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The Economic Disperity Across the EU

March 18, 2011
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Eurostat recently released its annual report on regional GDP in the EU27.  Even though the report was issued this February, the data was from 2008, so a couple of countries might now have lower numbers, but overall, the trends are striking.  As Figure 1 shows, Luxembourg remains the richest EU country in terms of GDP per capita (Germany has the largest overall economy, but also has the largest population in the EU).  Denmark is now the second richest country by this measure, overtaking Ireland, and in general small west European countries have the highest living standards with the five largest economies clumped together in the middle of the pack, with France being the highest at number 8.

In order to give you a sense of the income disparity across these countries, I have also included the richest regions (indicated by red squares) and poorest regions (green triangles); many small countries are not divided into small units by Eurostat.  In general, the richest region of a country tends to be home to the country’s capital and/or largest city, although there are two major outliers—Germany and Italy.  Both countries have histories of strong economic development before late unifications in the 19th century.  In Germany, the richest region is Upper Bavaria, which is home to Munich.   Of course, Berlin is naturally at a disadvantage, having been divided for more than 40 years.  In Italy, despite its long history of being politically fragmented into many small states, Lazio’s (the region around Rome) GDP per capita is actually very close to that of the richest region Lombardy, with values of €31,100 and €33,900 respectfully.

While it is not surprising that regions centered around a country’s political or economic capital should have the highest levels of wealth in the country, the data also shows that some countries have been better at maintaining some equality between regions, while others have large discrepancies.   The UK is the more dramatic example, as Inner London is 4.25 times as rich (on a per capita basis) as Cornwall & Isles of Scilly and almost 3 times as rich as the national average.  However, the rest of the UK is still close to the EU average, since the UK average is €29,600 compared to €25,100.  While the GDP gaps are smaller in absolute terms, this inequality is a bigger worry many post-Communist countries, such as Romania, Slovakia, and the Czech Republic, as their poorest regions remain very poor by European standards.  For instance, the average resident of Bucharest-Ilfov is almost four times as well off as someone from Northeast Romania (which is also the second poorest region in the EU with a GDP per capita of €5,800).

While Eurostat does provide data in terms of GDP per capita, its preferred measure is GDP per inhabitant at Purchasing Power Standard (PPS).  PPS is based on the idea that a dollar (or in this case a euro) can buy different amounts of the same good or service in different places, so even if you have fewer dollars than a person someplace else, you might still be able to buy more.  The most common example from economics textbooks is the cost of a haircut, since the only input is basically the labor of barber, so ideally the cost should be standard.  Using haircuts as an example, imagine that Mr. Smith lives in Dublin and Mr. Novac lives in Prague.  Both make €25,000 a year, but the cost of a haircut is €20 in Dublin and €10 in Prague.  As a result, Mr. Novac could be better off, since he can actually buy 2,500 haircuts a year while Mr. Smith can only buy 1,250.

Figure 2 shows the same data as Figure 1, except that it has now been adjusted to reflect these discrepancies.  As a result, the Netherlands is now has the second richest inhabitants in the EU and citizens of Slovenia and the Czech Republic are now better off than those in Malta and Portugal.  In addition, the regions containing the capital cities of many post-Communist countries now appear to be much better off.  For instance, Prague is the 6th richest region in the EU using this measure, and Bratislava is 9th.  In fact, of the countries that have sub-national statistical regions, only Poland and Bulgaria do not have a region that is above the EU average.

Bucharest-Ilfov is the region that probably represents the biggest difference between the two measures.  Using PPS, the region has a GDP per inhabitant of 113, which is clearly above the EU average and would make the region richer than the richest regions in Slovenia, Portugal, and Hungary, in addition to Poland and Bulgaria.  However, as Figure 1 shows, the nominal GDP is €15,800 per capita, which is both well below the EU average of €25,100, as well as below the richest regions in every other EU country except for Poland and Bulgaria.  As a result, while the average Bucarestean may be able to buy more haircuts in Bucharest than many of the residents of Ljubljana, Lisbon, or Budapest, he would not be able to buy as many haircuts if he left Bucharest.  This exemplifies one of the pitfalls of PPS, it is good at showing how people might be richer if they stay home, but travelling or buying something that has a uniform global price are still dearer.

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