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How the megacities of Europe impact a continent’s wealth

Last May the Centre for European Reform, a Brussels-based thinktank, published a paper entitled The Big European Sort? The diverging fortunes of Europe’s regions. The “sort” refers to a sifting process that is steadily transforming the demography of EU member states, and driving the polarisation that increasingly defines politics in Europe and beyond
  • Much ink has been spilled over the economic causes of the EU’s political problems. Many point towards high levels of income inequality, and the financial and euro crises. Fewer have considered how structural economic changes have led to regional divergence – with profitable companies and highly-skilled people clustering together in successful cities, leaving less successful areas behind.
  • This interactive map illustrates Europe’s economic fault-lines. It shows regional productivity, measured by economic output per worker: the deeper the blue, the higher the region’s productivity as a percentage of the EU average, while the deeper the red, the lower. It shows that many regions in richer countries are far less productive than the EU average, and some places in poorer countries are more productive than that average. By clicking on a region, you can see more information about how it compares to the rest of Europe. Many UK regions have similar productivity to countries in Southern Europe. These countries were badly hit by the Great Recession.
  • Through a modelling exercise, we have also estimated how productive a region ‘should’ be, given the age of its population, how many of its residents are graduates, how close geographically the region is to the economic core of the EU or the region’s country, and how densely settled the region is. That is displayed on the second map. According to our modelling, the worst performing European region is Berlin: it is a favoured destination for young graduates, but has not yet translated that into the higher levels of productivity seen in most capitals in Europe. Many post-industrial towns and cities are not much better: many have not found a niche in an economy that is increasingly dominated by the services sector.Open the map in a new window
  • Over the last four decades, Europe has seen diverging fortunes among its rural regions, towns and cities. But the much-discussed ‘rural-urban divide’ is too simple, and does not fit the data. Nor has economic integration in the EU led to greater divergence across regions, on average. Growth in industrial output has been stronger in the countryside and towns in Western Europe, and spread evenly across regions in Central and Eastern Europe. But high-value services have become more concentrated in successful cities in the West, especially since the financial crisis.
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  • In the 1980s and 1990s, industrial heartlands such as the Ruhr Area in Germany suffered from relative – and in some cases, absolute – decline in industrial output. The largest cities and regions near them – often capitals such as Paris or London – were able to replace declining industrial production with high-value services, especially tradable services such as finance, tech, culture and advertising, and in some cases, such as Munich, also with high-tech manufacturing.
  • The increasing concentration of services can also be seen in corporate profit data. Bloomberg Economics estimates show that the concentration of profits among the top firms has not been driven by size or market power, but rather by the sector in which the firms operate. Tech, healthcare and communications are the sectors in Europe with the strongest divergence in profits between the top and the median firm.
  • The most important question is: what makes a successful region? With a new regression analysis, we show that high productivity levels in regions are associated with three factors: they are part of – or geographically close to – successful cities; a larger proportion of their workforce are graduates; and their populations are younger. The association of a high share of graduates with productivity levels is also rising over time. This will, in turn, encourage more young graduates to move to places that are already successful.
  • This creates a dilemma for Europe’s policy-makers. Should they attempt to invest in areas in relative decline, to try to stem the outflow of highly-skilled people and address the frustration of people ‘left behind’? Or should they invest more in skills, housing and transport to make it easier for people to move to successful cities? While the latter might lead to the largest productivity gains, it risks hardening Europe’s political fault-lines.
  • This paper is the first in a major new CER project, ‘Growing together: the Angelopoulos project on the future of the European economy’. In future papers, we will consider how technological changes and globalisation might affect growth and inequality across the EU’s member-states and regions, and whether these changes will tend to aggravate or soothe political tensions in Europe.
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