SEC(2007) 694

VOLUME 1

COMMISSION STAFF WORKING DOCUMENT

Accompanying the FOURTH REPORT ON ECONOMIC AND SOCIAL COHESION {COM(2007) 273 final}

CONTENT

Chapter I Economic, social and territorial situation and trends in MS and regions of the EU27

Chapter II The impact of Cohesion Policy

Chapter III National Policies and Cohesion

Chapter IV Community Policies and Cohesion

Maps

Statistical Annex

CHAPTER I

Economic, social and territorial situation and trends in MS and regions of the EU27

1. TABLE OF CONTENTS

1. ECONOMIC, SOCIAL AND TERRITORIAL COHESION 3

1.1. GDP trends and convergence at national and regional level 3

1.2. Productivity and employment growth 13

1.3. Employment rates 18

1.4. Unemployment rates 22

1.5. The risk of poverty 25

1.6. Structural change and economic development 28

1.7. The regional impact of global developments 33

1.8. Demography: Europe's changing population 37

1.9. Territorial trends at more local level 44

2. FACTORS DETERMINING REGIONAL COMPETITIVENESS, GROWTH AND EMPLOYMENT 50

2.1. Making Europe and its regions more attractive places to invest and work 51

2.1.1. Access to services of general economic interest 51

2.1.2. Environmental protection and growth 60

2.2. Improving knowledge and innovation for growth 63

2.2.1. FDI and regional development 63

2.2.2. R&D and innovation 64

2.3. More and better jobs 68

Education levels critical for economic development 68

2.4. Lisbon Agenda for the regions 73

Economic, social and territorial cohesion

Disparities in GDP per head between regions in the EU have narrowed markedly over the past decade as growth in the least prosperous regions has outstripped that elsewhere. This has meant at the same time a lessening of the division in terms of economic potential between the core and the periphery and a corresponding reduction in territorial imbalance. However, although convergence of levels of GDP per head across regions has been accompanied by a narrowing of disparities in rates of employment and unemployment, these remain wide between both different parts of the Union and different areas within regions so posing a threat in some places to social cohesion.

The concern here is to document these developments and examine economic and demographic developments across the EU over the recent past at national and regional level and assesses their implications for cohesion, not only economic and social but also territorial, in the sense of the balance between and within regions and between different territories. Its primary focus is on the extent to which regional disparities in terms of GDP per head, employment and demographic and territorial trends have changed since the mid-1990s.

GDP trends and convergence at national and regional level

Since the mid-1990s, the European Union (EU-27) has gone through, first, an economic upswing, with growth of real GDP per head[1] reaching almost 4% in 2000, and, secondly, a slowdown with growth of less than 1% in both 2002 and 2003. In 2004 and 2005, there was a modest recovery with growth increasing to 1.9% and 1.3% respectively (Fig. 1.1).

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In the 12 new Member States, the 10 which entered the EU in 2004 and the two which did so at the beginning of 2007, the story is different. These 12 countries also experienced high GDP per head growth in 2000 of 6%. The subsequent slowdown, however, was both much less severe and less widespread, mainly affecting Poland (where growth fell from over 5% a year to only just over 1% in 2001 and 2002). Growth, therefore, averaged 3.1% in 2001 and rose to 3.4% in 2002. As Poland recovered, growth reached 6% in 2003 and 2004 and remained high with 5% in 2005.

BOX - The 2007 EU enlargement

Romania and Bulgaria joined the European Union on 1 January 2007. This enlargement added 8.6% to the Union’s landmass and 6.3% to its population – a similar addition to when Austria, Finland and Sweden joined in the mid-1990s - but only 1% to its GDP measured in purchasing power standard terms, less than any previous enlargement. GDP per head is, therefore, only 35% of the EU average in Bulgaria and 38% in Romania. Accordingly, the accession of the two countries will lower the EU average level of GDP per head by just over 4%.

Although GDP growth in both countries has been well above the EU average since 2001 (averaging 5% and 6%, respectively), it would still take another 20 years or so at these rates for their GDP per head to reach 75% of the EU average.

With this enlargement, the Eastern land borders of the EU have grown by 1 300 km. The EU now reaches the Black Sea and completely encircles the Western Balkan. The EU border with the Ukraine is now almost twice as long. The EU now shares a 500 km border with Moldova.

Between 1995 and 2005, growth rates varied markedly between the new Member States, with some countries growing particularly fast. The three Baltic States have doubled their GDP per head in real terms in ten years, with growth averaging 7-8% a year. In contrast, Bulgaria and Romania saw their economies contract in the second half of the 1990s, but since 2000, they have both grown by an average 6% a year (see Box on the 2007 enlargement).

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Countries with a very low GDP per head are catching up faster …

In the 10 years from 1995 to 2005, GDP per head growth in all the new Member States, with the exception of Cyprus, exceeded the average rate in the EU27 (Fig. 1.2). Since 2000, growth has been highest in the countries with the lowest level of GDP per head in terms of purchasing power standards (PPS). In the eight new Member States with the lowest levels of GDP per head (grouped on the right in Fig. 1.3), growth between 2000 and 2005 was 5 percentage points above the EU27 average of 1.4%. In Poland, however, growth was not as high, averaging only 3% a year as compared to rates of between 5% and 9% in the seven other countries.

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In the four new Member States with the highest levels of GDP per head - Cyprus, Slovenia Czech Republic and Malta – growth was less strong but still, on average, between 0.6 and 1.8 percentage points above the EU27 average in Slovenia, Czech Republic and Malta, while in Cyprus growth was just below the EU average..

BOX - GDP performance: comparison with key competitors

GDP per head in PPS terms in the US in 2004 was 60% higher than the EU27 average, and 43% above the EU15 average. Only two Member States, Ireland and Luxemburg, had levels above that of the US. In Japan, GDP per head in the same year exceeded the EU27 average by 19%, though in this case, six Member States had a level above this and in five it was only slightly below. Between 1995 and 2005, GDP per head in the EU grew at virtually the same level as in the US (2% as against 2.1%) and twice as fast as in Japan.

Regional disparities in GDP per head are far more extreme in the EU27 than in the US or Japan, especially after the two recent enlargements. In the EU, the GDP per head in the region where this is highest is 8 times greater than in the region where it is lowest. In the US, the difference is only 2.5 times and in Japan just two times. All US states have a GDP per head that is above the EU average. In Japan, 40 of the 47 regions do. Clearly, the challenge of reducing regional disparities and ensuring economic and social cohesion across the EU is far greater than in the US or Japan.

The variation in rates of GDP per head growth across regions in the EU is also much greater than in the US. Over the period 1997-2004, growth at regional level in the EU varied from below zero to over 8.6%, while in the US it varied from zero to 3.6%. This wider variation in growth rates, however, is in some degree a positive feature given the much greater need for low income regions to catch up. Map 1.1: Growth of GDP, 1999-2004 (EU, USA, India, China and Japan)

In China, GDP per head, again in PPS terms, is only one-fifth of the EU average, while in India, it is one-eighth. In Romania and Bulgaria, which have the lowest GDP per head in the EU, the level is still over twice as high as in India and 50% higher than in China. These two countries, however, are catching up rapidly with the EU. Growth of GDP per head in India has been double that in the EU over the past decade and the growth rate in China was three times the one in the EU. Nevertheless, even if such high growth rates can be sustained, it would take over 40 years for GDP per head in China to come close to the current level in the EU.

Despite the vast difference in GDP per head, the size of regional disparities in India and China are similar to that in the EU. The region with the highest GDP per head in both China and India has a level seven times greater than in the lowest regions against eight times in the EU. Differences in regional GDP growth rates in India between 2000 and 2004 were very similar to those in the EU, varying between 1% and 13% while, in China, they varied by much less – by between 6% and 11%.

… The four (former) cohesion countries continue to reduce the gap

The performance of Greece, Spain, Ireland and Portugal was uneven between 1995 and 2005. In all but Portugal annual economic growth consistently exceeded the EU average (Fig. 1.4).

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Since 1995 Ireland has consistently grown much faster than the EU15. Between 1995 and 2005, its annual average growth of GDP per head was 4 percentage points above the EU average. As a result, in 2005 Ireland had the second highest GDP per head in the EU in PPS terms.

In Spain, growth of GDP per head was on average 0.7 percentage points a year higher than the EU average over these 10 years. As a consequence, GDP per head in PPS terms in 2005 was slightly above the EU27 average.

In Greece, growth has been stronger, averaging 1.5 percentage points above the EU average between 1995 and 2005, increasing GDP per head to 85% of the EU average in 2005.

In Portugal, growth was above the EU average up until 1999, but since then it has been well below the rate in the rest of the EU, with little sign of any recovery. GDP per head in PPS terms in 2005 was, accordingly, only 74% of the EU average, below the level in the Czech Republic and Slovenia.

At regional level the situation is improving …

Comparing the top 20% of NUTS2 regions in the EU27 with the bottom 20% in terms of GDP per head between 1995 and 2004, clearly demonstrates the reduction in disparities which occurred over the period, the ratio of the average level in the top regions to that in the bottom declining from 4.1 to 3.4.

In 1995, 78 of the 268 NUTS 2 regions which at present make up the EU27 had a GDP per head below 75% of the EU27 average (from here on called ‘lagging’ regions). Of these 78 regions, 51 were in the new Member States and 27 in the rest of the Union. Of the 51 regions in the new Member States, 39 had a GDP per head below 50% of EU average. Only four regions in the new Member States had a level of GDP per head above 75% of the EU average: Prague, Bratislava, Cyprus and Malta

Lagging regions are catching up …

By 2004, the situation had improved significantly, with only 70 lagging regions, 49 in the new Member States and just 21 in the rest of the Union. The three regions in the new Member States in which GDP per head had risen above 75% of the EU average were Slovenia and two regions which include the national capital, Mazowieckie in Poland and Közép-Magyarország in Hungary. The fact that there were not more, despite relatively high growth in these countries over the period, emphasises the low level of GDP per head from which they were starting. At the same time, the number of regions with GDP per head of less than 50% of the EU average fell from 39 to 32. Malta's GDP per head just dipped under 75% of the EU average in 2004. (Map 1.2: GDP/head (PPS), 2004)

In the rest of the EU, three regions, Campania, Puglia and Sicilia, in Italy, saw GDP per head fall below 75% of the EU average, while in nine it rose above this level – two regions in Greece, four in Spain, Cornwall in the UK, Dessau in Germany and Southern and Eastern Ireland which includes Dublin. All nine of these regions are long-term recipients of Structural Fund support with Objective 1 status. As the population of the three Italian regions is almost the same as the population of the nine regions in which GDP per head rose above 75% of the EU average, the total population living in lagging regions in the EU15 barely changed. (Tab. 1.1).

Table 1.1

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BOX - The lagging regions in the EU15

The lagging regions in the EU15 (defined in relation to the EU15 average GDP per head), which were major recipients of support from the Structural and Cohesion Funds, showed a significant increase in GDP per head relative to the rest of the EU between 1995 and 2004. In 1995, 50 regions with a total of 71 million inhabitants had a GDP per head below 75% of the EU15 average. In 2004, in 12 of these regions with population of almost 10 million and spread across the EU (in Germany, Greece, Spain, France, Ireland, Portugal, Austria and the UK), GDP per head had risen above the 75% threshold.

On the other hand, in five regions, GDP per head slipped below 75% of the EU average over the period, three Southern Italian regions, Hainaut in Belgium and Lüneburg in Germany, which together had a population of around 6 million.

… And regions with a GDP per head below 50% of the EU27 average are catching up faster …

At the national level, as indicated above, Member States with a low level of GDP per head have tended to grow faster than other countries over recent years, implying a marked catching up. This was also the case at the regional level.

Between 1995 and 2000, growth of GDP per head in the regions where this was below 50% of the EU average was, in aggregate, less than in the rest of the EU. However, this was largely due to economic contraction in Romania and Bulgaria affecting all 14 regions there. In the 19 remaining regions, growth averaged just over 4% a year, well above the EU27 average of just under 3%. Between 2000 and 2004, average growth in regions with GDP per head below 50% (this time including the Bulgarian and Romanian regions) was only slightly less than in the earlier period at almost 4% at year, though this was much further above the EU average of 1.6% (Fig. 1.5).

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In regions with a GDP per head of between 50% and 75% of the EU27 average, growth over the period was also higher than in other regions, if to a lesser extent (only 0.1% above the EU average before 2000 and 0.3% after).

… While some of the higher income regions are facing problems

Some of the regions with GDP per head above 75% of the EU average experienced very low or even negative growth rates between 1995 and 2004. In five regions – Guyane, Champagne-Ardenne and Poitou-Charentes in France, Berlin in Germany and Valle d'Aosta in Italy – GDP per head declined in real terms over these nine years. In twelve others, growth was under 0.5% a year. In the four years, 2000- 2004, moreover, GDP per head fell in 27 regions and in a further 24, growth was under 0.5% a year. (Fig. 1.6)

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Convergence is therefore occurring at the EU level …

Over the period 1995-2004, therefore, disparities in GDP per head between NUTS 2 regions narrowed across the EU, most of the reduction occurring in the last four years. This is confirmed by a number of statistical measures (including the Gini coefficient and weighted coefficient of variation), most visibly by the narrowing of the gap in GDP per head between the most and the least prosperous regions.

As part of this convergence, there was also a reduction in the gap between the core regions in the central part of the EU (the so-called Pentagon stretching from London across to Hamburg, down to Munich, across to Milan and up to Paris) and other parts of the EU, so contributing to territorial cohesion. The peripheral, regions, broadly defined, therefore, performed better in terms of growth over this period than the traditional economic hub of the EU.

This stronger growth performance, however, does not extend to all the peripheral regions, just as the relatively weak performance does not apply to all core regions. In other words, things are more complicated than a simple comparison between the core and the periphery might suggest. Some regions seem to have overcome handicaps stemming from their peripherality, at least during this period, others not.

But not in most cases at the national level…

It is equally instructive to examine what has been happening to regional disparities within countries over recent years, since much of the regional convergence which has occurred at EU level is a consequence of convergence of low income countries rather than of low income regions as such. For cohesion in all three dimensions – economic, social and territorial – to be strengthened, it is as important that regional disparities narrow within countries as over the EU as a whole (Fig. 1.7).

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In practice, convergence of GDP per head at regional level has occurred in some Member States over recent years but divergence in others. In Austria disparities in GDP per head between regions narrowed over the period 1995-2004. In Germany, France, Greece, Spain and Italy, however, there was little change, and this was also the case in Belgium and Finland. In the UK, Sweden, the Netherlands and Portugal disparities widened between the 1995 and 2004, most of this divergence occurred between 1995 and 2000, with very mild divergence between 2000 and 2004 in the UK and Portugal, while in Sweden and the Netherlands regions converged moderately over this period.

In Poland and Hungary, there was also a widening of regional disparities between 1995 and 2000, but on a much larger-scale than in the UK, and little change from then to 2004. In the Czech Republic as well as in Romania and Bulgaria, disparities widened markedly throughout the period, while in Slovakia, there was some widening but on a much smaller scale.

BOX – The impact of Commuting on GDP per head

Gross domestic product per head measures the economic wealth created in an area per inhabitant of that area. This indicator is most relevant when the people who create this wealth live in the area. For large countries this is usually the case, there may be some cross border commuting, but it usually does not significantly alter the GDP per head level. For small countries, such as Luxembourg for example, GDP per head will overestimate the average GDP created per inhabitant if many people commute into the country and few of the country's residents work outside the country. This effect is, of course, much stronger at the regional level. For example, in Brussels almost one in every two people working in the region lives outside. As a result, GDP per head is almost double the level it would be if those contributing to Brussels' GDP and their dependents were included in the Brussels population. In a few rare cases, a region may have a substantial proportion of its residents working outside the region, with few commuting into the region, as a result GDP per head underestimates the economic wealth per inhabitant.

This effect of commuting is most pronounced in densely populated urban areas. Most capitals fall into this category; their GDP is overstated relative to that produced by residents by between 4% and 76%. In eight capital cities, GDP per head is inflated by more than 10%. However, this has not had a significant impact on the allocation of structural funding. (Map 1.3: GDP/head adjusted for effects of commuting)

Divergence within countries reflects growth of capital cities …

Taking a more territorial approach reveals that in all of these countries, especially in the new Member States, a large part of the divergence in regional prosperity was a result of high concentration of economic activity and growth in and around the capital city. Moreover, even in the countries in which disparities remained much the same or where they narrowed GDP per head in the capital city region grew faster than in other parts of the country.

Between 1995 and 2004, all capital city regions, with the exception of Berlin increased or at least maintained their share of national GDP. The increase was particularly marked in Warsaw, Prague, Budapest, Sofia and Bucharest.

The relative growth of capital city regions is strongly related to their attraction as locations for business as well as for individuals. This tends to lead to unbalanced territorial development within countries unless there are other centres of economic activity, in particular other large cities or conurbations – or even networks of smaller cities and towns to provide the same kind of attraction.

BOX - Concentration of economic activity in capital cities

In 2004, capital city regions[2] produced on average 32% of the GDP in the country where they were situated, while they accounted for just 22% of population. All capital city regions with the exception of Berlin have a higher GDP per head than the national average and in fourteen it is between 40% and 100% higher. This is due to the relative concentration of economic activity in these regions and their higher productivity levels. On average, productivity levels in capital city regions were 25% higher than the national level; Berlin was the only capital with a productivity level below the national level. The capital city region, therefore, tends to act as a growth pole, attracting business investment from outside through the range of services and amenities they have to offer as well as the large market they represent.

Between 1995 and 2004, capital city regions increased their economic position within the country on average their share of national GDP increased by 9% while the population only increased by 2%. Only Berlin and Dublin saw their share of national GDP decline (by 10% and 3%, respectively).

Balanced territorial development is aided by secondary growth poles

The concentration of economic activity in capital cities brings benefits in the form, for example, of economies of scale or agglomeration and a large size of market. But it also involves costs, in the form of congestion, poorer air quality and high property prices[3]. More balanced development tends to reduce these costs and, by spreading demand more evenly, to facilitate faster economic growth in the country as a whole.

In only three countries in Europe, however, do secondary growth poles seem to be effective in counterbalancing the economic power of the capital city. In Spain, the Barcelona region (defined at NUTS 3 level) was responsible for generating 14% of Spanish GDP, while Madrid generated 18% with a similar population. Madrid, however, attracted a larger share of population growth and of economic growth than Barcelona. Barcelona saw its GDP per capita decline in relation to that of Madrid between 1995 and 2004. In Italy, Milan was responsible for 10% of national GDP, similar to Rome. Naples in the south, however, accounts for a much smaller share of GDP with little sign of the gap being closed despite the slightly faster growth in recent years in the southern regions than in the northern ones. In Germany, there are multiple growth poles, the four largest city regions together with Berlin each accounting for around 5% of national GDP and three out of four (Munich, Frankfurt am Main and Hamburg) grew faster than Berlin over the period.

In other countries, the capital city region tends to dominate. In France and the UK, Paris and London account for around 30% of national GDP, while other cities account for no more than 3-4%. In France, GDP per head in the Lyon region is above the national average and closest to that of Paris, though this is not the case in Lille or Marseille. In the UK, GDP per head in Birmingham, Manchester and Glasgow is no higher than the national average and growth has been slower than in London. In Poland, despite relatively large concentrations of population in Lódz, Kraków and Wrocław, economic activity is heavily concentrated in the Warsaw region (which accounts for 16% of Polish GDP but only 7% of population) and growth between 1995 and 2004 was much higher than in these other cities.

In the rest of the EU, though there are examples of GDP growing faster in large non-capital cities than in the country as a whole, their share of national GDP fell by 1 percentage point between 1995 and 2004. In most cases, GDP per head remains around or below the national average. Only in Germany and Italy are there second cities with GDP per head higher than in the capital.

Continuing effort is needed to reduce disparities at EU level further.

Irrespective of what has happened within countries, the gap in levels of prosperity across the EU remains wide. In 2005, in three of the new Member States (Cyprus, Slovenia and the Czech Republic) GDP per head had risen to above 75% of the EU27 average. If recent trends in relative growth rates continue, projections suggest that by 2016 six more of the countries might reach this level – the three Baltic States, Hungary, Malta and Slovakia. Poland and, most especially, Bulgaria and Romania, could take considerably longer to do so (Fig. 1.8).

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Even if, however, economic growth in the new Member States can be sustained at a rate well above that in the rest of the EU and these projections are realised, in many regions in these countries GDP per head will still be well below 75% of the EU average unless regional disparities narrow markedly. In the Czech Republic, for example, in three of the eight regions GDP per head was around60% of the EU average in 2004. Many regions will, therefore, take far longer to reach the 75% level than the country in which they are situated, even given the maintenance of relatively high rates of growth. Cohesion policy, accordingly, remains essential for supporting the development of regions, particularly, in the new Member States if regional disparities are to be reduced to a more acceptable level within a reasonable period.

Productivity and employment growth

The level of GDP per head in any country or region can be approximately attributed to two broad factors. One is the output produced by each of the people in work, or their level of productivity. The other is the proportion of the population in work. The same goes for changes over time. For GDP per head to increase, therefore, either productivity has to go up or the proportion of people in employment has to rise. Both are important. Although the emphasis tends to be on increasing productivity as the means of expanding income levels over time, in part because of its link to competitiveness – though this link is not necessarily very close because of the growing importance of non-price factors – raising employment can contribute at least as much to growth in economies where levels are low. Moreover, low levels of employment and, correspondingly, large numbers out of work also have implications for social cohesion.

The challenge is to combine high productivity with high levels of employment – to avoid sacrificing one for the other – and to do so throughout a country or region so as to maintain territorial cohesion. This challenge is particularly acute, as shown below, in the new Member States, where productivity is still much lower than in most other parts of the EU, despite high rates of growth since the mid-1990s, but where equally in many places employment is also low. But a similar challenge, if perhaps less acute, also confronts other parts of the EU.

Productivity

Productivity trends at international level – growth in the EU falling behind the US

Between 1980 and 1995, productivity growth as measured by GDP per person employed was considerably higher in the EU-15, than in the US. Since then, however, growth in productivity in the EU-15 as lagged behind that of the US (Fig. 1.9). Whereas, GDP per person employed was only marginally lower than in the US in 1995 (3% lower), by 2005, the gap had become significant (12% lower).

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Much of this gap can be attributed to the longer hours which Americans tend to work, mainly because of having much shorter holidays. If differences in average working time are explicitly allowed for and productivity is measured in terms of GDP per hour worked, the gap all but disappears. In 2004, therefore, productivity in these terms was almost identical in the EU15 to that in the US, though the growth of productivity remains higher in the US than the EU15 even after allowing for changes in working time.

GDP per hour worked was higher in nine Member States than in the US. By contrast, it was substantially lower in Greece, Cyprus and Portugal (54%, 53% and 45% of the US level, respectively) and even lower in the 11 remaining new Member States, where it was between 8% and 45% of the US level. Over the period 1995-2004, only in Ireland, Greece and Sweden among the EU15 countries (no data for hours worked are available for the new Member States before 2000) was productivity growth higher than in the US, though it was similar in Finland, Portugal and the UK.

On the evidence of the growth in GDP per person employed, it was almost certainly higher as well in all the new Member States, apart from Cyprus and Malta. In these terms, productivity growth in the new Member States averaged 4.5% a year over the period 1995-2005, four times higher than for the EU15 (Fig. 1.10). In Estonia, it was close to 8% a year and in Latvia and Lithuania, 6-7% a year, though in the Czech Republic, it averaged under 3% a year, less than in Greece and Ireland. At the other extreme, GDP per person employed increased by just 1% a year in Germany and by only marginally above zero in Spain and Italy.

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Regional EU disparities in productivity …

Productivity, measured in GDP per person employed, varies markedly across the EU, underlying the disparities in GDP per head noted above. It is highest in Northern and Western European regions in which capital cities or large conurbations are situated and lowest in most in the new Member States. In most regions in Spain, Greece and Portugal (the Cohesion countries), it is much closer to the EU average, though still below. (Map 1.4: GDP per person employed (EUR), 2004). Regional disparities in productivity are also significant within Member States, contributing to the differences in GDP per head (Fig. 1.11).

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In terms of GDP per hour worked, which is a more accurate measure, regional disparities in productivity tend to be wider since average working time of those in employment is generally longer in the lagging regions than in the higher income parts of the EU. The highest levels of productivity are even more overwhelmingly in the regions which include the capital city in the Northern and Western parts of the EU (7 of the top 15 regions), the highest level (in Luxembourg) being some 20 times higher than in most regions in Bulgaria and some in Romania. Nine out of ten lagging regions have productivity levels below 75% of the EU average, with most of those in the new Member States having levels substantially below the average, in many cases, significantly lower than in most Greek, Portuguese, Spanish and southern Italian regions.

At the same time, there is evidence of a marked catching up over recent years, especially in regions – in the new Member States, especially – where productivity levels are lowest. Between 1995 and 2004, therefore, labour productivity, measured in terms of GDP per person employed, grew by 6.5% a year in the three Baltic States and in parts of Poland, while in most of the more developed regions, it rose by less than 2% a year, in some cases, much less. Almost all the regions experiencing the highest rates of productivity growth were in the new Member States – 27 of the 31 in which the growth rate was more than 4% a year (the only exceptions were three Greek regions and Madeira) – a result of the significant restructuring which is occurring there together with the considerable scope for catching up with levels elsewhere.

On the other hand, only one lagging region (Guyane) was among the 30 regions in which GDP per person employed declined over this period. The other 29 regions were in Italy, France, Spain and Germany. In some cases, the regions concerned have among the highest levels of GDP per head in their respective countries (Lombardia, Bolzano and Valle d'Aosta in Italy, Madrid, Navarra and Cataluña in Spain, Köln in Germany). In a number of them – in Germany and northern Italy, in particular – GDP growth was relatively low during this period, which might have been a contributory factor (though the lack of growth of productivity was itself a potential cause of the low growth). In the Spanish regions, however, GDP growth was above the EU average, which suggests that such growth might be difficult to sustain over the long-term, in the absence of the improvements in efficiency and development of high value-added activities which productivity growth tends to reflect.

The counterpart of the lack of productivity growth in Spain is a high rate of employment growth, which in a sense has fuelled the growth of GDP and has provided much needed jobs for a substantial proportion of the population who were previously unemployed or economically inactive. In Italy, a similar lack of productivity growth has occurred in a context of low growth of GDP and sustained growth of employment. Conversely, the high rate of productivity growth in regions in the new Member States has occurred in many cases with little or no increase in jobs in a context where the proportion of people of working age in employment is relatively low – indeed, similar to the level in Spain in the mid-1990s.

The challenge facing both sets of regions, as emphasised above, is to achieve simultaneously both a growth rate of productivity in line with the need to maintain and strengthen competitiveness and a rate of net job creation which provides employment for all those who want to work.

Box: regional variations in the main components of GDP growth

The pattern of regional growth in GDP per head and of the two proximate determinants of this, growth in employment and in GDP per person employed, is shown in the three maps. These indicate that in most of the regions in central and eastern Europe, Greece, and the Nordic countries, productivity growth was the main contributor to GDP growth between 1995 and 2004, in many cases, the only one. (Map 1.5: Growth of GDP per head, employment and productivity)

Between 1995 and 2004, growth in GDP was accompanied by growth in employment in the ten countries in Central and Eastern Europe only in 2003 and then only marginally. Overall, GDP growth was almost entirely due to growth of productivity and employment remained broadly unchanged or declined.

In Spain, growth in GDP was fuelled almost exclusively by employment growth and in Italy, Ireland and the Netherlands, growth of employment also contributed most to GDP growth. In the other countries, in Belgium, Germany, France and the UK, there was a more equal balance between employment and productivity growth.

Employment growth in the EU

At national level

Employment growth averaged just under 1% a year in the EU27 over the period 1995-2004. There was a marked difference, however, between the relatively high rate of increase up to 2001 and the absence of any growth at all in the two last years when GDP increased relatively little. Employment growth was particularly high throughout the period in Spain, as noted above (3.3% a year) and was also above the EU average in Italy – one of the few countries in which employment growth was maintained after 2001 – France and the UK. In Germany, on the other hand, growth was below average and employment fell significantly after 2001. In Portugal, employment rose by almost 2% a year up to 2001 but has hardly risen at all since then reflecting the low rate of GDP growth. In Greece employment increased by much less than the EU average up to 2001 (by only around 0.5% a year), but has risen at a much higher rate since 2002 (by almost 2% a year up to 2005).

Most of the other countries, apart from the new Member States, experienced a relatively high rate of employment expansion between 1995 and 2001 – over 2% a year in the Netherlands and Finland, 4% a year in Luxembourg and over 5% a year in Ireland – and little increase or a reduction in the subsequent two years. Since 2003, employment has risen but by less than 1% a year in most cases.

In the new Member States, employment declined significantly in most countries up to 2001, the main exceptions being Hungary and Cyprus, but it has begun to increase in many of them since, though at a relatively slow rate except in Latvia and Lithuania. In Poland and Hungary, employment has barely changed since 2001.

… And at regional level

Almost all regions (nine out of ten) with a GDP per head above 75% of the EU average experienced employment growth between 1995 and 2004, the average being 1.2% a year for the group as a whole.

Only sixteen of these regions experienced a reduction in employment of more than 0.1% a year over these nine years. These were 13 regions in Eastern Germany and Mazowieckie in Poland and two regions in Northern England. The highest rates of increase occurred in regions in Spain, Ireland and the south east of the UK.

In contrast, employment in regions with GDP per head below 75% of the EU average declined on average by 1% a year. In half of the regions employment fell, the largest reductions (over 3% a year) occurring in a number of Polish and Romanian regions.

The sectoral structure of EU employment reflects the continued shift towards a service economy and the ongoing decline in employment in agriculture and industry. Since 2000, total employment in the EU has increased by 8.5 million, mainly driven by strong net employment creation of almost 11.5 million in the service sector. The latter has more than made up for the employment contraction in industry (down 1.6 million) and agriculture (down 1.2 million) since 2000.

Within industry, employment has contracted particularly strongly in manufacturing, where it has fallen by 2.2 million (or about 6% on 2000 levels), although this has been offset to a certain extent by the rise in employment of 0.8 million in the construction sector. Within services, where employment has expanded in all sub-sectors apart from "financial intermediation", the main drivers of employment creation have been real estate, renting and business activities (up 3.5 million), health and social work (up 2.3 million) and education (up 1.3 million).

Employment rates

The low growth of employment across the EU since 2001 has slowed progress towards achieving the Lisbon and Stockholm employment targets. Given the limited prospects for increased employment growth in the immediate future, the overall aim of ensuring that at least 70% of people of working age (defined as those aged 15-64) are employed by 2010 now seems unlikely to be attained until a few years after this. Recent progress towards the female and people aged 55-64 targets is nevertheless encouraging. Since 2000, the female employment rate has risen by 2.7 percentage points to 56.3% (the target is 60%) and the older workers' employment rate by 5.9 percentage points to 42.5%, although for the latter with a target of 50%, there remains a long way to go.

Much of the slow progress can be attributed to the decline in employment in Germany and Poland, though in 2005, there are signs of some improvement in the latter. At the same time, employment rates in Greece and Italy remain well below the targets and still exhibit marked gender differences.

In 2005, as in 2000 when the target was first set, only four Member States (Denmark, the Netherlands, Sweden and the UK) had employment rates above the 70% objective, though five countries (Austria, Cyprus, Finland, Ireland and Portugal) are within 3 percentage points of it. The biggest increases in the rate since 2000 have been in Spain (a rise of over 6 percentage points), Cyprus, the three Baltic States, Greece, Italy, and Bulgaria. Nevertheless, the rate remains over 10 percentage points below the target in the last three of these countries as well as in Hungary, Poland, Malta and Romania. In Poland as well as Portugal, Germany, Denmark, Sweden, Romania, Malta and the Czech Republic rates have declined since 2000 (Fig. 1.12).

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Nine Member States met the employment rate target for women of 60% in 2005, three more than in 2000 (the three being Estonia, Austria and Slovenia), while another six, including France and Germany, were within 3 percentage points (Fig. 1.13). In Greece, Italy and Poland, however, the rate was over 10 percentage points below the target and in Malta, over 26 percentage points. Since 2000, large increases in the employment of women have occurred in the same countries in which the overall rate has risen (indeed they have been the primary cause of this), with particularly big rises in Spain, Italy, Latvia and Estonia. (Map 1.6: Female employment rate in 2005 compared to Lisbon target)

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Gender pay gaps reducing at a much slower pace than the gender employment gap

Despite reductions in the gender employment gap, the gender pay gap (in unadjusted form) – measuring the difference in average gross hourly earnings between men and women across the whole economy and all establishments – one of the structural indicators to monitor progress under the Lisbon Strategy has narrowed only marginally since 2000. In 2000, women in the EU had, on average, 16% lower hourly earnings than men, the gap ranging from below 10% in Portugal and Italy to 20% or more in Austria, Germany, the Netherlands and the UK. In 2005, their earnings were 15% lower than men and still 20% or more in Germany and the UK. On the other hand, there were several more countries where the gap was below 10%, including Belgium, Ireland and Greece.

The employment rate for older people – those aged 55-64 – increased by some 6 percentage points in the EU27 as a whole between 2000 and 2005 (from 36.6% to 42.5% – Fig. 1.14). This increase contrasts markedly with the downward trend in the rate over many years before reflecting the tendency towards early retirement in many countries, encouraged initially by governments in the context of high rates of unemployment. Despite the increase, however, in 2005 it still remained over 7 percentage points below the target of 50% to be achieved by 2010. (Map 1.7: Employment rate of people aged 55-64 in 2005 compared to Lisbon target)

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Eight Member States had employment rates for this age group above the target in 2005, four more than in 2000 (these being Estonia, Finland, Cyprus and Ireland), while in both Latvia and Lithuania, rates were only marginally below. Despite the large increases in employment of 55-64 olds since 2000 – which exceeded 10 percentage points in Hungary as well as in Latvia and Finland – the proportion of this age group in work in 2005 was still between 10 and 23 percentage points below the 50% target in 12 Member States. Poland, the country with the lowest employment rate for older people in 2005, was the only country where this rate declined noticeably between 2000 and 2005.

BOX - Regional employment rates in the US

The variation in the total employment rate (measured as the total employed relative to population 15-64) between the 180 US economic areas is far smaller than in the EU. In the EU, the total employment rate is 60% higher in the 10% of regions where this is highest than in the 10% where it is lowest, whereas in the US, the difference is only 22%. Confining the comparison to the EU15 only does not dramatically alter the picture (the gap of 60% is reduced to 56%). This underlines the fact that the US labour market is more integrated than in the EU and population is more mobile.

Overall, the US employment rate is 10 percentage points higher than that of the EU. Most of this difference is due to higher employment of the group aged 15-64 (8.5 percentage points), the remaining 1.5 percentage points are due to the far larger number of those aged 65 and older in work in the US than in the EU (14% as compared with 3%).

At regional level disparities are larger than at national level …

The employment rates at national level conceal wide variations across regions, reflecting the regional and, indeed, local nature of employment problems.

Regional disparities in employment and unemployment have long been a key focus of EU policies, not only because of the effect of low employment rates in parts of the EU on the achievement of the Lisbon targets but more importantly their implications for social cohesion. Between 2000 and 2005, there was some convergence of employment rates across regions in the EU27. Over these five years, the difference in the average employment rate of the 10% of regions where rates were highest and the 10% where they were lowest declined from 30 percentage points to 27 percentage points[4]. Two other statistical measures (the Gini coefficient and coefficient of variation) also declined. (Map 1.8: Employment rate in 2005 and employment rate deficit compared to Lisbon target).

In 2005, however, employment rates in the lagging regions were some 11 percentage points lower than those in the rest of the Union (57% against 67%), more than in 2000 (9 percentage points). Despite some increase over this period, employment rates remain particularly low in the south of Italy, five regions (Campania, Puglia, Basilicata, Calabria and Sicilia) having rates below 50% of working-age population in 2005 and Sicilia a rate of just 44%. This compares with rates of 78% in the UK region of Bedfordshire and Hertfordshire, a difference of almost 35 percentage points.

The disparity in employment rates across regions is also relatively wide in Spain, reflecting the still large differences in economic development between the regions. While regional variations in employment rates are relatively low in Poland and Romania, this reflects the large number of people in rural areas employed in agriculture, mostly in subsistence farming, which serves as a residual means of support for those unable to find work in other activities (Fig. 1.15).

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… Though decreasing in several Member States

There was a slight tendency for regional disparities in employment rates within Member States to narrow between 2000 and 2005. This was the case in most countries, most especially in Bulgaria, Spain, Italy, Sweden and the UK. At the same time, disparities widened in Austria, Belgium, Slovakia and Hungary.

Nevertheless, the average employment rate in lagging regions taken together was not only 11 percentage points lower than in the other regions in 2005, but it has also decreased by half a percentage point since 2000, while in the other regions it has increased by 1.5 percentage points.

There are, however, marked differences in the experience over this period across the EU. In all the regions of Bulgaria, Spain and Italy the employment rate increased. In Greece, employment rates increased in all but three regions. In contrast in all of Romania and all but two regions in Poland the rate declined. In Portugal and Hungary about half the regions saw their employment rate decline, in some cases by more than two percentage points.

To achieve the Lisbon employment rate target of 70% of working-age population, the number employed in the EU needs to increase by well over 20 million in the coming years. For the sake of cohesion, these extra jobs need to be created mainly in regions where employment is particularly low, namely in southern Italian and Polish regions, in particular.

Unemployment rates

Unemployment is not entirely the mirror image of employment. A country or region with a low employment rate will not necessarily have a high rate of unemployment but instead perhaps a large number of people who do not participate in the labour market at all. This is the case of women in Southern Italy, for example. Not all of those concerned either here or elsewhere in the EU will have taken a deliberate decision not to work. Many will have decided not to look for a job because they consider they would be unlikely to find one but would enter the labour market if the situation changed. Indeed, when employment increases it is generally accompanied by a rise in labour market participation as well as a fall in unemployment. Accordingly, unemployment can give a misleading indication of the number of people who would like to work but cannot find a job and, therefore, of the size of the potential work force. Nevertheless, it is the most visible sign of labour market imbalance and of the threat this poses to social cohesion.

Unemployment in the EU27

Between 2000 and 2005 the overall unemployment rate in the EU27 increased marginally (from 8.6% of the labour force to 8.7%) (Map 1.9: Unemployment rate, 2005). There were, however, considerable variations between countries. In 8 Member States, unemployment increased by around 1½ percentage points or more (by almost 4 percentage points in Portugal), in 10, it changed by less than 1 percentage point and in 9, it fell by more than this – in the three Baltic States plus Bulgaria, by over 5 percentage points (Fig. 1.16).

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While the unemployment rate of men increased slightly over the period (from 7.5% to 7.9%), unemployment among women fell slightly (from 10.0% to 9.7%). As a result the gap between the two narrowed. The gap between the male and female unemployment rate in 2000 was the highest in Greece (6.6 percentage points), Spain (4.6), Italy (3.6) and Poland (3.1). In Greece this gap had barely narrowed by 2005 a reduction of 0.3 of a percentage point, while the other three reduced the gap by between 1 percentage point and 2.6 percentage points.

At 18.6%, the youth unemployment rate still remains around twice as high as the overall unemployment rate, pointing to an over-supply of relatively low-skilled, inexperienced young workers. Furthermore, large disparities are still evident across the Member States, with rates above 20% in eight countries, and especially high in Slovakia and Poland at around 30% and 37% respectively, but as low as around 8.5% in Denmark, Ireland and the Netherlands.

Still, the youth unemployment rate (of those aged under 25) in the EU27 increased by 0.7 of a percentage points between 2000 and 2005, but again this average hides much variation. In Bulgaria, the Baltic States, and Slovakia, youth unemployment rate fell by more than 6 percentage points, while in five Member States, including Portugal and Hungary, it increased by more than 5 percentage points.

The long-term rate of unemployment[5] in the EU was 4% in 2005, the same as in 2000. While a number of Member States recorded a substantial reduction over this period, especially Latvia, Lithuania and Bulgaria, the rate in creased by almost 3 percentage points in Poland and by 2 percentage points in Slovakia, in both of which rates were already high (10% and 12% respectively). (Map 1.10: Unemployment rate (female, youth and long-term), 2005)

Across the EU, long-term unemployment continues to be significantly higher for women (4.5% in 2005) than for men (3.6%), with the widest differences, as for the overall unemployment rate, occurring in Spain and Italy as well as in Poland (in each case the gap being 2 percentage points or more), but above all in Greece (8.9% for women, 2.6% for men).

Unemployment at the regional level

As in the case of employment, regional disparities in unemployment rates narrowed between 2000 and 2005, the difference in the average rate between the top and the bottom 10% of regions (again defined in terms of population) declining from 19 percentage points to 16 (Fig. 1.17). (Other measures of regional dispersion, such as the Gini coefficient, also declined.)

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In the lagging regions, unemployment fell from an average of 13.4% to 12.4% over the period, the largest falls being in the Bulgarian and Southern Italian regions as well as in the Baltic States. In 17 of these regions, however, – mostly concentrated in Poland, Portugal, Greece and Hungary – unemployment increased by over 2 percentage points.

In the more developed regions (those with GDP per head above 75% of the EU average), by contrast, unemployment remained stable between 2000 and 2005 at just below 8%, though with Spanish, Italian, French and UK regions generally experiencing a reduction and German, Austrian, Dutch and Belgian regions, some increase. The increase was especially marked in Germany. In this group of regions, 44 experienced an increase in unemployment of more than 4 percentage points, 33 of them in Germany.

The risk of poverty

Although there is no measure of the number of people across the EU-27 living in poverty in an absolute sense, there are indicators of those whose income is low enough to put them at risk of being socially excluded in a relative sense. These were defined by the Member States through the Open Method of Coordination on Social Inclusion in June 2006 as those with disposable income below 60% of the national average level of income, as measured by the median, on the assumption that household income is distributed evenly between all members[6]. Such people, it is argued, might well be unable to afford the standard of living which most people in the country concerned take for granted and, accordingly, may be deprived in a relative sense, even if in some cases they may still be better off in absolute terms than many in parts of the EU where average income levels are much lower.

According to the latest data (collected in 2005 for income in 2004), the proportion of the population at risk of poverty, defined in relative terms, ranges from 21% in Lithuania and Poland and 20% in Ireland, Greece, Spain and Portugal to 11% in the Netherlands, 10% in the Czech Republic and 9% in Sweden. On average, on this measure, 16% of the EU population, or around 75 million people, were at risk of poverty in 2004 (Fig. 1.18).

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A slightly larger proportion of women than men have income below the poverty line, 17% on average as opposed to 15%. In Bulgaria and Italy the difference reached 4 percentage points. In all Member States, apart from Hungary and Poland, the relative number of women with income this low is either larger than that of men or much the same, partly reflecting the larger numbers of women than men aged 65 and over and the relatively large proportion of these living alone and dependent on a retirement pension. However, when looking at the gender dimension, it is important to interpret figures with caution since they assume equal distribution of resources within the household, which might not necessarily be the case[7].

The risk of poverty is even higher for children, young people and the elderly.

The young have the highest at-risk-of-poverty rate, at 19% for children under 18 and 18% for the 18-24 age group. The rate then declines with age as individuals progress in the labour market, before it rises again after people retire and no longer have income from work. The risk of poverty for children is particularly high in Poland (29%), Lithuania (27%) and Romania (25%). One person households, especially those with dependent children tend to have the highest poverty risk, some 33% of lone parents with a dependent child in the EU having income below the poverty line. Poverty among children, it is widely recognised, can potentially affect their development and future opportunities and so the life chances of future generations.

The risk of poverty for people aged 65 and more is particularly high in Ireland (33%) and Cyprus (51%), while it is also significantly higher than for the population as a whole in a number of Member States. Older women, without exception, are at greater risk of poverty than older men, who are on the whole no more exposed to the risk of poverty than their younger counterparts. The most elderly, those aged 75 and over, in which women are in the majority, tend to be most at risk of poverty for a number of reasons, not least the lower incomes on which their pensions are based and the fact that in some countries the rules on indexation mean that pensions fail to keep pace with the growth of average earnings.

At the same time, the risk-of-poverty rates take account only of monetary income and leave out of account the wealth which those in retirement might possess, particularly their house (which means that they tend to have relatively low housing costs) and accumulated savings. Accordingly, the risk of deprivation among pensioners might well be somewhat less than implied by the poverty measure.

As indicated above, the at-risk-of-poverty rates presented here are specific to each country and are measured in relation to very different levels of income. People with a given level of income in absolute terms might therefore be classified as being at risk of poverty in one Member State but not be in another.

The income threshold against which the risk of poverty is assessed is much lower, measured in purchasing power parity terms (i.e. taking account of the difference in price levels) in the new Member States and Cohesion countries than in the rest of the EU. This threshold, therefore, is over 7 times higher in Luxembourg and four time higher in Austria than in Latvia, Lithuania and Bulgaria and higher still (12 and 8 times) than in Romania. This means that the at-risk-of-poverty threshold for a single person household varies from EUR 558 a year in Romania to EUR 17087 a year in Luxembourg. In Romania, therefore, single people at risk of poverty have to live on income of less than two euros a day and in Bulgaria, Latvia and Lithuania, less than four euros a day.

In Member States where poverty affects a larger proportion of the population, it also tends to be more severe, though this is not always the case. Head count figures in themselves do not indicate how far below the threshold the income of people at risk of poverty is. On average in 2004, the gap between the median income of those at risk of poverty and the poverty line itself in the EU was 23%. Member States with the smallest proportion of people at risk of poverty also tend to have the lowest intensity of poverty as well and vice versa for those with the largest proportion at risk. This is particularly the case in Poland, where the median income of those at risk of poverty was some 30% below the poverty threshold.

Member States with the lowest proportion of people at risk of poverty tend also to have the most equal distribution of income. This, however, is only a partial indicator of social cohesion within Member States. It is also relevant to know how the income of those at the bottom end of the distribution compares with the income of those at the top This can be assessed by the ratio of the top quintile (the income received by the 20% of the population with the highest income) to the bottom quintile (the income received by the bottom 20%)[8]. On average in EU Member States, this ratio was 4.9, which means that the income of someone 20% from the top of the distribution was nearly 5 times higher than that received by someone 20% from the bottom. In Portugal, however, this ratio was over 8, while in Lithuania, Latvia and Poland, it was only slightly less.

The risk of poverty is especially high for the unemployed

Being unemployed entails significantly more risk of having income below the poverty line than being in work throughout the EU, despite the income support schemes which exist in all Member States. The proportion of those who spent more than half of the year (2004) unemployed who had a poverty-level of income, therefore, ranged from a low of 26% in Denmark and Sweden – still 5 times higher than the proportion with this level of income who spent most of the year in employment – to a high of around 60% in each of the three Baltic States, over 6 times greater than for those who were mainly employed (Fig. 1.19). In 9 of the other 24 Member States for which data are available, moreover, the relative number of unemployed at risk of poverty was around half or just under (44-51%). These include four more of the new Member States (the Czech Republic, Hungary, Poland and Malta), though they also include three of the most prosperous countries in the EU – Luxembourg, Ireland and Austria.

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They do not, however, include the three EU15 Cohesion countries – Greece, Spain and Portugal – where the difference in the risk of poverty between being employed and being unemployed is significantly lower than elsewhere. This is a reflection not of the level of unemployment benefits but of the large number of the unemployed living in households where someone is working. In addition, in each of these countries, especially in Greece and Portugal, being employed is less of a safeguard against being at risk of poverty than in other Member States, with the exception of Poland. In Greece and Portugal as well as in Poland some 13-14% of people who were employed for most of 2004 had income below the poverty line.

Structural change and economic development

The differences in levels of GDP per head across regions, as already indicated, reflect the combined effect of variations in, first, the level of productivity or the value-added – or output – produced by those employed (together of course with the capital and other factors of production they have available to work with) and, secondly in the number of people available to work who are actually employed. As seen above, both the level of productivity of labour and the proportion of working-age population in work – the employment rate – are much lower in general in regions with low GDP per head than in those with higher levels. Both need to increase if these regions are to attain the income levels in much of the rest of the EU.

The low level of productivity, however, is linked not only to much lower levels of value-added per person employed in all the various sectors of activity, which have their root in a range of causes, including the method and organisation of production, the technology used, the skills of the work force and so on, but also to the relative importance of these sectors. The structure of the regional economies concerned, in other words, is biased towards low-value activities which itself has a depressing effect on the overall level of productivity and, accordingly the income generated in the region. As the regional economies develop, the relative weight of these low value-added sectors will tend to decline, just as they did in higher income parts of the EU in the past.

Low-vale added activities dominate the economic structure of less developed regions …

The pace at which this happens, however – just as the pace at which productivity growth occurs within sectors – is conditioned by the resources available, both human and physical, as well as by less tangible factors, such as the innovative capacity of the region, its system of governance and so on. The work force in the region and the enterprises located there have to possess the skills and know-how required by the higher value-added activities and need to be supported by suitable infrastructure, facilities and services for these activities to develop and expand.

The relative concentration of low income regions on low value-added activities is evident from comparing their division of value-added and employment between sectors with that in regions with higher levels of GDP per head. This, at the same time, indicates – if only in broad terms given that future development may not precisely mirror the past – the structural changes which regions will need to accommodate to attain higher levels of GDP per head (Tab. 1.2).

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The generation of value-added in regions with GDP per head below 50% of the EU average, which are all situated in the new Member States, comes much more from agriculture and industry than in higher income regions and less from services, predominantly business and financial services and education and healthcare within public services. Equally significantly, to produce only a slightly larger share of value-added from agriculture than in higher income regions absorbs a considerably larger proportion of those in employment – 17% of the total in work. Shifting the work force from agriculture into other, more productive, activities would, accordingly yield a substantial gain in overall income even without any growth of productivity within sectors.

In regions with a slightly higher level of GDP per head in 2003, of 50-75% of the EU average, which include many of the Objective 1 regions at the time (i.e. before the 2004 enlargement), the division of value-added between sectors is more similar to that in higher income regions, except for a larger share in agriculture, construction and public services and a much smaller share in business and financial services. Again a relatively large share of employment is absorbed in agriculture (10%) to produce a relatively small share of total value-added (5%).

… Which are also the activities with lower productivity …

The relative levels of labour productivity implied by the sectoral division of value-added and employment and the scope for catching up in the low income regions can be seen more directly by relating value-added in the different sectors in purchasing power parity terms to the number employed. (Tab. 1.3)

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Although the level of productivity varies between sectors in all regions – it is higher in industry and business and financial services than in others (though the latter largely reflects the method of measuring value-added in financial intermediation) – the level in the lowest income regions is considerably less than in the rest of the EU. In agriculture, it was under 40% of the EU average in 2003 and in industry, under half, the latter in part reflecting the concentration on more basic manufacturing (textiles and clothing, for example) than in higher income regions where there is much more concentration on medium and high tech sectors (engineering and electronics, in particular). In services, it was closer to the level elsewhere, but it was still only around two-thirds of the EU average or less.

… And with a relative high concentration of employment

In addition, to the low productivity in each sector, however, the difference in the distribution of employment between these as compared with the EU average further reduced value-added per person by almost 13%. In other words, productivity – and GDP – could be this much higher in these regions if the share of employment in each sector was the same as in other regions.

The productivity gap between regions with GDP per head of between 50% and 75% of the EU average and other regions is much narrower in all sectors, especially in services, where in each sector, value-added per person employed was less than 10% below the EU average in 2003. In agriculture and industry, on the other hand, it was well over 20% below the level elsewhere, partly in industry reflecting the relative weight of low-tech manufacturing as opposed to medium and high tech.

Although the broad sectoral structure of these regions is less concentrated on low value-added activities than in lower income regions, it is still the case that the relative concentration of employment in such activities as compared with the rest of the EU reduced the overall value-added generated by those in work by 6%. As a result, the overall level of productivity was some 15% below the EU average.

By contrast to the position in low income regions, in the regions with GDP per head of 15% or more above the EU average productivity in all sectors is not only higher but the concentration of employment on higher value-added activities as compared with other regions itself added over 5% to overall value-added per person employed in 2003.

This is compounded by low employment levels

The depressing effects of low productivity in the different sectors combined with the unfavourable structure of the economy, however, is not the only reason for GDP per head in the lagging regions being below that elsewhere in the EU. Low employment is also a major contributory factor. In the regions with GDP per head below 50% of the EU average, the lower proportion of the population in employment as compared with other regions reduced GDP per head in 2003 by almost 22% given the level of productivity. In other words, had the number in work in relation to population been the same as in the EU as a whole and had their productivity been the same as those already employed, GDP would have been almost 28% higher than it actually was.

In regions with GDP per head of 50-75% of the EU average, GDP per head was some 16% below the level implied by relative productivity, suggesting that it would be almost 20% higher if the level of employment was the same as the EU average. The gap between the relative level of productivity and GDP per head is also significant for regions with GDP per head between 75% and 100% of the EU average, implying that the latter could be raised by around 13% if employment could be increased to the level elsewhere.

By contrast, in regions with GDP per head of 15% or more above average, employment was also above average, reinforcing the effect of relatively high productivity on income levels. These regions, therefore, gain from having both a more productive economy and more people in work.

This makes clear that increasing GDP per head in lagging regions is not simply a question of making their economies more productive in a narrow sense but increasing the number of people in work. Such an increase is potentially important not only for the output that those at present out of work produce and the income they generate but also to maintain social cohesion. This is especially so in a context where the high rate of growth of productivity of those employed implies high growth of real wages and a widening gap between people working and those not.

Growth of value added is higher in less developed regions …

A key question in regions where GDP per head is well below the EU average and productivity is also much lower concerns the pace at which this gap in productivity is likely to be closed in the different sectors of activity, or in other words how quickly the possibilities for catching up are likely to be exploited. The experience of the period 1995 to 2003 throws some light on this.

This indicates that while sectors of activity contributed differentially to the overall increase in value-added, there was some similarity in the pattern of growth between regions with different levels of GDP per head. Growth, therefore, tended in some degree to be concentrated in the same broad sectors.

In all the regional groups, value-added in agriculture declined over this period, by more in the regions with the lowest GDP per head than in the others. Value-added in industry, on the other hand, increased in both regional groups with GDP per head below 75% of the EU average but declined, if only marginally, in regions with higher levels. Value-added in construction and services grew in all the regional groups. (Tab. 1.4)

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In each of the three broad service sectors, the rate of growth of value-added varied inversely with the level of GDP per head. In all three sectors, therefore, it was higher in the lower income regions than elsewhere and in each case lowest in the high income group.

In all the regional groups, growth of value-added in business and financial services was particularly high. In each case, therefore, there was a shift in output both from industry and, more especially, agriculture to services and within these from basic to more advanced services. The latter include education and health care, which account for much of the value-added in public services.

… But is it not matched by growth in employment

The number in work fell over this period in these regions as growth of productivity outstripped that of output. Relatively high productivity growth occurred in all broad sectors except agriculture, so narrowing the gap in value-added per person employed. In agriculture, where the gap was equally wide, productivity remained almost unchanged, so moderating the reduction in employment from the fall in output. This partly reflects the subsistence nature of the sector in many of the regions concerned and its role as an employer of last resort, in the sense that many of those unable to find work in other parts of the economy take up – or remain in – subsistence farming as a means of supporting themselves.

In industry and construction in these regions, growth of productivity exceeded the growth of value-added and employment fell. This was also the case in public services, where despite growth of value-added of almost 7% a year, the number employed declined slightly. Employment growth was, therefore, confined to basic market services and business and financial services, especially the latter, where it amounted to 3.5% a year. This, however, was not sufficient to offset job losses in the other sectors, partly reflecting the relatively small size of the service sector in these regions but more importantly the scale of productivity increases in a context of relatively high output growth.

Productivity increases were on a much smaller scale in other regions, where the productivity gap was much narrower, including those with GDP per head of between 50% and 75% of the EU average. Here net job creation in services more than compensated for large job losses in agriculture. These job gains were particularly substantial in business services (employment growing by 4.5% a year), a feature common to all the regional groups.

Such growth, combined with the growth of education and health care within public services has significant implications for the demand for labour. Together with the decline of jobs in agriculture and in industry – or at least low growth – it implies a rising demand for labour with high education and skill levels and a reduction in the demand for manual labour, both skilled and low skilled. It is coupled, moreover, as more detailed investigation shows, with a similar shift of jobs within sectors – towards managerial and professional type jobs and away from, for example, jobs on the production line – as a consequence of automation and changes in working methods. The challenge facing lagging regions is to accommodate these shifts by ensuring the availability of a work force with the education levels and the skills required as well as the provision of the infrastructure, services and amenities which support business development.

Regional characteristics remain determinants of economic structure

The structure of economic activity in regions is linked not only to the level of GDP per head but also to their inherent features. Although economic activity tends to shift from low value-added to high value-added sectors as regions develop, detailed analysis indicates that the sectoral composition of activity will continue to reflect in some degree the underlying characteristics of the regions concerned[9]. Such factors as geographical position, topology, climate, the pattern of urban settlements, cultural and industrial heritage and accumulated know-how which are important determinants of comparative advantage tend to influence the structure of the economy even in regions with relatively high levels of GDP per head.

This can be seen, for example, in regions which continue to specialise in textiles and clothing in northern Italy or in the manufacture of machine tools in western parts of Germany. The proportion of the regional work force employed in these sectors may be very small, though significantly larger than in other regions with similar levels of prosperity, but they remain important parts of the regional economy in terms of the income they generate both directly and indirectly. These areas of specialisation, therefore, tend to become less evident in terms of the relative numbers they employ as regions develop and other activities which are common to all regions - such as retailing, education and health care – expand, fuelled partly by the income generated in the areas concerned.

In short, while there is a tendency for regions to become more similar in terms of their economic structure as they grow – as they experience a common shift from primary and secondary sectors to services – aspects of specialisation remain. This has implications for their vulnerability to external events, such as the continuing process of globalisation, the depletion of traditional sources of energy and the associated increase in price, or global warming. The differential effect of these prospective developments is considered below.

The regional impact of global developments

Globalisation and trade liberalisation affects regions differently

The continuing process of globalisation, the entry of developing economies into industrial markets which is a major part of this and the associated intensification of competition in the markets concerned has different implications for regions in the EU. Although this process tends to be a gradual one, it can be accelerated by the sudden entry of new players into the market or changes of trade agreements. This may leave producers in the EU with limited time to react to the difficulty of competing with lower cost producers in third countries in markets for more basic products by either shifting their focus of competition from price to non-price factors, notably quality and design, or abandoning these markets completely and moving into new, less basic, ones.

Since the industries which are most exposed to increased global competition are not evenly distributed across the EU but tend to be concentrated in particular places, reflecting the differing areas of regional specialisation, some regions are much more vulnerable to this ongoing process than others. Regions specialising in textiles, clothing and leather[10], or steel-making (basic metals NACE 27) or electric, audiovisual and ICT equipment[11] are particularly vulnerable since these are industries which developing countries have moved into on a large-scale and where low costs are a primary factor of competition, at least in respect of mass-market products.

The regions with a relatively large share of employment in textiles, clothing and leather tend to have relatively low levels of income – and low labour costs – and are mainly located in the new Member States (Map 1.11: Employment in selected manufacturing sectors, 2005). Here in a number of regions – in Bulgaria, Romania, Estonia, Lithuania and parts of Poland – the industry has expanded over recent years as a result of low costs. There are, however, a number of regions in other parts of the EU where the industry is also responsible for a large share of employment. This is particularly so in Norte in Portugal, where some 13% of all those in work are employed in textiles, more than anywhere else in the EU. Here employment has declined in recent years as competition from low cost producers in China and other parts of East Asia has intensified, especially after the ending of the Multi-Fibre Agreement in 2005.

The challenge facing Portuguese producers is to shift the basis on which they compete away from low costs to quality, style and rapid response to changing patterns of demand, as producers in northern and central parts of Italy, where the industry also accounts for a relatively large share of employment, have successfully done in the past. This requires, however, a major change in methods of working and the organisation of production. It also requires a work force with different skills than those which have traditionally been required. A similar challenge is likely to face producers in the new Member States in the years to come as their income and wage levels rise.

The challenge, however, extends beyond producers in the industry as such, since employment in textiles and clothing is almost certain to decline whether the strategy adopted in the industry is successful or not – whether jobs are lost through the adoption of new technology combined with the outsourcing of the more basic, labour-intensive parts of the production process, as has happened in Italy, or simply by companies closing down. The parallel challenge is, therefore, for the region to develop new activities to replace the income and jobs lost as the industry shrinks.

Much the same considerations apply to steel-making, which is more dispersed across the EU but which is still much more important for some regions than others – in Northern parts of Spain, in southern regions in Sweden and the north of Finland, as well in the industrial area in the new Member States which spans the north-eastern part of the Czech Republic (Moravskoslezko), the southern part of Poland (Slaskie) and the eastern part of Slovakia (Stredné Slovensko and Východné Slovensko).

Employment in the manufacture of electrical appliances and audiovisual and ICT equipment is also widely spread across the EU, but nevertheless with high concentrations in several Hungarian, Czech and Slovakian regions, where the share in employment is above 4%, more than three times the EU average of 1.3%. As in the case of textiles, this sector also includes activities that are less easily relocated in being closely tied to companies with local headquarters such as Nokia in Finland and Hewlett-Packard in Ireland, especially when new product development is of key importance to remain competitive.

As do rising energy costs

Although it might fluctuate significantly, the price of oil is almost certain to increase over the long-term as more accessible reserves are depleted. This together with the need to reduce greenhouse gas emissions will feed through into overall energy costs. The rate at which this occurs will depend largely on the progress made in energy saving and the extent to which consumption can be reduced relative to GDP. So far, despite efforts made in this direction, energy use has continued to rise as GDP has grown.

Nevertheless, it is still the case that countries with the highest level of GDP per head tend to have the lowest consumption of energy per unit of output. The most notable exception is the US which, largely because of a policy of keeping prices low, consumes 50% more energy relative to GDP than the EU15 (Fig. 1.20).

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Increases in energy costs could affect regions differentially because of varying levels of demand for energy which stem from differences in geographical location, climate and the structure of economic activity:

- Increased energy prices are likely to push up transport costs, unless they are accompanied by greater fuel efficiency to compensate. Since increased costs affect different modes of transport differentially, they are also likely to encourage shifts between these, in particular from road to rail and, where possible, to sea and inland waterways. Nevertheless, the most peripheral regions, such as the northern parts of Finland and Sweden or the most southern parts of Portugal, Spain and Italy, are likely to be most affected.

- Increases in energy prices will also tend to push up the cost of some processes and products more than others and encourage less energy-intensive methods of production and new materials to be developed, such as, for example, composite materials to replace steel which uses substantial amounts of energy in its production. Regions which rely more than others on the industries most affected for income and jobs – the regions specialising in steel-making, for example, as noted above – will tend to lose out unless they can respond in a like way. Regions specialising in tourism could also be affected by the increased price of air travel.

- Regions where there is the possibility of developing or expanding renewable energy sources – wind power, solar, biomass or hydroelectric – could gain as energy use shifts in this direction.

- The rise in energy costs could also encourage a shift in the pattern of settlements within regions with people tending to live closer to where they work, or vice versa, though it will take some time before this is reflected in spatial development.

Climate change is also likely to affect some regions more than others

The 4th Assessment Report from the Intergovernmental Panel on Climate Change published in January 2007 confirms that changes in climate are due to increases in atmospheric concentrations of greenhouse gases which far exceed pre-industrial levels and that this increase in brought about by human activities such as fossil fuel use and agriculture. This once again underlines the urgent need for global action to reduce greenhouse gas emissions. The world's average temperature has already risen by some 0.8 degrees. Historical emissions show that considerable further warming and changes are in store. Global temperatures are likely to rise by up to 4 degrees or more this century if nothing is done.

Within Europe, climate change is altering weather patterns and giving rise to floods, drought, heat waves and forest fires. While the implications of rising temperatures vary in different part of Europe, the overall picture is that the climate change will bring about a fundamental change in the basis for economic activity. This will have direct impacts on regional and territorial cohesion and should therefore be taken into account when defining the future EU cohesion policy.

BOX Floods, droughts and heat waves

Floods

The number of floods in the EU27 has increased every decade since the 1960s[12], while at the same time the costs associated with them have risen substantially, partly as a result of built-up areas continuing to expand in areas prone to flooding (Map 1.12: Flood risk assessment in NUTS3 regions). If this continues, it could increase the frequency and scale of flood disasters because of its effect in reducing the amount of water that the soil can absorb. On top of this, climate change is likely to lead to more extreme weather patterns and itself increase the frequency of floods.

At present, 7% of people in the EU27 live in areas at high risk of flood. This proportion varies from around 2% in Denmark to 12-13% in Austria and Slovakia[13]. In 45 of the 1275 NUTS3 regions for which data are available[14], over 20% of the population is at risk. Thirty of these regions are in Germany, 5 in Austria, 3 in Italy and 2 in Spain, France and Romania.

Droughts and heat waves

Around 9% of people in the EU27 live in an area where there are over 120 days a year, on average, without rain or 4 months. These areas are almost exclusively in Greece, Southern Italy, and Portugal, though there are also a few regions in the south of France and the South-East of the UK, while droughts are common in Hungary and the east of Bulgaria and Romania, though of slightly shorter duration. The frequency and duration of droughts is likely to increase as a result of global warming, with these regions at particular risk.

In addition, four countries – Cyprus, Malta, Italy and Spain – can be termed ‘water-stressed’, in the sense that withdrawals are more than 20% of available reserves. Global warming will reduce rainfall and increase temperatures in these countries, adding to problems of water scarcity.

The impact of heat waves is at present the focus of much research with the aim of preventing a re-occurrence of the consequences of the hot summer in 2003 when between 20 and 50 000 people are estimated to have died[15] and loss of agricultural production amounted to around EUR 12 billion. Heat waves are expected to be commonplace by the middle of the century, putting people of 65 and over at particular risk and increasing the likelihood of fires.

Demography: Europe's changing population

Europe's population is still growing, but is projected to start declining by around 2023[16]. In 2005, only 300 000 more people were born in the EU than died, giving a natural population growth rate of less than 0.1%, one-tenth the rate in the US. According to the latest projection, deaths will outnumber births in the EU from 2008 onwards, leading to a natural decline in the population.

From then on, population growth will depend on immigration. This is already the main source of population growth in the EU. Between 2000 and 2005, 86% of population growth was due to migration, compared to only 42% in the US. If migration trends remain the same, EU population will start to fall in around 15 years time, unless there is a pick-up in the birth rate.

BOX - Demographic challenge in Bulgaria

Among the EU Member States, Bulgaria is in a particularly challenging demographic situation. At the end of 2005, the total population was 7.7 million and is expected to decline significantly by 2050 as a result of a low birth rate, high adult mortality and a high level of net emigration. This has led to population decline of 5.4% between 2000 and the end of 2005. The old-age dependency rate was 44.5% in 2005(. Projections of Bulgaria’s future old-age dependency rate are significantly higher than the EU average (61% compared to the EU average of 53% in 2050), which will have a major effect on the long-term sustainability of pensions.

The rapidly increasing share of those aged 65 or older has implications for social inclusion. The at-risk-of-poverty rate among this age group increased to 16% in 2004 from 14% in 2003. In addition, life expectancy at birth in 2004 was 76.2 years for women and 69 years for men) both significantly below the EU averages. Infant mortality was more than double the EU average in 2004 (11.6 as against 4.5), though it has declined significantly from 27.3 in 1970.

The economic and social impacts of demographic change.

Demographic change will gradually limit the scope for future employment growth. Although the population of working age (aged 15-64) is already expected to decline from around 2011 onwards, total employment in the EU-25 is expected to continue growing up to around 2017 due to rising labour force participation. Thanks to higher education levels and greater labour force attachment of younger cohorts of women, female employment rates are projected to rise from just over 55% in 2004 to almost 65% by 2025, assuming, of course, a counterpart growth in jobs. The employment rates of older workers are also projected to increase, from 40% in 2004 for the EU-25 to 47% by 2010 and 59% in 2025. From around 2017 onwards, however, in the absence of an increase in net inward migration, the shrinking working-age population could lead to the number in employment remaining unchanged and, subsequently, to it declining. Productivity growth will then become the only source of economic growth.

Overall, three phases can be distinguished:

- Between 2004 and 2011, there is scope for significant employment and economic growth as both the population of working age and participation rates are expected to increase.

- Between 2012 and 2017, rising participation rates can offset the decline in working-age population resulting from the baby-boom generation entering retirement and being replaced by much smaller numbers of young people becoming of working age. The overall number of people in the work force in the EU could continue to increase, though at a slower rate and this period could be characterised by tightening labour market conditions.

- After 2018, the ageing effect will dominate. By then, the cohort trend towards higher female participation rates will more or less have come to an end putting even greater pressure on measures to increase participation of women as well as on measures to increase the participation of older workers to raise the effective retirement age. Consequently, the declining number of people of working age can then be expected to result in a decline in total employment and lower prospects for economic growth, though not necessarily of growth in GDP per head.

Changing migration patterns in EU Member States …

In the five years 2000-2005, the Member States experiencing the largest net inward migration (i.e. immigration less emigration) were the three cohesion countries in the south of Europe, Spain, Greece and Portugal plus Italy, countries where immigration had previously been relatively low. In Spain migrants added over 8% to population over this period, while in the other countries, they added over 3%. Inflows were also relatively high in Cyprus as well as in Ireland, in both of which the shares of foreign-born residents was already relatively large (above 10%). By contrast, net migration into Germany, France and the UK, in which foreign-born population shares were also high, amounted to less than 2% of their population (Fig. 1.21).

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The difference between the US and the EU in terms of the share of foreign born residents is not that large (Fig. 1.22). In 2000, the US share of foreign born residents was 11%, in the EU27 it was 8% and in the EU15 it was 11%. As the EU27 has a larger population than the US, the total number of foreign born residents is actually higher in the EU.

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Because the US is a single country and the EU consists of 27 countries, it is arguable that those born in other EU Member States rather than in third countries should be excluded from the comparison to make it meaningful. This amounts to around 2% of EU population. This lowers the proportion to 6% for the EU27 and 8% for the EU15 . However, moving from New York to California is quite different from moving from Portugal to Finland, not only because of the difference in language but also because of far greater cultural differences. Within the EU, there are only a few Member States with more people born in other parts of the EU than in countries outside the EU, Belgium, Luxembourg and Ireland being the most prominent.

The most striking difference between the US and the EU is how foreign-born residents are distributed. In the US, they are concentrated in the two main States of entry, California and New York, where 25% and 20% of the population, respectively, was foreign born in 2000. In contrast, in the EU, there are only three small countries with very large shares, Luxembourg (33%) and Estonia and Latvia (19% in each). In the EU, in four out of five Member States, those born abroad represented between 5% and 15% of the population in 2000[17], whereas this is the case in just two out of five US States. Foreign-born residents were, therefore, more dispersed in the EU than in the US.

Overall, if migration between Member States is included, net inward migration into EU-25 Member States was much the same as into the US over the period 2000 to 2005 (adding 2.1% to population over the five years as against 2.3%). Migration into EU-15 Member States was higher than into the US, Net inward migration, however, varies considerably across the US, adding over 10% to populations in Nevada, Arizona and Florida over the period, more than in any EU country. Only in Spain, Cyprus and Ireland did net migration add over 6% to population and in all other Member States, the figure was under 4%.

… And at regional level

Migration has also been the main factor responsible for differential rates of population growth across EU regions. Some 39 NUTS 2 regions in all experienced net outward migration over the period 2000-2003, the highest rates (5% or more of population) being in eastern Germany, Poland and Bulgaria. Outflows were also significant (2% or more) in southern Italy, northern France, north and eastern Finland and a few parts of the north of the UK (North-Eastern Scotland and Tees Valley & Durham). (Map 1.13: Component of population change, 2000-2003)

By contrast, 66 regions experienced net inward migration of over 5‰ over these three years and 32 regions, of over 8‰. Nine of these were in Spain, 7 in northern and central Italy and two in the south of France. They also include a number of island regions - Cyprus, Malta, Canarias, Illes Balears and Corse (see Box on Island regions).

Economic factors in the form of differences in income levels and employment tend to be the main factors inducing people to move between regions, In Germany, all of the new Länder in the east have experienced a net outflow to the western Länder since the early 1990s, reflecting the substantial gap between the two in terms of income and employment levels. In Italy, migration still tends to be from the less prosperous south to the more prosperous north. In France, people have moved away from the old industrial regions in the North, such as Nord-Pas-de-Calais or Lorraine, to the south.

Box – Islands

There are 16 island regions in the Union with an overall population of around 9.5 million, 70% of them in Sicilia and Sardegna. On average, GDP per head in 2004 was well above that of the lowest income regions in the EU, but (with the exception of Illes Balears, Åland and Gotlands Ian) lower than the EU average. In general, there has been a slow convergence of GDP per head towards the EU average between 1995 and 2004, though for some of these regions (Bornholm, Sicilia, Sardegna, Gotlands Iän, Orkney Islands and Shetland Islands) the gap has widened. These are the same regions (together with the island of Eilean Siar), which have experienced population decline over this period.

Though accessibility often constitutes a particular problem for islands, insularity does not seem to constitute in itself a major obstacle to development. What seems to determine their long-term development prospects is rather their size of population, which in many cases is too small to support a reasonable level of infrastructure and basic services.

Capital cities, as centres of economic activity have also seen significant inward migration. Indeed, this is true in virtually all countries, the migrants in question coming both from other regions in the country concerned (as in the case, particularly, of Helsinki, Stockholm and the capital cities in all the new Member States) and from third countries (as in the case of Madrid and Rome), as well as from other parts of the EU (as in the case of Brussels and Vienna).

Non-economic factors, however, in particular, the quality of life and the attractiveness of the environment, seem to have an increasing effect. The regions concerned include a number with relatively low levels of GDP per head, such as Cornwall in the UK, Ionia Nisia and Peloponisos in Greece, Canarias in Spain and Algarve in Portugal.

Natural growth is slowing down throughout the Union

The significant reduction in fertility rates (the average number of children per woman declined from an average of 2.5 in the EU in 1965 to 1.5 in 1995), which underlies the slow-down in population growth, began in the 1960s in northern Europe and spread some 10 years later to the southern countries and some 20 years later to central and eastern countries. The same trends are, therefore, evident in all parts of the EU[18]. Nevertheless, there are substantial differences between regions in both the direction and scale of population change.

Over the period 2000-2003, just under half (118) of the NUTS 2 regions in the EU experienced natural growth of population. In 30 of these regions, growth was over 4‰ per year – 11 in France, four in Spain, five in the Netherlands, three in the UK (inner, outer London and North Ireland), both regions in Ireland and one each in Sweden (Stockholm) and Austria as well as in Cyprus.

By contrast, the natural population decline was 2