The latest edition of the EU Regional Competitiveness Index was recently released, with regions in Denmark, the Netherlands, and Sweden scoring particularly well. Maarten Wensink and Pieter Vanhuysse write that while the index offers an intuitive measure of how competitiveness varies across EU regions, high scores are not necessarily based on a sustainable societal model.
The latest edition of the periodic competitiveness ranking of European regions is out. The EU Regional Competitiveness Index (RCI) measures what regions have on offer for firms and residents in terms of living and working conditions for all 242 NUTS-2 level regions across the EU.
As before, the most competitive regions are in northern and north-western Europe, with the Benelux countries, Denmark and Sweden leading the way. Dutch regions make up half of the top ten, where they are joined by capital city regions Stockholm, Copenhagen, Île-de-France, Brussels and Helsinki. In contrast, most eastern and southern EU regions that are not capital city regions score below the EU average. The RCI also tells us something about the direction of change: compared with 2016 (or 2019), regions in Spain, Poland and the Baltic countries are catching up, while those in Italy have experienced only modest improvement.
As the publication of the RCI routinely leads to some alacrity among the best performers, it is important to pause for a moment and investigate what this index is for, and what it does and does not measure. An explainer by the Directorate-General for Regional and Urban Policy has the details.
First, the RCI maps differences across EU regions as an important investment tool for the EU’s regional development programme: “Around one-third of the EU’s budget is invested in Europe’s regions under cohesion policy funding… Most of the investments are for the development of underperforming regions and aim to reduce regional disparities, including in competitiveness.” Furthermore, “in more competitive regions on average, GDP per capita is higher, women have better achievement rates and lower rates of unemployment.” In other words, the RCI is a tool for directing funds to lagging regions, improving opportunities for workers there.
Second, what exactly does the index measure? The full details on this are available here, but broadly speaking, the RCI is a composite measure of (often correlated) societal dimensions that tend to be associated with competitiveness: institutional strength, ease of doing business, absence of organised crime, macroeconomic stability, health, percentage of the population with tertiary education, labour market efficiency, market size, technological readiness, and a selection of innovation metrics. Regions scoring high on most of these aspects will generally be good places to live.
The missing element – sustainable models
So, what’s not to like? Goodhart’s Law is one ground for caution: when a measure becomes a target, it ceases to be a good measure. Another ground is that the RCI does not measure how regional competitiveness is achieved, notably whether the model is sustainable or not. Environmental variables are entirely missing – a baffling gap given the EU’s Green Transition ambitions. Nor does the RCI measure any support for parents, who invest their own time and money to produce a public good for the community: the next generation of adult workers and taxpayers, who will later sustain the welfare state and care for the elderly.
Similarly, the RCI lists the share of the population aged 15 to 64 as a measure of innovation, but is silent on whether that population is raised locally or, instead, taken in through migration, creating population predicaments in the donating regions. When highly qualified young southern and eastern Europeans move to the Benelux, Sweden or Denmark, they take their skills and human capital with them, even though these were financed by the preceding generation back home.
This type of poorer-periphery-to-richer-core brain drain – or cream skimming – is the other side of the valued ‘freedom of movement’ coin. It causes international imbalances that seem counterproductive to the goal of increasing regional cohesion in the EU and might cascade down to yet more peripheral countries in even more precarious situations. It also means that above-mentioned catch-up competitiveness in some eastern European countries may be short-lived.
Unsurprisingly, the top-ten RCI regions are highly successful in attracting highly educated working-age migrants from elsewhere, both from inside and from outside the EU. But are they also successful at boosting the human capital of their own youth, and, more generally, at securing the future foundations of their societies? After all, Europe is an ageing continent of pro-elderly welfare states embedded within societies composed of strongly child-oriented families (read: parents).
High-quality, widely accessible early childhood education policies are therefore a policy tool that constitutes a genuine investment in the future – and genuine help for all parents. Yet, public spending on such policies, while particularly high in Sweden and Denmark, is barely above the EU average in the Netherlands, the RCI champion. Similarly, reading scores for 15-year-olds in Belgium, Denmark and Luxemburg have not improved over the seven PISA waves between 2000 and 2018, and have even been on a steady downward trajectory in Sweden and, again, the Netherlands.
One might say that the RCI does what it needs to do: to measure competitiveness, full stop. It is good to be competitive, but the most successful regions might be ignoring less sustainable elements of competitiveness and get there anyway. Compare this with the economic issue of being a strong exporter, which many countries aspire to. One can try to stimulate exports through low wages in a cheap currency, yet real competitiveness combines high value-added creation with high wages in extravagantly expensive currencies – and high exports.
In the same vein, the smartest model for achieving competitiveness would be for regions to look after their elderly, support parents in raising the next generation, refuse to sacrifice their green areas to infrastructure, and still achieve economic success. Measuring competitiveness is valuable, but it captures only one piece of a complex puzzle of good governance and sustainable politics.