Europe’s Economy: How Crisis Resilient is Europe Really?

Europe’s Economy: Lessons for policy-making in times of corona and beyond

The coronavirus crisis and its continuing effects on European economies has propelled the debate about crisis resistance and resilience firmly back onto the EU agenda. Disparities in the degree of resilience between EU regions already existed before the outbreak of COVID-19. Southern and Eastern Europe and rural regions, remote from metropolitan areas, already  performed below average in terms of diversity, skills, innovation, and quality of government.

The importance of economic resilience

The European Union, like much of the world, is suffering from the ongoing coronavirus crisis, with many member states shutting down their economies almost entirely for several weeks. Although most countries have relaxed restrictions and reopened retail outlets and services, uncertainties about the future course of the virus continue to dominate discussions.

As the level of vulnerability and counter-measures taken so far differ markedly between member states, greater economic and social divergence is more than likely. In this context, it is more important than ever that European countries and regions prove to be resilient. This will lead to a faster recovery and to a stronger capacity to handle future shocks.

Economic resilience can be defined as the ability of a region to recover successfully from shocks that either throw the economy off its growth path or have the potential to do so. Resilient economies can reduce vulnerabilities, resist shocks, and recover quickly – economic resilience is of particular importance in times of crisis.

Understanding the differences in European regional resilience pre-COVID-19

Classic macroeconomic aggregates (such as GDP per capita) fall short when attempting to comprehensively assess the long-term resilience of an economy. Structural features must also be considered.  As shown in the literature, high levels of diversity, skills, innovation, and good governance are all also preconditions for resilient regions.

Diversity

Diverse regions are less dependent on particular companies or sectors and are characterised by coverage of multiple market segments. More diverse economies tend to be more resilient as they are better able to adapt to changing circumstances after any shock.

Overall, sectoral diversity is generally high across Europe’s economy (Figure 1). However, some regions in Spain and Italy, as well as most Eastern European regions, show lower levels of diversity. In particular, big cities and capitals have a very different sectoral composition than other parts of Europe’s economy. This uneven distribution of sectors between and within European countries might hinder the resilience process.

Europe’s Economy: Skills

Countries and regions with a higher-skilled labor force have proven to be more resilient to shocks. More highly qualified workers tend to be employed in jobs that are more crisis-resistant and are less substitutable by new technologies. In the current COVID-19 crisis, job losses are more likely in lower-skilled professions that cannot be conducted from home.

In terms of skills, Europe’s Economy reveals a North/West versus South/East divide (Figure 2). Regions in Eastern Europe and Italy have very low numbers of tertiary-educated workers. Scandinavia and the UK have high numbers. Again, highly skilled workers tend to be found in capital cities and the regions surrounding them. These regions will likely be able to recover more quickly from the current crisis.

Italy,  as a country severely affected by the pandemic, has levels of high skilled workers well below the average in all of its regions. This shortcoming of skilled workers in Italy (and most East European regions) will slow down their process of recovery and hinder the process of becoming more resilient and crisis-resistant.

Innovation

Regions with higher innovation activity tend to respond to shocks better than others. Low spending on R&D corresponds to lower innovation expertise and resources to withstand and tackle the impacts of a crisis. Particularly in times of rapid technological change and digitalization, regions require the innovative capacity to keep up with the times.

Innovation is high in most German and Austrian regions, as well as in parts of France and Scandinavia (Figure 3). Some more rural regions benefit from their proximity to a metropolitan area, like the regions around London, Stuttgart, or Stockholm. Areas on the periphery of Europe are generally spending little on R&D. These regions may not have enough innovation power to quickly overcome the current crisis and sustainably strengthen their resilience to crises.

Good Governance

The quality of government, usually understood as low levels of corruption, impartial rule of law, government effectiveness, and accountability, is a key characteristic of resilient economies. There is a strong positive correlation between the quality of government and its proven capacity to be resilient during and after economic shocks. With respect to the COVID-19 crisis, a higher quality of government goes in line with more effective measures to stem the pandemic as the population trusts their leaders and will follow legal mandates and instructions to stop the spread.

Here there emerges a clear difference between Core/North Europe on the one hand and Eastern/Southern Europe on the other (Figure 4). While most regions in Germany and Scandinavia have a very high quality of government, regions in Romania, Greece, and Bulgaria have rates considerably below the EU mean. Italy, in particular, seems to have an unfavorable combination of being severely affected by the coronavirus and relatively low quality of government. This might pose a risk for recovery from the current crisis and future resilience.

Lessons for policy-making in times of corona and beyond

The “Next Generation EU” package with its “Recovery and Resilience Facility” that was negotiated at this month’s European Council meeting is a decisive step in helping member states overcome the current crisis and become more crisis-resistant in the future. In particular, direct payments – if effectively distributed – have the potential to boost Europe’s economic resilience as member states do not have to save for their repayment.

Short-term assistance is indispensable above all for countries most severely impacted by the coronavirus, particularly those with lower fiscal and structural resourcefulness such as Spain and Italy. Yet as disparities in structural features already existed before COVID-19, more long-term measures should be implemented.

Apart from providing immediate relief and recovery from the coronavirus crisis, the EU’s structural and cohesion funds should be scaled up and allocated more efficiently to structurally fragile regions in Eastern Europe.

These regions should be assisted in creating better educational opportunities for disadvantaged households as well as reallocation and retraining of employees. In addition, policies promoting firm-level innovation and advancing the digitalization process will help them become more crisis-resistant. Finally, policies should be promoted for shoring up enduring and high-quality governmental structures and institutions in South and Eastern European regions.

This post is based on a study by Bertelsmann Stiftung’s project, Repair and Prepare: Strengthening Europe. Get access to the full study.