U.S. Markets

Europe's East-West wealth gap narrows but grows North-South: study

SOFIA (Reuters) - The European Union’s central and eastern members are catching up in terms of wealth with richer western Europe, but there is economic divergence between the north and south, a study prepared for EU finance ministers shows.

The Frankfurt skyline with its financial district is photographed on early evening in Frankfurt, Germany, March 25, 2018. REUTERS/Kai Pfaffenbach

The EU is keen for the 27 countries that will remain in it after Britain leaves next year to converge economically, believing that wide disparities make policy-making difficult for the bloc and could be the source of future crises.

Large differences also fuel support for euro-skeptic and populist parties that could threaten the future of the EU.

GDP in the 11 mostly central and eastern European countries that joined the bloc in 2004 has been growing faster at an average growth rate of 6 percent.

This has resulted in a cumulative increase in real income per capita in some cases of more than 200 percent between 1999 and 2016, the study said.

That contrasts with only about 2 percent on average for the richer west, which increased GDP per capita only 50 percent over that period, the study said.

The financial crisis started in 2010, however, has deepened the wealth divide in the euro zone between the richer and more stable north and the poorer south.

According to International Monetary Fund data, GDP per capita in Germany jumped 19 percent in 2016 from 2010 levels, 14 percent in the Netherlands and France and 13 percent in Belgium or Austria.

In southern countries, which had lower GDP per capita in 2010 to start with, it grew much more slowly, deepening the wealth gap. In Italy it rose only 6 percent, 10 percent in Portugal and fell 7 percent in Greece in the same period.

“This pattern, reflecting East-West convergence but North-South divergence within the euro area, can be observed for a number of indicators, such as real wages, investment and consumption,” said the analysis, done by the Centre for European Policy Studies (CEPS) think tank.

Neither the east-west convergence nor the north-south divergence is linked to euro membership, the study said, forecasting that the East-West convergence will continue in the coming years while some North-South convergence might re-start.

The paper said it could not predict if the East-West catch-up process would eventually lead to convergence in wealth.

“It is often argued further catching up would require a change in the growth model (for the central and eastern European countries),” the study said.

“Catch-up growth can rely on importing foreign capital and know-how via massive amounts of foreign direct investment, but after a certain level, more domestic innovation is required to maintain growth,” it said.

“Reorienting the growth model towards more domestic innovation may pose the key challenge for the New Member States,” it said.

To help EU economies converge, the European Commission has proposed that the next long-term EU budget should help finance that process through a “reform delivery tool” and a “convergence facility” as well as through a “stabilization function”, the precise sizes and role of which are yet to be negotiated.

Editing by Richard Balmforth