The authoritative source for independent research on UK-EU relations

05 Mar 2021

Economy

In 1900, the UK was Europe’s strongest economy. It was also the most regionally equal. Industry generated, almost everywhere, prosperity of a level never seen before. While other European nations had only a few heavily industrialised regions, the UK boasted at least two dozen world-leading towns and cities.

As industrial prosperity spread to all of Europe, and right across each country, the UK held its lead. But in the 1950s the continent started to catch up. First the economies of German regions overtook the UK. Then in the ’60s and ’70s many Dutch, Belgian, French, and Italian regions did the same.

The success of European integration played a part. The UK staying out of the EEC held it back. Meanwhile national solidarity was eroded by a particularly painful transition away from heavy industry.

In the ’70s, ’80s and ’90s, good fortune and hard choices stopped the UK’s relative economic decline. It joined the EEC and drove the creation of the Single Market. North Sea oil boosted both the economy and the treasury. Deep reforms accelerated the move away from an industrial economy with state- controlled industries towards a services economy with privatised ones.

Where are we now?

South-East England benefitted most, and today it is among the strongest economies in Europe. Most of the rest of the UK trails well behind, with economies more like Spain than Germany. The UK is Europe’s most regionally unequal major economy.

People in regions with weak economies can feel that their place does not pay its way even if high London rents and universal services like the NHS make living standards more equal. Living on someone else’s money is no replacement for the pride that came with the strong economies and grand town halls of the past.

Where are we heading?

Regional inequality is not inevitable. In Germany and the Netherlands it is low and has been falling for two decades. Convergence is possible.

The coal-rich region of Limburg in the Netherlands faced similar challenges to much of the UK in the 1960s. It took a different approach, fell less far behind, and has bounced back more quickly. Today Limburg’s economy is as strong as South East England’s.

Limburg enjoyed large national investments in skills, transport, research & development, culture, and institutions, often delivered on the ground by strong provincial governments. In the 1970s the Dutch government moved many state functions to the region including the Dutch office for national statistics.

The UK would emulate this three decades later in South Wales. But at least as important were hundreds of local decisions and investments of all types made in Limburg.

Germany’s East enjoyed thirty years of similar but larger investment as it recovered from the failure of communism.

Today both regions have stronger economies than North England, the Midlands, Wales, or Northern Ireland, places where investments in growth on a similar scale were never tried. Fast electric trains connect Leipzig, Dresden, and Chemnitz, three Eastern cities enjoying enormous German investment in research and cultural institutes. The same cannot be said of Leeds, Manchester, and Sheffield nor Birmingham, Nottingham, and Leicester.

The EU’s role in regional economic convergence is often exaggerated. The Single Market has boosted growth almost everywhere, but there is little evidence that this has driven convergence. EU spending is often claimed by supporters to be a significant driver of convergence. It is not. In the most heavily supported regions in western Europe, EU spending rarely tops up national spending by more than one or two per cent.

Reducing regional inequality within countries is the task of national governments, not the EU. But the legacy of EU funding is still important to the UK. EU funding was unusual because its spending, especially through the regional development fund, was guaranteed in the long-term, often controlled locally, and explicitly aimed at achieving regional convergence.

Since the UK left the EU it has adopted similar language, but not yet expressed a similar strategy. We have the undefined objective of ‘Levelling Up’, a UK Shared Prosperity Fund that barely exists, and both a Towns Fund and Town Deals with no clear objective. In each case the amount of money is far too small to have much hope of success.

They are just like the dozens of similar schemes announced over decades in Westminster that were never likely to achieve regional economic convergence.

Could we succeed now where we failed in the past? We have the advantage of knowing that success is possible. Since voting for devolution in 1997, Scottish public investment in growth has kept pace with London.

The economy and productivity of Scotland, focused on its larger cities and advocated for and controlled locally, has kept pace with South East England while the rest of the UK has fallen behind. What worked in Limburg and the East of Germany can work here.

But do the rest of the UK’s lagging places want to emulate these successes? In Wales and Northern Ireland the support for devolution suggests that the answer is yes. Strong institutions argue for and manage greater investment in growth. But England’s trailing places seem less keen. Metro Mayors were imposed only after regional assemblies and city mayors were rejected.

Without strong institutions to push back, the UK Government in Westminster continues to expand and cut local government spending. Investment in the things that stimulate economic growth continues to be higher in South-East England,where the decisions are taken.

For example,an increase in research and development spending large enough to boost the UK’s lagging regional economies seems likely to be assigned centrally under the same formula as today, which favours London.

A commitment to invest more in skills, transport, research and development, culture, and institutions in struggling regions than in prosperous ones would decrease regional inequality in the UK, especially if this additional spending were to be focused on cities. EU membership posed very few barriers to doing this.

Brexit thus changes very little. On regional inequality, the UK’s choice remains its own to make.

By Tom Forth, Head of Data at the Open Data Institute, Leeds. This piece was taken from the Brexit and Beyond: Economy report, which is part of the Brexit and Beyond report.

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