2. Territorial scenarios for Europe: future alternative growth strategies Roberta Capello In cooperation with Roberto Camagni, Andrea Caragliu, Ugo Fratesi ERSA-DGRegio lectures Bruxelles, 8 April 2016 Politecnico di Milano and Past President of RSAI

3. Objectives of the presentation To present scenarios for European territory in the future (2030) under alternative assumptions on specific driving forces of change. Scenarios have been built in the ESPON ET2050 project and in the FP7 GRINCOH project. 2

4. The foresight tool: the MASST-3 model Scenarios are based on the MASST model MASST is an econometric forecasting model. Previous versions of MASST developed for ESPON 3.2 (2004-5); ESPON SPAN (2010-11); DGRegio projects. The model is able to simulate effects on regional growth of: -the economic crisis; -macroeconomic elements (public budget constraints, sovereign debt, spread in interest rates on public bonds, exchange rates); -territorial capital (innovativeness, trust, agglomeration economies, HC); -cohesion and infrastructure policies. 3

5. Methodology for building scenarios: a sketch The methodology for building scenarios is made on the following steps: starting from a ‘seminal idea’ about the driving forces believed to characterize future economic-territorial development (assumptions), the basic characteristics of a scenario are built, together with the relevant conditional elements, the most likely bifurcations in the driving forces (qualitative assumptions); these conditional elements are plugged into the econometric model, as assumed values of the independent variables of the model (quantitative assumptions: levers of the model); identifying the magnitude of the most likely effects on European regions through a simulation procedure (scenarios). The simulation period runs from 2013 through 2030.

6. Conditional elements: integrated scenarios 5 A scenario is an integrated vision of the different driving forces that are expected to have effects on future trajectories. Therefore: - individual driving forces must be related to each other, and cross feed- back effects must be underlined, i.e. the assumptions have to be highly consistent: this overall coherence has to be reflected in the label given to the scenario; - one has to assume an “if.... then..” logic, keeping assumptions carefully separated from effects; - the assumptions on the driving forces should be as differentiated as possible, sometimes even opposite to each other, so as to yield differentiated images.

7. Assumptions of the Baseline Scenario (2030) - the socio-economic and demographic trends of the past will continue, and no major change (beyond the crisis) will alter the EU economy; -economic policies will remain the present ones (stable budget for SFs); -a general slow economic recovery will start in 2016; -a slight increase in competitiveness of European countries is assumed in 2030; -interest rates on bonds will return back to lower, pre-crisis values, thanks to the end of strong financial speculation; -the stability pact remains the same, imposing highly restrictive fiscal policies. n.b. These assumptions were agreed in December 2011, and revisited after Draghi’s interventions in July/September 2012, which stopped the speculations on the euro. The final conditional quantitative foresights have been run in early 2013. 6

8. RESULTS FOR THE BASELINE SCENARIO (2030)

9. 8 Average annual GDP growth rate Average annual population growth rate Average annual employment growth rate Average annual manufacturing employment growth rate Average annual service employment growth rate EU27 1.890.311.581.381.63 Old 15 1.880.471.531.481.54 New 12 1.93-0.381.900.982.33 1. The New12 countries grow a little more than the Western countries. 2. New12 countries increase employment in services more than in manufacturing, entering a new stage of development. 3. Western countries show a balanced growth between manufacturing and services. Aggregate results of the Baseline scenario

10. Baseline: annual average GDP growth rate 9 Two speed Europe; Southern peripheral countries grow less than Northern countries. Southern European countries discount the difficult present conditions on their future evolutionary trajectories. Eastern European countries still grow more than the EU 15, but this is not enough to catch up the GDP per capita levels of the Western countries in 2030. Overall intra-national regional disparities increase.

11. Theil index in the Baseline scenario (2030) 10 Total regional disparities Inter-national disparities Intra-national disparities

12. EXPLORATORY SCENARIOS (2030)

13. Summary of assumptions for the exploratory scenarios “Megas” scenario Market driven scenario; welfare system fully privatized; financial debt repaid in 2030; budget reduced for cohesion policies; concentration of investments in European large cities. “Cities” scenario Public policies mostly at national level; actual welfare system reinforced through increased taxation; financial debt fully repaid in 2050; budget maintained for cohesion policies; concentration of investments in second rank cities. “Regions” scenario Social policies; strong public welfare system paid through debts; financial debt not repaid in 2050; budget significantly increased for cohesion policies; concentration of investments in rural and cohesion areas. 12

14. 13 Aggregate GDP growth results for the exploratory scenarios 1. The “Cities scenario” is the most expansionary: territorial capital and the urban system are better exploited than in the other scenarios. 2. This holds also for New 12 countries, even if to a more limited degree 3. New 12 countries are those that gain in the regions scenario with respect to the baseline. AggregatesBaselineMegasCitiesRegionsMegas vs. baselineCities vs. BaselineRegions vs. Baseline EU271.892.222.311.820.330.42-0.06 old151.882.222.311.810.340.43-0.07 new121.932.222.231.980.290.300.05

15. GDP growth rates in the Megas scenario: differences with respect to the baseline In Western countries: - strong advantages to rich and central regions; - rural areas of rich regions gain relatively less; - relatively poor countries (like Greece) take advantage of a general increase in demand. In Eastern countries: - relatively more diffused growth, thanks to a general recovery of the EU economy.

16. GDP growth rates in the Cities scenario: differences with respect to the baseline In Western countries: - more widespread and diffused growth at intranational level; -strong countries like Germany, the Netherlands, Austria, increase less than Southern countries (catching-up). In Eastern countries: -diffused advantages, relatively less pronounced than in Western; -similar increase in growth than in the megas scenario.

17. GDP growth rates in the Regions scenario: differences with respect to the baseline Central/core regions grow less than in the baseline scenario. Rural or peripheral areas gain relatively more than in the baseline scenario. This holds for both Western and Eastern countries.

18. Theil Index by Scenario: Total Regional Disparities The “Cities” scenario is also the most cohesive! (disparities increase less)

19. Theil Index by Scenario: Between Country Disparities The “Cities” scenario is the most cohesive! (disparities shrink more)

20. Theil Index by Scenario: Inside Country Disparities In this case, the “Regions” scenario is the most cohesive (et pour cause!)

21. Conclusions: Designing new cohesion policy: competitiveness vs. cohesion? The (supposed) trade-off between two goals, efficiency and equity, has always characterized the European policy debate and the suggested strategies: -a “competitiveness” strategy, favoring highest returns on investments on core areas, the “champions”, so to achieve higher aggregate growth rates and obtain higher fiscal revenues on which redistributive policies can rely; vs. - a “cohesion” strategy oriented towards the support of weaker and peripheral regions, favoring equity rather than competitiveness goals.

22. Competitiveness vs. cohesion: beyond the trade-off (1) Recently the very existence of this efficiency/equity trade-off was questioned (OECD, 2001; Camagni, 2001; Camagni, Capello, 2015) emphasizing: - the aggregate development effects of sound spatial development policies (wider utilization of territorial capital), on the one hand, and - the economic and social costs of a spatially concentrated development process on the other (inflationary pressures in particular). Our impression is that the trade-off idea appears as a misleading, short-term (and old) approach to territorial policies.  A selection of the most appropriate places inside lagging areas on which to concentrate public investment and support could be a sound intermediate choice, merging the advantages of concentration strategies and the virtues of place-based approaches.

23. Competitiveness vs. cohesion: beyond the trade-off (2) Modern territorial development policies should be designed so as to maximize the returns to public investments (“do more with less”). This goal is achieved through the capability of single policies to: - intervene bottom-up through local actors, depositaries of relevant local information; -act on the specificities of each single area, - push local actors to “tap” and mobilize previously “untapped” assets of territorial capital. the aggregate development effects will be maximized, and at the same time the economic and social costs of an unbalanced development process will be kept under control.

24. THANK YOU VERY MUCH FOR YOUR ATTENTION! Roberta Capello Department ABC - Politecnico di Milano Piazza Leonardo da Vinci 32 - 20133 MILANO tel: +39 02 2399.2744 - 2399.2751 fax: +39 02 2399.9477 roberta.capello@polimi.it 23