The emergence of core-periphery structures in the European Union: A complexity perspective

Gräbner, Claudius; Hafele, Jakob Working Paper The emergence of core-periphery structures in the European Union: A complexity perspective ZOE Discussion Papers, No. 6 Provided in Cooperation with: ZOE. institute for future-fit economies, Bonn Suggested Citation: Gräbner, Claudius; Hafele, Jakob (2020) : The emergence of core-periphery structures in the European Union: A complexity perspective, ZOE Discussion Papers, No. 6, ZOE. Institut für zukunftsfähige Ökonomien, Bonn This Version is available at: https://hdl.handle.net/10419/224134 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ Growth, Prosperity and the environment: Integrating environmental and social indicators into QUEST The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective Claudius Gräbner, Jakob Hafele ZOE Discussion Papers | No. 6 | August 2020 ZOE Discussion Papers No. 6 ·August 2020 The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective Claudius Gräbner1,2,3, Jakob Hafele1,2 1: ZOE. Institut für zukunftsfähige Ökonomien. 2: Johannes Kepler University Linz, Institute for the Comprehensive Analysis of the Economy. 3. Institute for Socioeconomics, University of Duisburg-Essen. Abstract: This paper investigates the emergence of polarisation patterns in the EU during the last 60 years from a structuralist and complexity economics perspective. Based on the results, feasible opportunities for EU policy-making, which aim to counteract a tendency of polarization, are delineated. The study comprises of a historical analysis of the politico-economic events during this time and a complementary quantitative analysis of the European trade network. The results suggest that trade in the Eurozone is unequal at the expense of the peripheries and follows a pattern of “unequal technological exchange”. The paper also assesses the usefulness of country taxonomies such as ‘cores’ and ‘peripheries’ for identifying the roots of polarization patterns. While it generally affirms the relevance of structural dependencies, and confirms the epistemic usefulness of country taxonomies, it also highlights three challenges – the challenges of dynamics, of ambiguity and granularity – that any such taxonomy necessarily faces, and which must be dealt with explicitly in any structuralist analysis using such taxonomies. Licence: Creative-Commons CC-BY-NC-ND 4.0. Herausgeber /Publisher: ZOE. Institut für zukunftsfähige Ökonomien e.V., Thomas-Mann-Straße 36, 53111 Bonn. [email protected] ·www.zoe-institut.de ·ISSN 2627-9436. ZOE Diskussionspapiere präsentieren wirtschaftsund sozialwissenschaftliche Analysen von Potentialen und Hemmnissen für eine zukunftsfähige Wirtschaftsordnung. ZOE discussion papers present economic and socio-scientific analyses of potentials and barriers for a future-fit economic system. 3Gräbner, Hafele: The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective 1 Introduction This paper studies polarisation patterns in the EU during the last 60 years from a structuralist perspective. It pursues two goals, one substantial, the other methodological: first, it seeks to contribute to a better understanding of the historical roots of polarization patterns in the EU and to delineate pragmatic and feasible policy measures that can be used to counteract current polarization patterns. Second, existing structuralist studies regularly use country taxonomies, such as ‘cores’ and ‘peripheries’ in their analysis, and then try to identify structural interdependencies between the groups. Grouping countries always comes with a loss of information and a certain degree of ambiguity. Therefore, the second goal of this paper is to ask critically to what extent the analytic gain of using such country taxonomies outweights their potential costs of shallowing the particularities of single countries. Political and economic polarization patterns in the EU have been documented by several recent studies (e.g. Celi et al., 2018; Gräbner et al., 2019, 2020b; Simonazzi et al., 2013). The reasons for these patterns remain, however, subject to debate. While some prominent explanations consider the financial crises in 2008ffas a major source for these polarization patterns, others stress that polarization has its roots in the decade before the financial crisis (e.g. Gräbner et al., 2020b). The present contribution goes back in time even further: inspired by structuralist theorists such as Musto (1981) – who warned already in 1981 that “growing inequalities, caused by regional concentration of economic activities, will lead to permanent structural crisis in the Union, predetermine the development outlook of the new [Southern] member states and hinder further integration” (p. 245, translation by the authors) – it searches for deeper structural reasons of ongoing polarization dynamics in the whole time period since the 1960s. Considering such longer time horizon also allows for a critical evaluation of the dynamics of core-periphery structures with regard to the actors involved: as will be shown below, although the core-periphery structure as such can be observed over almost the entire time frame since the 1960s, the allocation of countries to the core and the periphery as such is not entirely stable. An adequate consideration of such longer-term phenomena is important in the context of the second main focus of the paper, i.e. the critical evaluation of a structuralist approach to study polarization in the EU. Before we proceed, two methodological clarifications are in order: first, the present paper rests upon the triangulation of two non-standard approaches to socio-economic development: structuralism and economic complexity. The two approaches are complementary since complexity economics provides for a number of methods that can be used to study patterns – which have been described by structuralists many years ago – quantitatively and in more depth. At the same time, structuralism can provide for a theoretical framework that most current complexity economic studies are lacking. By contextualizing the quantitative part of the investigation, the two approaches are triangulated in a way that is consistent with a critical realist perspective (Lawson, 1997). Second, since approaches are also characterized by a focus on the productive sphere of the economy and for the pragmatic reason of data availability, most of the discussion that follows focuses on economic development and polarization in the manufacturing sector. This can be justified by the structuralist contention that the industrial sector of a nation is crucial for its overall development since it not only provides for accessible employment opportunities for both skilled and unskilled labor, but is also essential for the diffusion of productive knowledge within the economy. To achieve the two main goals of the paper – to delineate guidelines for policies based on a historical analysis of polarization patters in in the EU and to scrutinize the usefulness of structuralist country taxonomies for such an analysis – it proceeds as follows: section 2 explicates the theoretical origins of our work by reviewing structuralist contributions to the EU and it’s predecessors. These contributions are characterized by the analytic use of core-periphery country taxonomies. Section 3 provides for the context of the later empirical analysis by conducting a politico-economic analysis of the major development events in the EU since the 1950s. These elaborations suggest that there is evidence for the existence and stability of core-periphery structures in the EU. Section 4 then highlights a so far underappreciated dimension of these structures: that of an unequal technological exchange. These contributions are then synthesized in section 5. This includes a discussion of the policy implications that are suggested by the results and an assessment of their pragmatic feasibility in light of EUs current room to manoeuvre. Finally, section 6 concludes. 2 The theoretical framework: core-periphery theory and structural polarization - a literature review 2.1 The theoretical vantage point: core-periphery thinking, structuralism and economic complexity The reference to the core-periphery distinction can be traced back to early philosophers like Plato (Sepos, 2016). Today, is plays a role in a number of approaches in economics and political economy, including the ‘New Trade Theory’, ‘New Economic Geography’, the ‘Varieties of Capitalism’ (VoC) approach and structuralism. New Trade Theory (NTT) has been pioneered by Paul Krugman who developed several general equilibrium models of international trade built upon theories of monopolistic competition and production under increasing returns to scale. In Krugman (1981) he presents a model that explains the emergence of ‘core’ and ‘periphery’ countries by the cumulative effects of capital accumulation: the country with www.zoe-institut.de/discussion Institut für zukunftsfähige Ökonomien ·Discussion Paper 6/2020 4Gräbner, Hafele: The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective an initially more favorable capital-labor ratio will become rich and industrialized, while the other country will become capital-poor and agricultural. In Krugman (1991), which is often considered the vantage point for what later will be called ‘New Economic Geography’ (Fujita et al., 1999), he develops these ideas further and studies the emergence of cores and peripheries within a single country. In all, both NTT and NEG are built upon general equilibrium models in which cores and peripheries are mere outcomes of the models, which are not themselves used for explanatory purposes. This is different in the VoC approach, which goes back to Hall and Soskice (2001): It stands for a comparative institutional analysis of market economies based on New Institutionalist theory and with the aim to identify certain ‘ideal types’ such as ‘liberal’ or ‘coordinated’ market economies. A number of studies on the EU in this tradition are present in the literature (see Hall, 2018, for an overview). The main units of analysis of this work have been the single countries and their institutions, which are then compared to the ideal types suggested by the theory. As in the case of NTT and NEG, the relations between the countries as such receive relatively little attention. Structuralists, by contrast, emphasize exactly those relations as key explanatory factors for the emergence and stability of core-periphery patterns across countries. Unequal distribution of political power and asymmetric trade patterns favouring core countries are considered central characteristics of these relations. Together with the relations between cores and peripheries, structuralist research regularly refers to the distribution of technological capabilities and – through the concept of circular cumulative causation (Myrdal, 1958) – income inequality as further key explanatory devices (for an overview see Bárcena and Prado, 2016). Given ample evidence for the political and economic importance of the relations between countries in the EU (e.g. Celi et al., 2018), the present paper finds itself much closer to structuralism than NTT, NEG or the VoC approach. The main focus will be on one particular aspect of this relationship, which has been highlighted regularly by structuralist scholars: international trade and the dynamics of the manufacturing sector. Of particular relevance here is the idea of an ‘unequal exchange’ between the core and the periphery. This concept goes back to Prebisch (1950) and Singer (1950), who have identified an unequal exchange between primary goods produced in the peripheries and industrial goods produced in the cores. They found that this leads to a constant deterioration of the terms of trade for the peripheries with adverse consequences for industries in peripheries. Emmanuel (1972) picks this up and comes up with his own theory of unequal exchange in which he puts differences in wages at the heart of his explanation for the uneven development between cores and peripheries hindering the development in peripheries. The present paper complements structuralist theory with methods and concepts from the literature on economic complexity (see Hidalgo, 2015; Hidalgo et al., 2007), a combination that has so far been undertaken only in Gala et al. (2018) At the core of the complexity literature is the idea that a key explanation for a society’s wealth is the ability of its citizens to collectively engage in sophisticated economic activities, such as the production of complex products. Analyzing international trade data with tools from network science, Hidalgo and Hausmann (2009) allows the delineation of indicators that measure the complexity of products (i.e. the amount of technological capabilities needed to produce the product) and of countries (i.e. the amount of collective capabilities accumulated in this society). The resulting formal apparatus allows for the empirical identification of core-periphery patterns in global production structures, as anticipated by earlier structuralist scholars. As we will discuss in sections 4 and 5 below, it also allows for the extension of structuralist concepts since with the complexity of products a new dimension of unequal exchange between cores and peripheries can be investigated. 2.2 Structuralist analyses of core-periphery relations in the EU The present study is by no means the first structuralist analysis of polarization patters in the EU. As one of the first of its kind, Musto (1981) stressed the relevance of the unequal distribution of technological capabilities, and predicted structural crisis because of the increasing polarization between technologically advanced and less-advanced regions in the EU. More recently, Simonazzi and Ginzburg (2015) analysed the trends that led to the uneven development between Southern European peripheries and core countries. In short they argue that the deindustrialization of the European peripheries in the 1970s followed increased international competition and market saturation for peripheral exports in core countries. According to the authors this was amplified by the fact that the state was prevented from investing in industrial upgrading in times of liberal integration to the EU. Moreover, the financial liberalization policies since the late 1980s have had particularly negative effects on the development of Southern periphery countries, because their national control mechanisms were particularly weak and speculation had been amplified over-proportionally if compared to the core countries (see also Celi et al., 2018; Kapeller et al., 2019; Stockhammer, 2015). These dynamics implied unsustainable debt driven growth in the peripheries that covered up the underlying structural problems and subsequently culminated into the financial crisis 2008. Here, Simonazzi and Ginzburg (2015) make an argument that is common for structuralists: countries in the European periphery are affected differently by more general dynamics, and these different reactions tend to reproduce existing core-periphery relationships (see also Celi et al., 2018). Gräbner et al. (2019) argue that the path dependent development of production structures in cores and peripheries, which they link to the deeper accumulation dynamics of www.zoe-institut.de/discussion Institut für zukunftsfähige Ökonomien ·Discussion Paper 6/2020 5Gräbner, Hafele: The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective their technological capabilities, is a key driver for diverging development in the EU (for a discussion of how the 2020 Corona-crisis aggravates these trends see Gräbner et al., 2020a). They show empirically that the increase of economic openness in the EU tends to aggravate the structural polarization in the EU and argue that convergence can only be achieved via a change of institutions and active industrial policy. A slightly broader perspective is taken by Kapeller et al. (2019), who add the increasing focus on competition in the EU as a further explanation for polarization patterns and present a set of policy measures that can address these shortcomings. These arguments relate well to the work of Storm and Naastepad (2015) as well as Dosi et al. (2015), and stresses – in a very structuralist spirit – the relevance of technology gaps, i.e. the uneven distribution of technological capabilities between core and periphery regions in Europe: Many periphery countries simply lack the technological capabilities to compete successfully in the relevant international markets, and experience too high levels of domestic inequality to stabilize their aggregate demand internally. Another factor that is regularly stressed in structuralist theory is that of politico-economic power (see already Sunkel, 1972) For the context of the EU, for instance, Becker et al. (2015) argue that the implementation of the Deutsche Mark as anchor currency prior to the introduction of the Euro gave the German central bank the power to dominate the monetary policy of the EU. The restrictive monetary policy that followed from this dominance then had asymmetrically negative impacts on countries in the periphery, thereby reinforcing existing core-periphery structures (for the asymmetric effects of the Treaty of Maastricht see, e.g., Storm, 2019). The institutional shift that came along with the monetary integration can be understood as a shift in political power away from national democratic institutions and towards technical state apparatuses which made it increasingly difficult to challenge those asymmetric structures (Schneider and Sandbeck, 2019). The same can be said for the responses to the Euro crises, which was driven by the interest of core countries (Magone et al., 2016) and had adverse effects on peripheries (Storm and Naastepad, 2015). This focus on the long run relationship between core and periphery, the consideration of power relations, as well as development of productive structures and technological capabilities is again a typical feature of structuralist analysis (Bárcena and Prado, 2016). Therefore, the emergence of core-periphery structures in Europe has recently been linked to the idea of ‘growth models’ (see e.g. Baccaro and Pontusson, 2016). The latter are used to explain the membership in the core or the periphery with the pursuit of different growth models (Gräbner et al., 2020b). The literature on growth models is concerned with the composition of aggregate demand, and according to the most common distinction, the European core has followed an export-driven growth model and the periphery has followed mainly a debt-driven growth model, which was rendered infeasible after the crisis (Gräbner et al., 2020b; Stockhammer, 2015). When elaborating on the reasons why some countries have seen the emergence of a debt-led rather than an export-led growth model to stabilize aggregate demand, Gräbner et al. (2020b) stress the relevance of non-price competitiveness, which mainly depends on the accumulation of technological capabilities and is essential for being successful on international markets (see also Dosi et al., 2015). Three things are noticeable with regard to the various structuralist contributions of European development dynamics: first, while all these contributions make use of country taxonomies, no commonly accepted classification exists. Second, some authors use additional country groups beyond the simple core-periphery dichotomy. Third, most contributions don’t provide a clear definition of cores and peripheries. This leads to a variety of country taxonomies that are currently used in the literature (see table 1 for an overview). 2.3 Three challenges for structuralist country taxonomies Differences in the country taxonomies used in the literature relate to different selections of variables and indicators, different methods and different personal assessments used to classify countries. Here we suggest the existence of three main challenges for country taxonomies as used in structuralism that are underlying these difficulties: first, the challenge of dynamics, which refers to the fact that countries might switch from one group to another over time. Ireland is an example that comes immediately to mind which switched from being a periphery, very depended on the UK, to a financialized country with considerable GDP growth throughout the 1990s (notwithstanding more recent problems of Irish GDP accounting). Second, the challenge of ambiguity, according to which countries might belong to the core in one sense, and the periphery in another sense. France, for instance, is a politically important player, yet features some typical economic characteristics of peripheries. Third, the challenge of granularity stresses that countries themselves might be divided into core and periphery. Within Spain, for example, the North plays the role of a core, the South the role of a periphery. These three challenges illustrate that any fixed country typology must be used carefully. Nevertheless, the present paper also grants credit to the structualist argument that the relationship between core and peripheries is an important ingredient to any explanations of the developmental dynamics in the EU. However, to take the three challenges seriously we fully acknowledge the potential ambiguity of any static topology and respond to this by an explicit discussion of the challenges whenever they appear relevant. These discussions will not only prove to be insightful on their own, but also allow us to draw a more nuanced picture of the www.zoe-institut.de/discussion Institut für zukunftsfähige Ökonomien ·Discussion Paper 6/2020 6Gräbner, Hafele: The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective Source Country groups used Main methods of classification Gräbner et al. (2019) Core, periphery, financial hubs, catch-up economies Descriptive statistics, analysis of technological change, hierarchical clustering based on reaction to European integration Esposito et al. (2019), López-Bazo et al. (1999), and Vickerman et al. (1999) Core, periphery Location, north – south Becker et al. (2015) and Simonazzi et al. (2013) and others1 Core, periphery Other, e.g.: level of trade integration, GDP, level of industrialization, power, size, productivity Seers (1979) Core, semi-periphery, inner and outer periphery Technological capacity, capital goods industries, military power, national owned industries, main import and export goods, per-capita income, dualism between urban upper class and rural lower class, dependence on migration and tourism, lack of diversification and factor mobility, inability of governments to impose sacrifices on any class, foreign indebtedness Farole et al. (2011) and Thomas (2013) Sub-national /regional core and periphery GDP and export (Thomas, 2013), economic agglomeration (Farole et al., 2011) Simonazzi and Ginzburg (2015) First-comer industrialized (cores) , late-comer and late-late-comer industrialized (periphery) level of industrialization, productivity (performance dependent on four factors: 1) innovation, 2) position in global value chains, 3) support by infrastructures and institutions and 4) industrial policy) Bartlett and Prica (2016) Core, Inner Periphery, Outer Periphery (European Periphery outside of the Eurozone), Super Periphery (outside of the EU and the Eurozone, but influenced by developments in the EU) Structural imbalance between core and periphery Table 1: Taxonomies used in the current literature. determinants of the developmental dynamics in the EU. Therefore, the paper proceeds as follows: the paper adopts as a baseline taxonomy the classification proposed in Gräbner et al. (2019) with the only exception being France, which is – because of its political power (Schneider, 2017) – considered a core country in the present paper 2 . The resulting taxonomy is summarised in table 2. This taxonomy is not only based on both theoretical and empirical considerations, it also represents a workable compromise between aggregation of similar countries into meaningful groups, and sufficient granularity to account for specifics. Moreover, the typology is based on a perspective 1 For instance, Bayoumi and Eichengreen (1992), De Santis and Cesaroni (2016), Leonardi (2006), Magone et al. (2016), and Rhodes (1995). 2 Note that Gräbner et al. (2019) mainly used economic rather than political variables for their classification. on the current situation in Europe. Therefore, the historical analysis in section 3 allows for a critical analysis of how countries arrived at their current place in this typology and, because of the long time horizon covered, allows for a critical reflection of the taxonomy, particularly against the three challenges mentioned above. Before proceeding with the historical analysis, the classification of one country deserves further justification: Considering Italy as part of the periphery is certainly a controversial choice, which provides for an immediate illustration of the three challenges introduced above. First, as will be shown below, Italy is subject to the challenge of dynamics since it cannot be considered to be part of the European periphery right from the 1950s. Second, Italy illustrates the challenge of ambiguity, since it is politically quite influential in Europe www.zoe-institut.de/discussion Institut für zukunftsfähige Ökonomien ·Discussion Paper 6/2020 7Gräbner, Hafele: The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective Category Distinguishing characteristics Members Core High GDP per capita levels Importance of industrial production Production of complex products Relatively low unemployment Austria, Belgium, Denmark, Finland, France, Germany and Sweden Periphery Lower export shares Relatively high public debt Tendency to current account deficits Relatively high unemployment Cyprus, Greece, Italy, Portugal, and Spain Catch-Up Relatively low levels of wages and GDP per capita High degree of foreign ownership Small service sector, but important manufacturing sector Bulgaria, Romania, Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovenia, Slovakia Finance High debt levels of private firms Important share of finance in terms of gross output High foreign investment inflows Large incomes from wealth taxes Luxembourg, Netherlands, Malta, and Ireland Table 2: Our baseline taxonomy, mainly based upon Gräbner et al. (2019), who further justify the taxonomy via an analysis of the technological development paths in all the countries, as well as their reactions to European economic integration. and the world: it is part of the G7 and has an influential voice within European policy debates. However, there are also reasons for the classification of Italy as periphery country: not only is it struggling with low productivity, but it also plagued with high levels of public debt and relatively high unemployment rates. Thus, in economic terms, Italy shares more with countries typically associated with the periphery. And also the political position within Europe might not be as strong as the size and the history of the country might suggest. As the current debate about the introduction of European bonds, particularly during the Covid19-pandemics (‘Corona-Bonds’) shows, Italy cannot enforce their interests effectively against Germany and other Northern European countries. Finally, Italy also illustrates the challenge of granularity. Some parts of Italy, particularly in the North-West, host very productive, highly innovative and internationally competitive industries and are characterised by low unemployment and high incomes. At the same time, other areas, particularly the Southern ‘Mezzogiorno’ are lagging economically, suffering from high unemployment and technologically inferior businesses. Thus, there are cores within the periphery, just as there are some peripheries within the countries classified as cores (some parts of Eastern Germany immediately come to mind). 3 Developmental trends in Europe since 1950 The structuralist contributions reviewed in the preceding section suggest that unequally distributed technological capabilities, as well as the asymmetric power relations between core and periphery countries, play an important role for current polarization dynamics. Since they also stress the relevance of path dependencies inherent in the politico-economic environment, the present exposition takes a long-term perspective starting from 1950s. 3.1 Catching-up after the second World War The 1950s and 1960s were, at first sight, a time when today’s periphery countries experienced good economic development: the industrial sectors in the Southern European peripheries were growing steadily, supported by the protectionist policies in place (Foreman-Peck and Federico, 1999). In effect, the peripheries showed considerable growth rates. For example, in the 1960s Greece experienced the 2nd highest average growth rate worldwide, exceeded only by Japan (data: World Bank). However, because of their backlog in terms of technological capabilities, the European peripheries remained dependent on capital and technology imports from the core – a situation that structuralists describe as ‘dependent industrialization’ (e.g. Nohlen and Schultze, 1985). According to Becker et al. (2015) this led to current account deficits financed by tourism and remittances from the core countries – a highly dependent development model making the peripheries vulnerable to crises. The time after the second World War also provides for a first example for the challenge of dynamics. Italy, in most of the core-periphery literature treated as a periphery, was at www.zoe-institut.de/discussion Institut für zukunftsfähige Ökonomien ·Discussion Paper 6/2020 8Gräbner, Hafele: The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective this point of time much closer to the core: it industrialized earlier than Greece, Spain and Portugal and, consequently, had a much stronger industrial base in the 1960s than the other countries. Thus, it also enjoyed a considerably higher standard of living (Simonazzi and Ginzburg, 2015). Until about 1962, the Italian economy also experienced further industrialisation and upgrading, fuelled by protective and active policies and quick urbanisation (Celi et al., 2018). France on the other hand, often treated as core country because of its considerable political power and its high GDP (Seers, 1979) has shown a negative trade balance throughout the 1960s and 1970s (data: COMTRADE) and lagged behind in terms of size and complexity of its industries. Since its political position was already very strong at that time, it also represents an example for the challenge of ambiguity at that time. This indicates that countries may switch positions within a given taxonomy and begs the question about the determinants of such changes – a question that will be taken up below. 3.2 Economic liberalization, increased competition and the end of convergence in the 1970s and 1980s The Treaty of Rome set the stage for an ongoing process of economic liberalization which culminated in the integration of Greece, Portugal and Spain into the European single market in 1981 and 1986, respectively. The rules of the Single Market were applied to all countries equally – to the economically and technologically strong core countries as well as the economically and technologically less developed peripheral countries (see table 2). The integration of Greece, Portugal and Spain into the Single Market led to increasing imports from the technologically strong core countries. These flows of manufactured goods from the core into the periphery followed the liberalization and put the previously well-protected industries in the periphery under increased competitive pressure. There are a number of arguments for why the industries in the peripheries were not ready for this increasing competition: 1. their lower productivity as compared with the firms in core countries (Hummen, 1977; Musto, 1986; Seers, 1979), 2. their smaller size and inability to exploit economies of scale (firms in the peripheries were much smaller, handicraft type of manufacturing, as compared to the large industrial plants in the cores Hummen, 1977; Zouboulidis, 2006), 3. their low innovativeness (Seers, 1979; Simonazzi and Ginzburg, 2015), and 4. less linkages with other industries and related services (Simonazzi and Ginzburg, 2015; Zouboulidis, 2006). The shift of policies towards integrated markets was not an isolated European phenomenon. The replacement of Keynesian polices with market-liberal policies in the 1970s led to an increasing globalization of manufacturing structures and the rapid growth of global production networks (Dicken, 2015). This change was accompanied by a centralization of worldwide industrial production into fewer and larger firms and thus also an accumulation of power in these production networks (Dicken, 2015; Kapeller and Gräbner, 2020). So-called lead firms, which often resemble an oligopoly within the production network, faced smaller suppliers who were exposed to increased competition. This asymmetrical structure allowed lead firms to decide what, when, how and where to produce and to exert price pressure on the suppliers creating a new kind of dependency of firms that were integrated into those networks as suppliers (Milberg and Winkler, 2013, p. 111ff., 123ff.). This shift was accompanied by increasing demand for complex and high-quality goods in European core-countries, based on the saturation of those markets with durable consumer goods (Simonazzi and Ginzburg, 2015, p. 112 ff). Companies responded with vertical product differentiation, shortened product cycles and services-based marketing strategies. Thus, more complex and higher-quality products were created, which were integrated into a marketing-oriented service sector making it more difficult to compete with. For the European peripheries it became much more difficult to produce competitively with core-countries industries because the shift towards more complex products meant that tacit productive knowledge, sectoral linkages and broad production networks became relatively more important as main determinants for international competitiveness (e.g. Carlin et al., 2001; Dosi et al., 2015). These demands could only be met by very few of the most productive firms in the peripheries. The oil crisis in the 1970s came on top of the increased competition stemming both from the EU market liberalization and the globalization of production structures. Those two effects led to the exit of smaller and younger industries in the peripheries. Figure 1 shows that the share of manufacturing value added (MVA) in GDP started to decline, even before the countries had gone trough a proper experience of industrialization, given rise to a ‘premature de-industrialization’ (Rodrik, 2016). This premature de-industrialization marked a turning point in the catch-up process of the European peripheries. A phase of broad and rapid industrialization was interrupted and replaced by a phase in which only the most productive industries survived, mostly by being integrated into global production networks. This led to a new type of dependent development in which peripheral economies became depended on lead-firms in global production networks. Figure 2 depicts the stable catch-up process until the oil-crises, which then became volatile and finally stopped.3 3 The data we use comes from UN INDSTAT. UNIDO gathers that www.zoe-institut.de/discussion Institut für zukunftsfähige Ökonomien ·Discussion Paper 6/2020 15 Gräbner, Hafele: The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective −0.10 −0.05 0.00 0.05 (−3,−2] (−2,−1] (−1,0] (0,1] (1,2] PCI corridor Share of exports of core minus periphery Difference between exports in (1961,1971] −0.10 −0.05 0.00 0.05 (−5,−3] (−3,−2] (−2,−1] (−1,0] (0,1] (1,2] PCI corridor Share of exports of core minus periphery Difference between exports in (1971,1981] −0.05 0.00 0.05 (−5,−3] (−3,−2] (−2,−1] (−1,0] (0,1] (1,2] (2,3] PCI corridor Share of exports of core minus periphery Difference between exports in (1981,1991] −0.04 0.00 0.04 (−5,−3] (−3,−2] (−2,−1] (−1,0] (0,1] (1,2] (2,3] PCI corridor Share of exports of core minus periphery Difference between exports in (1991,2001] −0.025 0.000 0.025 0.050 (−3,−2] (−2,−1] (−1,0] (0,1] (1,2] (2,3] PCI corridor Share of exports of core minus periphery Difference between exports in (2001,2011] −0.025 0.000 0.025 0.050 (−5,−3] (−3,−2] (−2,−1] (−1,0] (0,1] (1,2] (2,3] PCI corridor Share of exports of core minus periphery Difference between exports in (2011,2016] Export surplus for core Export surplus for periphery Data: Atlas of Economic Complexity (SITC data); authors' own calculations. Figure 7: Unequal technological exchange in the Eurozone. The Product Complexity Index (PCI) corridor groups products by their complexity, with higher values indicating higher complexity. The values on the y-axis indicate the export surpluses of the groups with positive values indicating a relative surplus for core countries, and negative values indicating a relative surplus for periphery countries. policy measures. Third, section 2.3 introduced three challenges for structuralist country classification: the challenges of dynamics, ambiguity and granularity. Throughout the historical view on the developments in Europe on encounters numerous examples for the relevance of each of these challenges. Italy, for instance, has moved from the group of core countries in the 50s to the periphery, illustrating the challenge of dynamics. France is a country that holds both characteristics of a core country (e.g. influential political position), as well as a member of the periphery (e.g. high unemployment and vulnerable labor markets), thereby illustrating the challenge of ambiguity. And Spain with its ’cores within the periphery’ does the same for the challenge of granularity: regions in the North are economically extremely well-offand competitive, while much of the remaining countries is facing serious economic problems. This suggests that country classifications have to be used carefully and the criteria for the classification must be made very explicit. Moreover, one must keep in mind that heterogeneity both within country groups as well as within countries might be considerable and that despite path dependencies it is not impossible for countries to switch to an alternative development trajectory, catapulting them into a different group. Fourth, despite the relevance of the three challenges just described, the country classifications are relatively stable and changes between groups can happen only in particular windows of opportunity (or ‘critical junctures’ Capoccia and Kelemen, 2007). Therefore, adopting a core-periphery view on the developments in Europe not only helps to highlight these exceptionable events, but also facilitates the identification of important structural features of polarization patterns in Europe. Particularly, a historical view shows that countries on different development trajectories can be affected very differently by the very same historical event, and that institutional changes in the Union, although affecting all countries equally in the first place, do not necessarily have the same consequences for all countries (on a similar point regarding institutions more general see Chang, 2010). Fifth, the structuralist perspective on core-periphery relations is distinctively useful when compared to other research programs also using a core-periphery categorisation (see section 2): ‘cores’ and ‘peripheries’ in Europe are not merely a result of different endowments, policies and institutions as considered in the fields of New Trade Theory,New Economic Geography or the Varietes of Capitalism approach. Rather, the relationships among ‘cores’ and ‘peripheries’ reproduce the groups themselves and must not be neglected when designing policy measures meant to end polarisation in Europe. Finally, the simultaneous relevance of the challenges as well as the usefulness of structuralist country classifications and the focus between groups suggests that relationships between countries on different trajectories are an important, yet one among several explanatory elements to make sense of polarisation. As often the case in economics, a plurality of approaches is necessary to fully understand a given phenomenon. The single approach, illuminating as it is, will always suffer from certain blind spots, which can only be eradicated by a pluralist research endeavour transcending a single study. www.zoe-institut.de/discussion Institut für zukunftsfähige Ökonomien ·Discussion Paper 6/2020 16 Gräbner, Hafele: The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective 5.2 Industrial policy for resilient economic development The prior analysis has shown that there are structural features in the EU economy that limit the ability of peripheral European countries to develop industries on their own terms and capture more of the value they help create. Only a coherent set of EU-wide policies that coordinates economic policies through multi-level governance across states can address this problem. One key element of such a set of policies is a place-based, self determined industrial policy that allows regions to develop resilient industries. Based on the previous results and building upon recent literature (e.g. Chang, 2009; Lin and Chang, 2009; Mazzucato, 2015; Pianta et al., 2020) we suggest that such an industrial policy should follow the following three key principles: • Adaptability of Policies to allow for the flexibility needed to react to unforeseen challenges and to do justice to the nature of complex innovation processes (Peneder, 2016; Teece, 2017). • Context appropriateness is necessary to do justice to the fact that the same rules affect countries on different development trajectories differently, and different reforms are needed in core, periphery, catch-up and financialized countries. This also allows to make better use of country-specific existing technological capabilities (Hidalgo et al., 2007) and institutional arrangements (Chang, 2010; Cimoli et al., 2009). • Coherence to create policy packages that maximize synergies instead of focusing on single policies with the risk of creating unnecessary trade-offs (Grahl and Teague, 2013, for EU Commission discussion on the topic see e.g. C(2016)6626 and SWD(2019)20). Here it is important to also factor in long-run trade-offs like resource depletion and climate trade-offs to make sure that established industries are resilient. As indicated by Bailey et al. (2018), the EU was already taking steps in the right direction, e.g. with its smart specialization strategy that emphasizes ‘place’ as a key part of policy-making and, thereby, allows for a certain degree of context appropriateness. However, as Hassink and Gong (2019) point out it also has its clear drawbacks, as it builds on existing competitive advantages and therefore structurally weak regions are less likely to benefit from it. Accordingly, it might even support divergence rather than supporting convergence. The new 2020 industrial strategy for Europe (COM/2020/102) and the new cohesion policies are also addressing some important points by supporting innovation capacities through investments and pushing for a greener low-carbon economy. The COVID recovery and resiliency facility (EUCO 10/20. CO EUR 8. CONCL 4) will potentially also provide 750 billion Euro for investments in the form of loans and grants and one of its proposed top priorities is cohesion. However, as with the smart specialization strategies there is also still room for improvements. E.g. the level playing field approach that can be found in the new industrial strategy lacks context appropriateness as it doesn’t do justice to the differentiated needs of peripheral economies (Landesmann and Stöllinger, 2019). Policy coherence is an ongoing challenge that is not sufficiently addressed and information on existing technological capabilities are not considered in the decisions on where to invest. In fact, some existing rules and regulations like the state aid rules make it very difficult to employ vertical industrial policy which is necessary to make best use of existing technological capabilities(Landesmann, 2015). The widespread acknowledgement of the need for ecological policy reforms in Europe allows for a coherent crossfertilization between policies geared towards more convergence and an ecological transformation in the EU. One example for such complementary measures is the establishment of (mostly) inner European supply-chains for the production of essential goods like medical equipment and pharmaceuticals, which has gained further momentum during the Covid-19 crisis in 2020. Strategically placing lead-firms of those supply-chains in peripheral regions could not only foster European convergence by boosting capability accumulation in the periphery, it could also make the European economy more resilient by reducing its dependency on imports, level economic power structures within the EU and reduce overall carbon emissions by saving transport emissions. While there is a need for more far-reaching reforms in the EU (see, e.g., Kapeller et al., 2019), there is already much potential to use already existing policy processes to address the challenge of polarization. For instance, the context appropriateness of existing policies could be improved by adding criteria to the cohesion fund as well as the recovery and resilience facility in order to push specific technologies which build upon already existing technological capabilities. A long term objective of EUs industrial policy is creating an international level playing field8. Building on that a carbon border tax could be implemented to support the establishment of green, and thus long-term resilient, industries. Or, finally, adding resilient and coherent industrial development as a core dimension to the Annual Sustainable Growth Survey would put this topic high on the Agenda of the European semester. However, changes to some existing rules and regulations are also necessary to allow individual member states directed investments and vertical industrial policy. At the moment, the stability and growth pact is effectively hampering peripheral economic development by limiting necessary investments due to its restrictive fiscal rules (Heimberger, 2020). Existing state aid rules prevent the direct support of specific industries, although such support would be necessary to achieve convergence (e.g. Gräbner et al., 2020b; 8 As opposed to the inner EU level playing field approach that is mentioned above www.zoe-institut.de/discussion Institut für zukunftsfähige Ökonomien ·Discussion Paper 6/2020 17 Gräbner, Hafele: The Emergence of Core-Periphery Structures in the European Union: a Complexity Perspective Kapeller et al., 2019; Pianta et al., 2020). As these changes require majorities among member states in the council that are not straightforward to establish, it seems necessary to start with the reforms that could immediately implemented within the current set of rules and regulations. 6 Summary and conclusions The present paper was meant to address two major goals: first, to contribute to a better understanding of the historical roots of polarization patterns in the EU from a structuralist and complexity perspective, and, second, to provide a critical self-reflection on the analytical usefulness of structuralist country taxonomies. The paper suggests that while there were (short) periods of convergence in Europe, the existence of core-periphery relations and a divergence of living standards has been the rule rather than the exception. This divergence has its reason not (only) in individual country characteristics, but also in the relationships between countries. The results of the analysis indicate that there are asymmetric trade structures regarding the technological complexity of traded goods between European Cores and peripheries. This unequal technological exchange, it was argued, is effectively hampering the development of the peripheries. The present analysis shows that the structuralist approach of using dependencies among countries and their reproduction as one central explanandum is useful. At the same time, the paper indicates the existence of three challenges for the structuralist approach of using country taxonomies – the challenges of dynamics,ambiguity and granularity – that must be kept in mind and that show that a structuralist analysis must be complemented with other approaches in a pluralist fashion. Based on these results, some pragmatic policy implications that can be placed within existing policy programs of the EU were delineated. Although these policies can be considered an important first step, fostering effective convergence will require more far-reaching reforms of the institutional structure of the EU. Given the political promise of the EU to bring about socio-economic convergence among its members, however, these challenges seem to be worth taken. Acknowledgements We are grateful to Matthias Aistleitner, Julia Eder, Philipp Heimberger, Anna Hornycewycz, and Oliver Richters for their extensive and most useful comments on earlier versions of this paper. All remaining errors are our own. The authors gratefully acknowledge financial support of the Economic and Social Research Council (UK) under grant reference number ES/R00787X/1. We also acknowledge the role of the National Institute of Economic and Social Research (NIESR) in hosting the Rebuilding Macroeconomics Network. 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