Austerity has slowed regional recovery during the post-2008 recession, says new study

Dr Riccardo Crescenzi and Dr Davide Luca of LSE's Geography & Environment Department and Dr Simona Milio of LSE's European Institute mapped the impact of the crisis across the 27 EU member states on key performance indicators. They then explored the potential links between pre-crisis economic factors and post-crisis economic performance that may have exacerbated or mitigated the short-term contraction of the various regional economies.

Three key conclusions emerge from the empirical analysis:

First, contrary to the common belief channelled by the media, the geography of the impacts of the crisis cannot be captured by a simple North-South divide. The analysis of post-2008 regional economic trends unveils a core continental area, where the impacts of the crisis have been low or moderately low. This revolves around Germany, most of Poland, and partly stretches to neighbouring regions (such as most regions of Slovakia and the Czech Republic). This 'core' is surrounded by a ring of more peripheral areas where the impacts have been high or very high and which include most of the regions of Ireland, Spain, parts of Italy, Greece, Cyprus, Lithuania, Latvia and Estonia.

Second, the analysis of the link between the post-2008 economic performance and pre-crisis national macroeconomic factors highlights the importance of national trade patterns and government expenditure. A healthy current account surplus is associated with a stronger economic performance and better regional employment levels during the post-2008 recession. Conversely, high public debt countries are more successful in sheltering their regional economies in the short-run both in terms of economic output and employment. Of course, this result does not necessarily suggest a sustainable long-term pattern but provides preliminary evidence on the importance of active government policies before the crisis in mitigating the short-term impacts of subsequent recessionary shocks.

Third, when examining regional resistance factors, the results suggest that human capital is the single most important regional factor associated with a better resistance to economic shocks. What matters is the capability of the regions to identify short-term innovative solutions to a changing (and more challenging) external environment. This capability does not necessarily derive from technology-driven processes supported by R&D investments but is more likely to be boosted by a skilled labour force that enhances rapid process and organisational innovation.

Finally the results unveil the significant divide between the regions of the 'old' Europe and the new member states. In the 'new' members states - and in particular in the regions of Poland, Slovakia and the Czech Republic - the positive post-2008 economic performance seems to be driven by a process of structural and technological catching-up while still benefiting from the relatively recent integration into the EU. Such process seems to be able to 'balance' the generalised downturn.

Dr Crescenzi, Assistant Professor of Economics Geography, said: "Our results provide European, national and regional policy makers with preliminary insights to assess the capabilities of their cities and regions to react to economic shocks and design adequate responses. We hope our research will fuel public debate on how to re-launch local growth and employment beyond austerity measures."

The geography of the economic crisis in Europe: national macroeconomic conditions, regional structural factors and short-term economic performance is published in the Cambridge Journal of Regions, Economy and Society.