regional Policy.
3
In 2000, Ireland’s GNP was 18.7% smaller than its GDP because of
the repatriated profits and interest from the extensive foreign multi-
national operations in Ireland (www.cso.ie).
2
European Union: Consolidated Versions of the Treaty on European
Union and the Treaty Establishing the European Community, Luxem-
bourg 1997, OOPEC.

COHESION
contrast to the national level there is little evidence of
recent regional convergence in the EU. There is a
slight fall in the dispersion of income levels among all
regions if the new Länder are excluded. What little
convergence there is at the regional level is probably
associated with the convergence of the Cohesion
countries at the national level.
4
The poorer regions of the EU 15 can roughly be
divided into three categories.
5
Those in poorer countries: 12 of the 19 NUTS 1
regions in the EU with GDP p.c. (current exchange
rates) in 1998 below 75% of the EU average, were
located in the three poorest Member States, Spain,
Greece and Portugal.
Large lower income regions within more
prosperous countries: of the seven other regions in
the sub 75% GDP category five are in the Mezzo-
giorno, one is in East Germany and one is the
French Overseas Territories.
Localised problem sub-regions within more
prosperous regions: e.g. Cornwall in the UK.
Recent economic development in the EU has been
characterised by the emergence of such localised
problem sub-regions.
Social cohesion can be measured, first of all, by
disparities in employment and unemployment. Inter-
estingly, there is no clear distinction between the
Cohesion countries and other EU 15 states. Spain has
unemployment above and male employment below
the EU averages. Greece has high unemployment but
average male employment, whereas Portugal has low
unemployment and the highest male employment rate
in the EU, Ireland has low unemployment and high
employment rates in every category (Table 1).
Between regions, differences in unemployment are
larger, but again there is no clear distinction between
302 Intereconomics, November/December 2002
Figure 2
GNP per Worker, Cohesion Countries
GNP per worker % EU 15 average
120
100
80
60
40
20
0
Greece joins
Spain & Portugal joins
1960 1965 1970 1975 1980 1985 1990 1995 2000
Greece Spain Ireland Portugal
Ireland joins
Source: European Commission: The EU Economy in 2001 Review,
European Economy, No. 73, 2001, Statistical Appendix.
Figure 3
Regional Unemployment Range, 2000
Unemployment %
30
25
20
15
10
5
0
Belgium
D
enm
ark
G
erm
any
G
reece
S
pain
France
Ireland
Italy
Luxem
bourg
N
etherlands
Austria
Portugal
Finland
Sw
eden
U
K
Source: European Commission: First Progress Report on
Economic and Social Cohesion, Brussels 2002, DG Regional Policy.
Table 1
Unemployment and Employment Rates
in the EU
Unemployment rate (%) Employment rate
(% of pop. aged
15-64), 2000
Total Total Long- Young Total Male
1990 2000 term 2000
2000
(% of total)
Portugal 4.1 4.1 39.9 9.0 72.2 81.0
Denmark 7.8 4.7 18.9 7.4 76.6 80.9
UK 7.0 5.6 27.9 12.1 72.2 79.1
Netherlands 7.3 2.8 26.5 5.1 68.5 77.9
Ireland 13.1 4.4 : 6.6 65.2 77.0
Luxembourg 1.6 2.4 21.4 7.0 62.9 75.2
Germany 4.9 8.1 48.9 8.9 66.0 73.6
Greece 6.3 11.1 56.4 29.5 57.4 73.6
EU15 7.7 8.4 44.8 16.1 63.8 73.4
Sweden 1.4 6.2 26.7 14.2 70.8 73.2
Finland 3.7 11.0 25.1 29.6 68.4 71.5
Belgium 6.3 6.7 55.0 16.0 61.3 70.3
Spain 16.4 14.4 41.0 26.4 55.2 70.2
France 8.7 9.6 42.6 18.8 61.9 69.1
Italy 9.0 10.8 61.1 31.5 54.2 68.8
Source: European Commission: Employment in Europe 2001,
Brussels 2001, DG Employment and Social Affairs, Statistical
Appendix.
4
A. Cappelen, J. Fagerberg, B. Verspagen: Lack of
regional convergence, in: J. Fagerberg, P. Guerrieri,
B. Verspagen (eds.): The Economic Challenge for Europe:
Adapting to Innovation Based Growth, Cheltenham 1999, Edward
Elgar.
5
Eurostat: Regions: Statistical Yearbook 2001, Luxembourg 2001,
OOPEC.

COHESION
Cohesion and non-Cohesion countries (Figure 3).
Italy, Spain, Germany and Finland all have large
regional differentials in unemployment. There does
not appear to have been any reduction in regional
disparities in unemployment for most of the 1990s. In
Italy, and to some extent Spain, differences in regional
employment rates seem to have even widened.
Employment fell in most Greek regions in the 1990s.
Other aspects of social cohesion are income
inequalities and poverty levels. One simple measure
of inequality is the S80/S20 ratio, the share of total
income received by the top 20% of income earners
compared with that received by the bottom 20%. It is
clear from Figure 4 that the Southern Cohesion
countries are characterised by a wider inequality of
income than other countries in the EU.
Poverty is now generally regarded as a problem of
exclusion, i.e. having insufficient income to participate
fully in society, and is consequently measured in
relative terms. The Eurostat definition of susceptibility
to poverty is an income of 60% or less of the median
income of the country of residence. With the high
degree of inequality in the Cohesion countries,
poverty is also likely to be high in these countries. This
proves to be the case after transfers are taken into
account. Before social transfers, the percentage of
the population with incomes 60% or less than the
median is near to the average in Greece, Portugal and
Spain. It is the UK and Ireland who have around one
third of their populations at risk from poverty. After
social transfers, Greece, Portugal and Spain together
with the UK and Italy have one fifth or more of their
population experiencing poverty level incomes. These
are also the countries where the persistence of
poverty is greatest, i.e. poverty in the current year and
at least two of the previous three years.
6
The EU seeks to achieve cohesion in three ways:
first, by raising productivity through the operation of
existing common policies, such as the internal market
and competition policy; second, through the
adaptation of these common policies, so that they
more directly facilitate cohesion; third through struc-
tural and cohesion funding. This is in contrast to the
personal and regional redistribution undertaken by
nation states because the EU recognises the limited
role it should and can play in the face of the very large
social, cultural, governmental and economic differ-
ences between Member States. Measures to promote
cohesion are not meant to provide transitory transfers
to smooth economic fluctuations in EMU, the practi-
cability of which is in doubt not least given the logis-
tical and political difficulties.
7
The Structural Funds,
the main instrument of cohesion policy, seek to
encourage the long-term growth potential of regions,
to render employment creation sustainable, and to
avoid situations of high unemployment and depen-
dence on continuous fiscal transfers.
Acclimatisation to EMU and Cohesion
In our conceptual framework, acclimatisation to
EMU is defined as the adaptation to the new policy
regime and to a changing pattern of country or region
Intereconomics, November/December 2002 303
7
E. Jones, J. Frieden, F. Torres (eds.): Joining Europe's
Monetary Club: The Challenges for Smaller Member States, New York
1998, St. Martin’s Press.
6
Eurostat: Structural Indicators: Social Cohesion, Web document at
URL, 2002, http://eur
opa.eu.int/comm/eurostat/.
Figure 4
Distribution of Income 1997 & 1998
Portugal
Spain
Greece
UK
Italy
Belgium
EU 15
Ireland
Germany
France
Netherlands
Austria
Sweden
Denmark
1998
1997
0 1 2 3 4 5 6 7 8
S80/S20 Ratio
Source: Eurostat: Structural Indicators: Social Cohesion, Web
document at URL, 2002, http://europa.eu.int/comm/eurostat/.
Figure 5
Poverty in the EU 1998
Greece
UK
Portugal
Italy
Spain
EU 15
France
Ireland
Belgium
Germany
Austria
Netherlands
Sweden
Denmark
Finland
After social transfers
Persistence of poverty
0 5 10 15 20 25
% of population with an income <=60% of the median
Source: Eurostat: Structural Indicators: Social Cohesion, Web
document at URL, 2002, http://eur
opa.eu.int/comm/eurostat/.

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