Why do countries have low GDP

Regions in the EU: Economic output still varies enormously

Elvira Stockmann / Carolin Dietmann

From Inner London-West via Stuttgart and Tübingen to Severozapaden in Northwest Bulgaria: The regional diversity of Europe is not only characterized by diverse cultural and geographical differences, but also, in particular, by very different economic developments and living standards. What is the economic situation in the European regions today? Where was economic growth highest last year? How have the regions developed over the past 20 years?

This article provides an up-to-date overview of the state of the macroeconomic level in the European regions and their developments over the past 20 years. The analysis is based on current data from the regional national accounts (VGR) within the EU, which are published by the Statistical Office of the European Union (Eurostat). The national accounts results serve as an essential basis for determining the contribution of the EU member states to the EU budget and as a basis for the allocation of cohesion policy expenditure. In Germany, the “National Accounts of the States” working group (AK VGRdL) calculates the national accounts regional results by federal state and at district level.

The 28 EU Member States are divided into 104 regions at NUTS 1 level, 281 regions at NUTS 2 level and 1,348 at NUTS 3 level.1 In Germany, the NUTS 1 regions are the federal states, the NUTS 2 regions correspond to the level of the administrative districts and the NUTS 3 to the districts and urban districts (see i-point »NUTS classification«). Figure 1 gives an overview of the regional distribution of gross domestic product (GDP) per inhabitant in 2017 within the European Union. The GDP is represented in purchasing power standards (PPS) and related to the EU-28 average of 30,000 PPS (see point i “Regional gross domestic product”). The NUTS 2 regions with the highest GDP per inhabitant in 2017 were therefore in Luxembourg, the United Kingdom, Ireland, Belgium, the Netherlands, Denmark, southern Germany and Austria. The weaker regions of Europe were on the southern, south-western and south-eastern periphery.

In 2017, regional GDP per inhabitant ranged from 31% of the EU-28 average (9,300 PPS) in the Bulgarian region of Severozapaden to the highest value with a GDP per inhabitant of 626% of the EU average or 188,000 PPS recorded by the British capital region Inner London-West. Thus, the GDP per inhabitant in Inner London-West was 20 times higher than in Severozapaden. Inner London-West was followed by the Grand Duchy of Luxembourg with 253% above the EU average (75,900 PPS), Southern in Ireland with 220% (66,200 PPS), Hamburg with 202% (60,600 PPS) and Brussels with 196% ( 58 700 KKS). In terms of overall economic output, the Île-de-France region with the capital Paris, with a GDP of over 709 billion euros, is by far the largest business location among the NUTS 2 regions in Europe, followed by Lombardy with 380 Billion euros and the administrative region of Upper Bavaria with around 262 billion euros.

Out of a total of 281 NUTS 2 regions in the 28 EU Member States, 47 had a PPS value that was 125% or more of the EU-28 average. This included 13 regions in Germany, six in the United Kingdom and five in Austria. Belgium and the Netherlands accounted for four regions each and Ireland, Italy and Finland two each. In Denmark, France, Luxembourg, Poland, Romania, Sweden, Slovakia, Hungary and the Czech Republic, of the NUTS-2 regions, only the capital region was above 125% of the average EU economic output per capita. A total of 196 NUTS 2 regions achieved with their GDP per capita measured in PPS at least 75% of the EU-28 average, including all 38 regions in Germany. Of the 23 NUTS 2 regions, which were below 50% of the EU-28 average, five each belonged to Bulgaria and Poland, four each to Greece and Hungary, three to Romania and two to France's overseas regions.

Figure 2 shows that in 2017 there were clear differences between the regions within the EU member states in terms of GDP per capita. In a total of eleven of the 28 EU member states with more than one region at NUTS 2 level, the maximum value of GDP per inhabitant was more than twice as high as the lowest value. The greatest regional divergence was found in the United Kingdom with a factor of 9.6, followed by Romania and Slovakia with a factor of 3.7 and 3.3, respectively, between the two extreme values. Croatia had the lowest range with a factor of 1.1. Its two NUTS 2 regions were well below the EU average. But Finland, Portugal and Slovenia were also among the countries with the smallest difference between the »minimum and maximum region«, each with a comparatively low factor of 1.5. With a factor of 2.4, Germany placed itself in the middle of the EU member states examined.

As a rule, economic activity in the EU member states with several NUTS 2 regions is concentrated in their capital regions, with the exception of Germany (Berlin) and Italy (Lazio). In the case of 20 member states, the capital region was also the region with the highest GDP per inhabitant. Outstanding values ​​were particularly evident in the Inner London-West, Brussels, Southern regions in Ireland, Prague and Paris. In the capital regions of the member states Bulgaria, Greece, Croatia, Portugal and Slovenia as well as in Estonia, Latvia, Malta and Cyprus, on the other hand, GDP per inhabitant was the maximum national value below the EU average. If one compares the national GDP per capita, eleven member states were above the EU-28 value in 2017; these included Belgium, Denmark, Germany, Finland, France, Ireland, Luxembourg, the Netherlands, Austria, Sweden and the United Kingdom.

These findings form an essential basis for political and economic decisions at federal and state level, but also in a European context. In the context of its cohesion policy, for example, the European Commission is concentrating on reducing the above-mentioned regional disparities within the EU when allocating funding.

The European Union invests through its European Structural and Investment Funds (ESI Funds) in the sustainable economic development of all EU regions and thus in their infrastructure as well as in their social and ecological sustainability. With the ESI funds, fund-specific tasks including economic, social and territorial cohesion are to be promoted and implemented. The content is based on the “Europe 2020” strategy, which primarily promotes intelligent, sustainable and integrative growth. The instruments of the ESI Funds include the European Regional Development Fund (ERDF), the Cohesion Fund (CF), the European Social Fund (ESF), the European Agricultural Fund for Rural Development (EAFRD) and the European Maritime and Fisheries Fund (EMFF).

The European Structural and Investment Funds complement as co-financing2 national and regional programs. The EU provides most of the funds from the three main funds ERDF, CF and ESF. As part of the cohesion policy, EU regions that are lagging behind are to be supported in order to reduce regional disparities within the EU. The ERDF focuses on measures that support research and innovation, the digital agenda and a low-carbon economy. The promotion of small and medium-sized enterprises (SMEs) is also sought. Programs under the ESF aim to promote employment and labor mobility, fight poverty, improve institutional capacity and make public administration more efficient.3 Since the budget of the grant funds is geared towards compensating for regional differences in development, the EU makes a significant distinction between three NUTS 2 region categories in terms of its funding conditions and funding rates within the framework of the ERDF and ESF.

These are:

  • Less developed regions with a GDP per capita below 75% of the EU-28 average,
  • Transitional regions (GDP per capita between 75% and 90% of the EU-28 average) and
  • more developed regions with a GDP per capita higher than 90% of the EU-28 average.

The basis for the classification for the funding period 2014 to 2020 is the average of the regional GDP per inhabitant (in PPS) for the years 2007 to 2009.4

In principle, every European region can receive funding from the ERDF and the ESF. But only a few regions can draw from the Cohesion Fund. The KF primarily pursues the goal of balancing out economic and social inequality and thus sustainably promoting the development structure within the European regions. It was set up specifically for EU countries with a gross national income per inhabitant of less than 90% of the EU average.56

In order to adequately address the most pressing challenges and meet the diverse development needs in all EU regions, EUR 351.8 billion - almost a third (32.5%) of the current multiannual financial framework of the EU (EUR 1,082 billion) - provided for regional and cohesion policy from 2014 to 2020. Of this, just over half of the budget - around 179.4 billion euros - was allocated to the less developed regions. The transition regions were allocated around 37 billion euros and the more developed regions 55.8 billion euros. The regions in Bulgaria, Estonia, Greece, Croatia, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia, Slovenia, the Czech Republic and Hungary are being transformed from the Cohesion Fund, which contains a good 63.3 billion euros in funding and Cyprus supported7 (Chart 3).

As things stand today, the financial volume of the future financial framework from 2021 to 2027 is likely to be around EUR 1,279.4 billion. The investment focus should be on a smarter and greener Europe.8 This is to be achieved by investing in innovation, digitization, economic change, in supporting small and medium-sized enterprises, in promoting renewable energies and in the fight against climate change. Additional criteria such as youth unemployment, climate change and the admission and integration of migrants are taken into account in the funding conditions in order to better reflect the concrete reality on site.

Cohesion policy will continue to play an important role in the coming funding period with a planned budget of just under EUR 442.4 billion. The procedure for the allocation of funds is still largely based on the regional indicator »gross domestic product per inhabitant«. The regions continue to be divided into three categories: less developed, changing and more developed regions, but with new thresholds. The regions that have a »GDP per capita« in PPS of less than 75% of the EU-28 average will continue to be declared as less developed regions in the future. The transition regions continue to include those regions with a »GDP per capita« between 75% and 90% of the EU-28 average. However, from 2021 onwards, regions with a GDP per inhabitant higher than 100% of the EU average will be designated as more developed regions. According to the current status (2017 reporting year), 29 of the 38 German NUTS 2 regions will be among the more developed and six will be among the transition regions.

After the EU has long tried to equalize living conditions within the community of states by providing financial support to structurally weak regions, the question arises as to how the funding policy of the past 20 years has had an impact. If you compare the GDP per inhabitant in PPS of the European NUTS 2 regions in 2000 and 2017, you can see that the economic level in all regions has increased significantly in some cases. None of the 282 regions had a lower GDP per inhabitant in 2017 than in 2000. On average in the EU-28, GDP per inhabitant in PPS has increased by around 50% since 2000. Particularly dynamic growth processes are evident in the Eastern European regions of Romania, Bulgaria, Estonia and Latvia. In some of these regions, GDP per inhabitant has more than tripled - albeit starting from a comparatively very low level. The growth leader was the Bucharest region in Romania, whose GDP per inhabitant has increased by 282% since 2000. Of the ten fastest growing NUTS 2 regions in Europe, eight are in Romania.

However, such a dynamic growth could not be recorded in all regions of Europe. In the already highly developed regions of Western Europe in particular, significantly lower level increases have been achieved since 2000. Particularly striking examples are the regions of Greece and Italy, which are currently only just above their 2000 level. The fact that the more developed regions generally have lower growth rates than the less developed regions is also due to the so-called »statistical base effect«: With a significantly lower starting level of GDP per inhabitant in the Eastern European countries, even lower absolute growth rates are sufficient To achieve growth rates. It is therefore not enough to just take a look at the percentage economic growth, but also to consider the respective absolute economic strength of the regions.

Figure 4 shows how much GDP per inhabitant (in PPS) changed between 2000 and 2017 compared to the EU-28 average (expressed as percentage points of the EU-28 average). Economically more dynamic regions with an increase in GDP per inhabitant of more than 5 percentage points above the EU-28 average are shown in green in the diagram. Regions with weak dynamism or with GDP growth per capita of 5 percentage points or more below the EU average appear in red tones.

The range therefore extends from + 93 percentage points for the emerging region of Southern (Ireland) to -35 percentage points for the weakest region of Umbria in Italy. Figure 4 shows clear catch-up processes in the Eastern European member states Romania, Slovakia and the Czech Republic as well as above-average economic dynamism in capital city regions such as Inner London-West, Bucharest-Ilfov, Bratislava and Prague. A closer look at the particularly fast-growing regions shows that of the 44 regions that grew more than 10 percentage points above the EU-28 average, almost three quarters are in the eastern fringes of the EU.

At the lower end of the growth scale there is also a clear regional concentration. In particular, the regions in Italy and Greece, which are still affected by the effects of the financial and euro crisis, developed significantly weaker than the EU-28 average, as did large parts of Great Britain. Of the total of 76 regions that lost more than 10 percentage points compared to the EU-28 average in 2017 compared to 2000, 13 were in Greece, 21 in Italy and 24 in Great Britain (around three quarters of these low-growth regions).

Despite the clear catching-up processes in some regions, a comparison of the NUTS 2 region categories to determine the EU funding conditions for the years 2000 and 2017 shows that only eight regions pass the 75% threshold from a "less developed region" to a "transition region" have exceeded. These include four Czech regions as well as Estonia and one Romanian, Bulgarian and Spanish region each. Figure 5 gives an overview of the regions whose GDP per inhabitant (in PPS) exceeded or fell below the 75% threshold of the EU-28 average in 2017 compared to 2000.

The economic power is not only very heterogeneous between the European countries, there are also big differences within the individual EU countries in terms of GDP per capita. This is particularly noticeable in the UK; this is where the gap between the richest and poorest regions in the EU is greatest. In 2017, the Inner London-West financial district, at PPS 188,000, was almost ten times more GDP per capita (in PPS) than the structurally weak region of Southern Scotland (PPS 19,400). Compared to the year 2000, this gap has even widened; At that time, London's GDP per capita was only eight times higher than that of the Scottish region. By contrast, the economic gap is comparatively small in Finland. Here the GDP per inhabitant (in PPS) of the economically weakest region Poh-jois-ja Itä-Suomi in 2017 was at least half of the capital region Helsinki-Uusimaa (42,400 PPS per inhabitant). Figure 6 gives an overview of the regional economic disparities within a country in 2017.

Germany, too, is characterized by a clear regional gap in economic power. In 2017, GDP per capita at current prices compared to the German average (39,650 euros per inhabitant) ranged from 68% in Mecklenburg-Western Pomerania to 161% in Hamburg.As a service metropolis, Hamburg is by far the front runner among the German NUTS 2 regions and in 2017 generated a GDP per capita of around 63,930 euros, which is 24,280 euros more than the national average. However, this is also likely to be associated with the high number of commuters. After the administrative region of Upper Bavaria (57,637 euros), the administrative region of Stuttgart took third place with a GDP per inhabitant of 50,931 euros and around 129% of the average value in a domestic German comparison.

In a total of 13 of the 38 NUTS 2 regions in Germany, a higher economic output per capita was achieved in 2017 than the national average. Including three of the four Baden-Württemberg regions: Stuttgart (28% above average), Karlsruhe (+ 9%) and Tübingen (+ 8%). Together with the four Bavarian administrative districts of Upper Bavaria (+ 45%), Middle Franconia (+ 11%), Upper Palatinate (+ 7%) and Lower Franconia (+ 2%), the southern German regions, along with the city states of Hamburg and Bremen, are among the economically strongest areas Germany.

1 NUTS = Nomenclature des unités territoriales statistiques.

2 With its ESI Funds, the EU supports the financing of national and regional programs. However, these are never 100% paid for with funds from the fund, but the applicant country must make a national contribution to the programs.

3 Basically, the five objectives of cohesion policy are: a smarter Europe, a greener, carbon-free Europe, a more connected Europe, a more social Europe and a Europe closer to its citizens.

4 Eurostat Regional Yearbook. Edition 2018.

5 In contrast to the ERDF and ESF, not only a different indicator is used for the funding conditions of the CF, but also a different time window. In the context of the CF, the average gross national income per inhabitant (GNI) in the period from 2008 to 2010 was used. In 2016, the time window for the average of the BNI was updated to 2014 to 2016.

6 Eurostat Regional Yearbook. Edition 2018.

7 Further information at https://ec.europa.eu/regional_policy/de/funding/ (accessed: July 10, 2019).

8 European Commission (2018): A Modern Budget for a Union that Protects, Empowers and Defends. Multiannual financial framework 2021 to 2027. Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions. Brussels.

The NUTS classification (system of territorial units for statistics) is a hierarchical system for subdividing the EU economic area and enables cross-border statistical comparison of EU regions. The division is based closely on the administrative structure of the individual countries. As a rule, a NUTS level corresponds to an administrative level or a spatial aggregation of administrative units. As a rule, the population of a NUTS 1 region is between 3 and 7 million inhabitants. NUTS 2 regions usually have between 800,000 and 3 million inhabitants and NUTS 3 regions generally have between 150,000 and 800,000 inhabitants. The NUTS 2016 has been in effect since January 1, 2018. The NUTS breakdown is updated regularly every 3 years, at the request of the member states, according to regional circumstances.1

1 Based on Article 5 of the NUTS Regulation, the European Commission intends to propose necessary adjustments to the NUTS classification in 2019, with an expected validity from 01.01.2021 to 31.12.2023.

The economic performance of a region is usually shown in terms of gross domestic product (GDP). It reflects the total economic value of the goods and services produced in an economy or a region within a calendar year, minus the goods used as intermediate consumption. Comparisons between regions can be made using this key figure. However, since regions of different sizes may have different GDPs, a comparable comparison is only possible if the regional GDP is put in relation to the population of the respective region. The GDP measures the economic performance regardless of whether the performance was provided by the resident working population or by commuters. Especially in economic centers such as the financial metropolis of London, but also Luxembourg or Hamburg, it should be noted that the economic power achieved there is strongly distorted by commuter movements. A large part of the economic output is provided by people who work in the economic centers and not by the residents who live there. Thus, a relatively high regional GDP per inhabitant is achieved. In contrast, the surrounding regions have a relatively low GDP per inhabitant. The income available there, however, is quite high due to the commuters who live here. As a result, GDP per inhabitant is not a measure of the monetary wealth of households in a region.

The GDP per capita is calculated in the currency of the respective region. In order to be able to compare the GDP between the regions, differences in price levels and purchasing power as well as exchange rates between the EU member states must be balanced. This is done by converting regional GDP using conversion factors, so-called purchasing power parities (PPP), into an artificial common currency, also known as purchasing power standards (PPP).