The Geography of the Crisis in Western Europe : Regional Impacts and Regional Responses

1. Geography of the Financial Crisis and Policy ResponseInternational Seminar, Warsaw, 22-24 September 2009 The Geography of the Crisis in Western Europe: Regional Impacts and Regional Responses Professor John Bachtler European Policies Research Centre University of Strathclyde, Glasgow, Scotland john.bachtler@strath.ac.uk

2. The Geography of the Crisis in Western Europe: Regional Impacts and Regional Policy Responses • Development of the crisis: causes and trends • Government responses • Regional impacts • Regional responses

3. Development of the crisis in Western Europe Origins of the recession in the financial crisis...... • explosion of credit during the 2000s, especially through use of complex and innovative instruments – assumption among banks and regulators that dispersion of risk provided stability • collapse of the housing market in the US - high rates of default on subprime mortgages • realisation among financial institutions of their over-exposure, leading to • rapid loss of confidence • severe contraction in liquidity as lenders became risk-averse • asset values marked down sharply leading to (near) insolvency of financial institutions • impact on wider economy through • drying up of credit • deterioration in confidence • fall in asset prices • decline in consumption and investment • fall in exports and contraction in output

4. Development of the crisis in Western Europe Collapse and rescue of financial institutions through merger, acquisition, bailouts, guarantees • United Kingdom: Northern Rock (nationalised); HBOS (acquired by Lloyds TSB); RBS and Lloyds TSB (capital injections), takeover of several building societies • Ireland: Anglo-Irish Bank (nationalised); Bank of Ireland, AIB (capital injections) • Germany: IKB (bailed out by the KfW), Sachsen LB (acquired by LLBW), Hypo Real Estate (public ownership), Commerzbank (capital injection) • Benelux: Fortis Bank (acquired by BNP Paribas, ABN Amro, ING (capital injections) • France: capital injections to six largest banks • Portugal: Banco Português de Negócios (nationalised) • Iceland: Glitnir, Landsbanki, Kaupthing (placed into receivership) • Switzerland: UBS (capital injection)

5. Development of the crisis in Western Europe Public intervention in the banking sector (% of GDP) Source: DG Competition

6. Development of the crisis in Western Europe: GDP Source: Eurostat; DG ECON, Sept 2009, Interim forecasts

7. Development of the crisis in Western Europe:unemployment rates Source: Eurostat. 2009 data are April for Greece and Italy and June for the United Kingdom.

8. Government responses to the crisis:stimulus measures

9. Government responses to the crisis:stimulus measures Source: DG Econ, Public Finances in EMU

10. Government responses to the crisis:Tax changes • Widespread use of tax reductions in…. • income tax rates, especially for lower or middle-income earners (AT, DE, DK, ES, IE, SE, UK) • value-added tax (VAT) reductions (BE, ES, PT, UK) • businesses taxes, accelerated depreciation (DK, IT, NL, UK) • specific taxes/allowances – commuter allowance (DE), stamp duty (IE), child allowance (AT), housing assets (PT, SE), university fees (NL), social contributions (SE), pensions (SE) • …but also targeted tax increases and restrictions on allowances • higher rate tax payers (IE) • capital gains and dividend taxes (FR, GR, IE) • tobacco, alcohol and other excise duties (FI, GR, NL, IE, UK) • sectoral levies – pharmaceutical companies (FR), energy, banking and insurance (IT) • intensification of fight against tax avoidance/evasion (IT)

11. Government responses to the crisis:support for households & businesses • Social welfare support for low-income earners, pensioners, unemployed (BE, IE, GR) • Labour market support e.g. part-time employment, short-time work (AT, DE, IT, NL) • Business aid and other support • strategic sectors (ES) • automobile industry (DE, FR, GR, NL, UK) • SME support measures (PT) • tourism (GR) • export aid (GR, PT) • environmental projects (DE, DK) • access to finance (FI, UK) • accelerated government payments (BE, FR, NL)

12. Government responses to the crisis:public investment and employment • Public service investment • education and research investment (NL, SE) • healthcare investment (DE) • Infrastructure investment (AT, DE, DK, DI, NL, PT, SE) • energy and telecoms (PT) • municipal projects (DK, ES, NL) • school renewal (AT,PT) • house building/renewal (DK, FI) • Public sector spending/employment • re-prioritisation of public investment (IE, IT) • wage freeze, pension levy on public sector wages, cuts in higher-level salaries (GR, IE) • reduction in public sector employment (IE) • rationalisation of public services (FI)

13. Government responses to the crisis:popular perceptions of crisis management

14. Government responses to the crisis: popular perceptions of crisis management

15. Regional effects of the crisis • Immediate impact in regions with export-oriented sectors, esp. • automobiles (AT, DE, ES, FR, SE, NL, UK) • logistics (NL) • computers (IE) • paper and pulp (FI) • Mix of dynamic regions and traditional industrial areas, e.g. • AT: Steiermark, Oberösterreich, Kärnten • DE: Baden-Württemberg, Bayern, Rheinland-Pfalz • FR: Nord pas de Calais, Ile France, Franche Comte • IT: Centre-North • NL: Zeeland, Noord-Brabant, Limburg • SE: western Sweden (Värmland, Västra Götland), south/mid-east (Blekinge, Södermanland) • UK: West Midlands • …with effects spreading to SME suppliers nationwide

16. Regional effects of the crisis Regional impacts also in: • construction, particularly in urban areas (FI, ES, IE, UK) • IE: Border, Midland and West region • UK: London and South East England • financial sector, concentration of job losses in areas of bank failure • DE: Sachsen, Bayern, Hamburg, Schleswig-Holstein • UK: London, Edinburgh, provincial centres • financial impacts from bank involvement in local authority financing • DE: US bank withdrawal from leasing agreements with local authorities (for transport, health projects) • UK: local authority losses from Icelandic bank collapse; reliance on PPP investment

17. Regional effects of the crisis Regional impacts also in: • externally oriented service sectors, through • downturn in international trade (NL – Amsterdam, Rotterdam) • changes in tourism patterns – some downturns (e.g. GR, ES) but also increases due to ‘staycations’ or exchange rate depreciations (e.g. SE) • public sector employment, where • in the short term, public employment has cushioned effects of the crisis in some regions…. • ….but in the medium/long terms, cuts in public expenditure may have significant impacts on local authority budgets and service provision (e.g. southern Italy, eastern Germany, northern England & Scotland, northern Sweden, northern Finland)

18. Regional effects of the crisisregional unemployment: 2008 and 2009 (%) Source: EPRC research – national employment data sources

19. Regional responses • Much of the governmental response has been national (and international) without geographical differentiation: • changes to regulation of the financial sector • changes to personal or business tax rates and rules • measures to ease the supply of credit • However, several aspects of the policy response have a geographical dimension: • regional incidence of national measures • national measures channelled through regions • regional policy responses • region-specific measures

20. Regional incidence of national measures • Some national measures designed with political awareness of regional needs…. • FR: desire to include all regions in public investment programme • specific regional projects identified • regional breakdown of funding provided • or ‘sectoral’ measures reflect pressures from certain regions • SE: support for automotive sector directed to western regions • NL: support for employment, research and knowledge benefits south-east region; also car scrappage scheme • UK: support for automobile industry targeted at West Midlands and northern England.

21. National measures channelled through regions Additional funding provided for investment by local/regional authorities, e.g. • ES: central government fund for local public investment • NL: 12% of funding for stimulus measures allocated to municipalities and provinces • DK: national measures include municipal investment support (1% of GDP) • FI: support for regions and local authorities with problems (factory closures) • DE: €10bn investment grants to local authorities • SE: additional funding (€1.2bn) for local authorities and county councils over 2010-12 period

22. Regional policy responses • Role of regional policy has generally been marginal • Additional regional policy funding (DE, SE, DK) • DE: extra funding for regional policy support in structurally weaker regions (€0.2 bn); higher regional aid ceilings; €3bn investment grants for structurally weaker local authorities • SE: small increase in funding for regional transport aid • DK: additional funding for regional training and employment support anticipated • Reorientation of regional policy and regional strategies (NL, UK) • NL: reorientation of regional ‘Peaks in the Delta’ programmes • UK: re-prioritisation of RDA budgets; widening of regional aid eligibility criteria beyond structurally weak areas • Funding for regional policy diverted to national measures (IT, UK) • IT: €18bn (30%) cut from Fund for Underutilised Areas • UK (Eng): 10%+ reduction in regional development agency budgets

23. Region-specific responses Distinctive aspect of response is greater role of the regions – reflects devolution of economic development • Devolved regions have implemented major rescue packages, e.g. • BE: Flanders • DE: Bayern, Hamburg, Schleswig-Holstein • NL: Gelderland • UK: Scotland, Wales • Types of measures • easing the flow of credit • support for construction • investment in infrastructure • encouraging energy efficiency/renewable energy • training and employment

24. Region-specific responses More generally, regions have sought to play a role • Regional coordination of responses to the crisis: • summits/councils to discuss options and coordinate measures • UK (Eng): monthly meetings of regional ministers meeting with regional fora; Regional Economic Council created • DK: regional growth fora – inclusion of labour market actors • NL: regional mobility centres – temporary PPP to facilitate job movement • SE: appointment of regional coordinators in closure areas • Use of Cohesion policy resources (adjustments to programmes – timing, types of projects) • front-loading of spending • re-focusing of priorities – SME/job creation/investment • changes in co-financing • extra commitments under 2000-06 programmes (extended closure)

25. Concluding questions To what extent will the economic crisis lead to restructuring and changes to the ‘economic model’ of individual countries? How will the regional map of disadvantage in Europe change? What are the implications for regional policies? 25

26. Thank you for your attention!