Eurozone: There is a remedy for regional convergence

Regional unemployment statistics in the European Union as published today by Eurostat, the EU statistical service, show clearly that the wide differentiation of this crucial variable calls for an appropriate modulation of policies designed to counter different growth/recession records. The European Central Bank is currently supplying ample and almost zero cost liquidity to Eurozone’s core regions, but unfortunately this basic element of monetary policy doesn’t bless the areas where this liquidity is badly needed. As for EU’s proper regional development policies, tough reality proves that it has not worked effectively at least not effectively enough to support the Union’s back-warded regions to overcome their basic growth problem. Unemployment Eurostat, released this morning story telling data on EU’s regional unemployment rates ranging from 2.5% in Salzburg and Tirol in Austria to 38.5% in Ceuta and 34.6% in Andalucía in Spain and 29.9% for Dytiki Makedonia in Greece. However even perfectly planned economic policy instruments like regional growth funds, combined with the best designed monetary policy measures cannot work magic and zero the deep-rooted development differences between historically and geographically differing regions. Ceuta in the North African coast and Salzburg in the heart of Europe would always differ as far as economic development is concerned. Differences though still betray that the policies applied so far have gloriously failed. Let’s see why. Of course differences between the two regions mentioned above, Ceuta and Salzburg, are so crippling that cannot be used as a guide to evaluate the effectiveness of regional and monetary policies. There are cases however like the region of Sterea (central) Ellada in Greece, with unemployment of 27.8% today, which before this current crisis was the industrial and agricultural powerhouse of the country, with a flourishing private sector and single digit unemployment. Sterea Ellada pays now the dearest price in terms of private sector layoffs, a perfect example of economic and monetary policy failures. According to Eurostat, “Among the regions, 53 had an unemployment rate of less than 5.2% in 2012, half the average for the EU27. They included twenty-two regions in Germany, eight out of nine regions in Austria, seven regions in the Netherlands, five in the United Kingdom, four in Belgium, three in Romania, two in the Czech Republic, one in Italy and the Grand Duchy of Luxembourg. At the other extreme, 25 regions had a rate higher than 20.8%, double that of the EU27: eleven regions in Spain, ten regions in Greece and four French Overseas Departments”. Some years ago it was not like that. Greece had overall single digit unemployment rates. What policies Unfortunately after almost five years of austerity measures applied in this country there are no tangible prospects that Greece will re-emerge as the success story it was after the turn of the Millennium. Presumably, if the currently applied policies continue unchanged the country might need a decade or more or even never be able to return to single digit unemployment rates supported by strong growth. Despite the regional development projects amply financed by Brussels, Greece may be indefinitely caught in the austerity and recession trap. The Greek case tells the story for the entire Eurozone’s south, comprising Italy, Spain and Portugal. Economic growth in all those countries was based for decades on a strong backbone of medium, small and very small enterprises. Today this huge productive potential is undermined by falling competitiveness and on top of that it is almost completely cut off from mainstream financial markets. In view of that, the President of the European Central Bank, Mario Draghi, has made as his main policy target the unobstructed transmission of ECB’s policy of cheap money to all Eurozone countries, particularly in south regions. He said “The recent Bank Lending Survey (BLS) confirmed weak demand for loans in the euro area. While some signs of stabilisation are emerging, the Survey on the access to finance of (SMEs) in the euro area indicates continued tight credit conditions, particularly for SMEs in several euro area countries”. This fatal drawback of Eurozone’s south cannot be countered with the currently applied monetary policy. There is an obvious need that the ECB has to supply those governments with ample liquidity, through a buying programme of sovereign bonds, in order to effectively counter the country risk. Only in this way the SMEs of the south will be able to gain access to cheap finance on the same footing as the Austrian and German SMEs, of course on the base of appreciation of individual investment projects risks by commercial banks. Those banks will be placed in their turn under the control and the guidance of the ECB, in the context of the European Banking Union, with the central bank in this way guaranteeing their creditworthiness. This is what the European ‘relaxationists’ want now and the Berlin ‘austerity loving’ government elite opposes.