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Europe will become even more polarized in downturn












The European Union was supposed to speed up the process of convergence between the continent’s high- and low-income countries, but by many measures the continent has actually become more polarized along regional, economic lines – and this trend is only going to be exacerbated in the event of a new economic downturn, as seems increasingly likely in the near future. That’s the gloomy prediction in a new report from the Vienna Institute for International Economic Studies, which however tempers the bad news with policy recommendations to combat the trend.



  • The economic polarization was masked by recent years of respectable growth, but a slowdown is already visible, with year-over-year GDP growth rates slumping in Germany, France, and Italy.



  • Meanwhile the underlying causes of economic disparities between countries and regions have never been addressed, the Institute’s authors argue, suggesting they will reemerge when the continent’s overall growth slows again.



  • The authors further argue that economic disparities, reflected in widely varying standards of living, are due in large part to major structural differences between states, including in institutional and legal areas such as tax and corporate law, the labor market and the financial sector.



  • Technological prowess also plays a major role, leading to self-reinforcing growth in technologically strong countries like Germany, leaving those withs a more limited technological basis further behind.



  • These differences are, in turn, partly the result of competition within Europe and with the rest of the world to establish and cultivate unique positions in certain key sectors, the Institute’s authors claim, for example with Ireland’s emphasis on low taxes or Luxembourg’s on financial deregulation. While of benefit to the countries in question, the pursuit of “locational” advantage is largely leaving the nations of southern Europe behind.



  • The Institute recommends increased centralization to prevent the gaps widening further, calling for “coordinated measures in various policy areas – especially in wage, monetary, fiscal and industrial policy,” in order to create “a long-term successful economic basis for the common European economic and monetary area.”



  • It’s worth noting the push to further centralization runs counter not only to the populist anti-EU movements now ascendant in many countries, but also to the advice of conservatives who argue in favor of decentralization, reasoning that allowing countries to compete in areas like taxation and regulation would lead to greater economic freedom and therefore higher growth.