The economic crisis in Europe: urban and regional consequences

Beginning in 2007–2008, the European economy experienced the worst economic crisis since the 1930s. The proximate cause was the financial and banking crisis that originated in the overleveraged banks and mortgage institutions in the United States, and which quickly spread through the global financial system to infect much of Europe. This set off a major credit crunch which in its turn triggered a major contraction in economic growth, from which many European countries have struggled to recover. Yet it has been a crisis that has not afflicted all parts of Europe to the same degree, but rather has exposed major disparities in economic weakness, recovery and resilience both between different countries and between different regions within countries. These disparities themselves have posed an historic challenge to the European project, to the stability and viability of the European Union, and especially the Eurozone. For, to succeed, a true monetary union requires that economic shocks do not have highly disparate impacts across the constituent countries or regions of which it composed (see Fingleton et al., 2015 ; Martin, 2001 ); or, in the event of such disparate responses occurring, that there exists a fully functioning union-wide fiscal stabilisation system of automatic transfers to help offset the impact of the shock in the worst-affected areas. The European monetary union has no such fully developed automatic fiscal stabilisation mechanism, and this has exacerbated the crisis in many parts of the Eurozone: lacking monetary independence and a central fiscal mechanism, some countries of the Eurozone, such as Greece, Portugal, Spain and Italy, have experienced particular difficulties in forging a recovery. In fact, at a broad level, there have been significant differences between the various major parts of Europe ( Figure 1 ). Both the Eurozone and non-Eurozone showed not dissimilar rates of economic growth in the years leading up to the crisis, and not overly different downturns in 2008–2009. But the recoveries have proved rather different. Both major areas initially recovered at the same rate, but from 2011 onwards growth in the Eurozone faltered, while that in the non-Eurozone area was maintained. As a result by 2014 GDP in the non-Eurozone area had risen to 5% points above its pre-crisis peak, while in the Eurozone it was still below its pre-crisis peak. However, even within the Eurozone itself there has been a major difference between the ‘core’ states of Germany, France, Netherlands, Denmark, Belgium and Ireland on the one hand, and the remaining Eurozone states on the other. In the former, GDP has recovered to above its 2008 level, whereas in the rest of the singe monetary zone, GDP continued to fall through to 2013, and only then showed a small improvement (see also Fingleton et al., 2015 ). Recession and recovery in Europe. Source : Authors’ elaborations of Eurostat data. The reasons behind these differences in economic trajectories after the outbreak of the crisis—or ‘great recession’, as it is often known—are manifold. What started as a financial and banking crisis soon hit the real economy. Construction was among the first and most severely hit sectors. Value-added in the construction sector fell between 6 and 20%—and employment between 10 and 20%—especially in those countries, such as Ireland, Latvia, Estonia, Portugal, Greece and Spain, that had developed construction bubbles in the pre-crisis period. Industry as a whole also declined by more than 2% for the whole of the EU between 2007 and 2011. But this average hides declines of more than 5% in the seven member states most affected by the crisis. In addition, the crisis in Europe has not just been about slow and uneven recovery from the recession, but also about its legacies and after-effects, including problems of public debt and entrenched unemployment. Partly because of the debt-based nature of their economic growth in the pre-crisis boom, and partly because of the severity of the crisis itself, several members of the Eurozone found themselves facing mounting sovereign debt problems, including some that already had already high debt-to-GDP ratios (60% or more), and others—such as Ireland, the United Kingdom, Cyprus and Spain—that had enjoyed lower pre-crisis ratios (around 40% or less) ( Figure 1 ). By 2012 four countries—Greece, Italy, Portgual and Ireland—had become hampered by debt-to-GDP ratios of more than 100% ( Figure 2 ). As the ratio of public debt to national GDP rose across Europe, as national credit ratings fell, and as the costs of borrowing to service national debt rose, so governments imposed harsh austerity programmes designed to reduce public spending and the debt overhang. A major debate has surrounded the impact of these austerity programmes—especially in Greece, but also elsewhere in the Eurozone and in the UK as well—as to whether fiscal entrenchment has served to intensify the scale of economic recession and delay the process of recovery. Austerians have argued for major fiscal cuts as the route back to growth, whereas Keynesians have argued for slower cuts or even increases in public expenditure on infrastructure and the like as the best path to the renewal of economic growth. Government gross debt as a proportion of GDP, 2012 (Countries outside the Eurozone highlighted). Source : Eurostate ( http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tsdde410 ). Further, the impact of the crisis has had particularly serious consequences for Europe’s labour markets ( Fratesi and Rodríguez-Pose, 2016 ). Unemployment rates rose everywhere in 2008, but much faster in some countries than in others ( Figure 3 ). They have also fallen at quite different speeds with the uneven economic recovery. By mid-2015, some seven years after the onset of the crisis, while unemployment rates had almost fallen back to their 2008 values in many European states, in some they remained stubbornly and historically high: 25% in Greece, 22% in Spain, 15% in Croatia and Cyprus and 12% in Italy and Portugal. In contrast, Norway, Iceland, Germany, United Kingdom and Austria all had rates of below 6%. The effect of the crisis has been to leave Europe with a much widened range of national unemployment rates ( Figure 2 ), and an entrenched dislocation in the job market for some countries. The growth and divergence of unemployment rates across European states. Source : Authors’ elaborations of Eurostat data ( http://appsso.eurostat.ec.europa.eu/nui/show.do ). Yet, while these national disparities in the impact and consequences of the crisis have been marked, so too have its effects across regions and cities within countries ( Groot et al., 2011 ). Writing about European monetary integration some 40 years ago, Magnifico (1973) raised questions about the need for regional disparities to be as narrow as possible as a condition for successful union. This has been the main drive of the European Union’s Cohesion Policy, as reflected in article 158 of the treaty: In order to promote its overall harmonious development, the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion. 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. Intervention through the Structural and Cohesion funds has thus fundamentally pursued the goal of achieving greater ‘economic and social cohesion’, focusing on the reduction of the disparities in GDP between the core and the periphery. Despite frequent criticisms ( Boldrin and Canova, 2001 ; Bouayad-Agha et al., 2011 ; Dall’erba and Le Gallo, 2008 ; Dall’erba et al., 2009 ; Rodríguez-Pose and Fratesi, 2004 ), Cohesion policy has grown to become the largest entry in the European budget. The years before the crisis, when the policy was at its peak in terms of expenditure capacity (€299 per capita per year between 2000 and 2004) also coincided with the greatest reduction in regional disparities since the inception of the policy in 1975. The 2000–2008 boom contributed to significant regional convergence on per capita incomes across Europe, as indicated by the logarithmic curve of Figure 4 , which plots economic growth between 2000 and 2008 on the y -axis on levels of GDP per head in 2000. Regional convergence in the European Union (2000–2008), EU-28. Source : Authors’ elaborations of Eurostat data. During this period, the rate of per capita growth was highest in Lithuania, Latvia, Romania, Bulgaria, Slovakia and Estonia, which enjoyed rates in excess of 5% per annum. At the other end of the spectrum, Italy, Portugal, Denmark and France had growth rates below one percent. Within-country differences were also stark. In Central and Eastern Europe growth tended to concentrate in national capitals, with Bratislava, Bucharest, Budapest, Prague, Riga, Tallin and Warsaw performing well above national averages. Economic growth was, by contrast, considerably lower in northern and eastern Poland, eastern Slovakia, north-eastern Romania or in rural areas of Hungary. In the southern periphery, economic performance was low everywhere in Italy and Portugal (with the exception of the Azores and Madeira), but important contrasts could be found in Spain and Greece. In Spain the most dynamic regions before the crisis were located in the North and North West (Aragón, Asturias, Basque Country and Galicia), while Andalusia and the Canary Islands trailed well behind. Athens, Central Macedonia and the Ionian Islands were considerably more dynamic than the rest of Greece. Since the inception of the crisis in 2008, our perception of regional convergence/divergence in Europe remains highly conditioned by whether central and eastern European countries are considered. At the level of the EU-28, the crisis has brought a considerable slowdown in growth and greater unemployment, but not necessarily a halt to convergence. Positive rates of growth in Poland, Slovakia and Bulgaria—in that order, the three most dynamic countries in the EU since the inception of the crisis—have compensated for significant wealth destruction in Romania, Hungary or Latvia. Convergence has therefore become less evident than in the pre-crisis period, but still lagging-behind regions continue to catch up ( Figure 5 ). Regional convergence in the European Union (2008–2013), EU-28. Source : Authors’ elaborations of Eurostat data. The panorama changes when countries in central and eastern Europe are not in the picture. For the EU-15 alone, the post-crisis years have been marked by considerable regional divergence and, consequently, by a deepening of regional disparities ( Figure 6 ). The worst economic performance in terms of GDP decline has taken place along the Mediterranean rim. GVA per head between 2008 and 2012 declined by an average of 5.2% per annum in Greece, 3.2% in Cyprus, 2.4% in Slovenia, 1.8% in Italy and 1.5% in Spain (EU, 2014: 15). This is in contrast with a 2.7% increase in Poland or of 1.2 in Slovakia (EU, 2014: 15). Regional divergence in the European Union (2008–2013), EU-15. Source : Authors’ elaborations of Eurostat data. The growing contrast between the economic behaviour of regions in the eastern and southern fringes of the EU before and during the crisis has led the European Commission to distinguish between two types of lagging regions: the ‘low growth regions’, including mostly southern European regions that have not managed to converge to the EU average since 2000 and that have performed particularly badly in economic terms since the outbreak of the crisis. This includes the majority of the less developed regions in Greece, Italy, Spain and Portugal; and the ‘low income regions’ or regions with a GDP per head below 50% of the EU average. These regions are mostly located in central and eastern Europe and in Bulgaria, Hungary, Poland and Romania in particular ( EU, 2015 ). But the crisis has left its imprint well beyond GDP per head. The severity of the rise in unemployment has been particularly evident in Greece and in Spain. All regions in these two countries—with the exception of the Basque Country—saw their unemployment rate grow by more than 10% between 2008 and 2013. High levels of employment destruction have been also evident in Bulgaria, Croatia, Ireland, most of Italy, Portugal, Slovenia and the Baltic countries, with the exception of Estonia. Even the two countries with the best economic performance in recent years—Poland and Slovakia—have experienced significant rises in unemployment levels. These have been concentrated in South Eastern Poland and Eastern Slovakia. By contrast, unemployment rates have declined since the beginning of the crisis in Germany and, especially, in the regions of the former East Germany. Significant internal regional differences in employment performance are found in Austria, Hungary, Romania and the UK. Social exclusion and poverty rates have also risen almost everywhere: by more than 15% in Ireland, Greece and Spain, with lower but non-negligible increases in Belgium, Germany, Hungary, Luxembourg, the Netherlands and the UK. The great recession has also led to a widening of the interregional gap also in the health of regional and local finances, with some regional local administrations becoming heavily indebted, as a direct consequence of the decline in local revenues, but also of lower transfers from central governments as a result of the widespread implementation of austerity policies ( Agnello et al., 2016 ). The decline in revenue at a time when expenditure needs in basic services, such as health, education and social services, have been increasing has created economic, social and political tensions which are at the root of interregional strains and conflicts with the state, most notably in Belgium, Spain and the UK ( Rodríguez-Pose and Sandall, 2008 ), but also elsewhere in Europe. And there is also an urban dimension to the crisis. In many of the worst hit countries, urban poverty and social exclusion have risen dramatically. In the EU three of every five urban areas have undergone significant declines in GDP and employment rate, affecting poor neighbourhoods and suburban areas to a greater extent than city centres and central business districts ( Cassiers and Kesteloot, 2012 ). The crisis has brought to the fore the fact that regional and urban differences in the EU go well beyond Magnifico’s (1973) concern about differences in regional growth, productivity and inflationary propensities, which have been the factors that have informed European Cohesion Policy until recently. While contrasts in wealth and productivity remain important, the crisis has unearthed a considerable diversity in the capacity of regions and cities to adapt to shocks and respond to challenges. It has also added new facets to our thinking about how regional problems in Europe are being approached. Unemployment ( Marelli et al., 2012 ), social exclusion ( Crouch, 2015 ; Rhodes, 2014 ), resilience ( Bristow, 2010 ; Davies, 2011 ; Fingleton et al., 2012 ; Martin, 2012 ; Martin and Sunley, 2015 ) and the capacity of territories to withstand the effects of a prolonged downturn and of fiscal austerity have become prominent issues, constantly climbing up the policy agenda. In particular, the severity of the crisis in terms of job destruction and the rise in unemployment has not gone unnoticed by decision-makers. The president of the Commission, Jean-Claude Juncker, has put jobs and job creation at the top of his political guidelines ( Juncker, 2014 ). Job creation now precedes the traditional goal of greater economic growth and those of greater equity and fairness and democratic change as the main objective of the post-2014 European Commission ( Juncker, 2014 ). But the mere mention of fairness and the repeated emphasis on ‘social fairness’ as a key policy objective of the EU has also put the issue of the distribution of economic benefits and that of inequality firmly on the table. By contrast, the idea of resilience, while attracting considerable policy interest, is however proving much more elusive in terms of defining concrete and feasible policies. The Cambridge Journal of Regions, Economy, and Society —while displaying from the very beginning a considerable concern with the territorial effects of the crisis 1 —could not remain at the margins of examining the regional and urban consequences of the great recession. As time passes, longer time series and better data, as well as a clearer understanding of the impact of different types of policies aimed at first at soothing the effects of the crisis and, later, at restoring previous (or building new) urban and regional development patterns, give researchers a better perspective about what triggered the crisis, what solutions are needed, and which policies are working best in providing these solutions. This has been the aim of this special issue: to unearth the urban and regional consequences of the crisis, by combining European-wide comparative analyses with specific case studies, covering not just European but also cases elsewhere in the world. The comparative analyses come first. They examine the extent to which pre-crisis conditions have affected the diversity of reactions to the crisis in terms of resistance to regional shocks ( Luca et al., 2016 ) and employment trends ( Fratesi and Rodríguez-Pose, 2016 ). The policy effects of fiscal consolidation in Europe—taking into account both spending-cuts and tax rises—is the object of the article by Agnello et al. (2016) , while Capello and Caragliu (2016) provide after-crisis scenarios, based on both ‘place-based competitiveness’ and ‘social cohesion’ assumptions. Focusing on a smaller set of European countries, Tubadji et al. (2016) assess how cultural hysteresis and path dependence affect entrepreneurship and the capacity to generate jobs differently in the core of Europe and in its Mediterranean rim. The remaining articles focus on different aspects of specific case studies, covering countries that have either borne the full brunt of the crisis—such as Greece ( Petrakos and Psycharis, 2016 ), Spain ( Cuadrado-Roura and Maroto-Sánchez, 2016 ) or Croatia ( Fröhlich et al. 2016 )—with countries, which although not exempt from problems, seem to have fared better—such as the UK ( Bell and Eiser, 2016 ). The special issue is completed with two examples from outside the EU: Turkey ( Eraydin, 2016 ) and Canada ( Dubé and Polèse, 2016 ). Many of these articles were presented for the first time at a series of special sessions which took place at the European Regional Science Congress (ERSA) in August 2014 in St Petersburg. Some of the articles presented at those sessions were revised and evaluated before being submitted for consideration by the peer-reviewers designated by CJRES. Other articles have joined this special issue as a result of the journal’s open call. While the articles cover a relatively wide range of topics and countries, they all have a common denominator. They demonstrate how differences in resilience, resistance and/or adaptability to economic shocks, on the one hand, and the variation in policy solutions adopted, on the other, have determined how European regions and cities have so far reacted to the crisis in terms of economic performance and employment generation. They also dwell on how these conditions are bound to have long lasting effects that will determine the economic fortunes of different parts of Europe and other areas of the world for years to come.