What if a group of investors had been asked to predict which countries, cities, and regions would emerge from the ruins of total war to become the most dominant economies in Europe nearly 75 years in the future? Would they have been able to do it? In 1945, Germany, the United Kingdom and France were among the most ravaged; today they are the leaders in aggregate GDP. Moreover, other countries who currently lead in per capita GDP—such as Norway—would have been considered “long-shots” at best (and more like black swans) to even the most savvy and adventurous investors in 1945.
Investors and entrepreneurs interested in Europe might be asking themselves this question today. New forces—including international migration, a rapidly aging population, and the prospects and consequences of increasing political (re)fragmentation—are re-fashioning some the “fundamentals” of Europe’s economies and, over time, will radically re-order Europe’s richest regions. These developments make it difficult to forecast Europe’s shape in the next few decades.
Fortunately, advances in data science have led to the creation of new data models which might help us consider and anticipate future economic trends with more accuracy and granularity than before. As a case in point, this blog presents results from a new subnational European income forecasting project developed by the World Data Lab. The model forecasts income and demographic change in 240 regions in Europe (except Norway and Switzerland), categorized according to the European Union’s NUTS-2 nomenclature. Mean income projections were combined with a convergence model with population forecasts from Eurostat and income distributions all on a subnational level. The combination of income forecasts with distributional data creates unique forecasts of the whole income spectrum.
In what we hope will be the first in a series of short articles on subnational Europe, we look at the broadest patterns of evolution of average incomes in Europe. In future installments, we plan to look at individual income segments, such as the middle class.
Three big changes
At first blush, the landscape of European spending power seems unlikely to change much at all over the next decade. The list of the Top Ten Richest Regions will remain largely unchanged, in terms of income per capita at the NUTS2 level. Nearly all of these regions—such as Inner London (West), Stuttgart, Oberbayern (Munich), and Darmstadt (Frankfurt)—include a major urban center and will likely be able to attract and retain the talent and capital needed to continue their economic dominance. The population growth in this group will average about 6-7 percent.
But beyond the experience of these and other modern-day city-states, three other narratives are unfolding simultaneously on the fringes of Europe’s economic center will profoundly shape Europe over the next decade.
First, “secondary regions” of Europe’s largest economies, are expected to experience weaker economic growth. That, coupled with an aging workforce and in some cases outright population decline (2.5 million across 24 regions in Germany; 1 million across 11 regions in Italy) will threaten to exacerbate the emerging disparities between the richest and poorest regions in the EU, but also within the countries themselves.
Second, in small-to-mid-sized regional pockets in certain Western European countries that have seen gains in competitiveness and economic growth over the last decade, will experience significant population increases, fueling a circle of expansion in consumer demand and investment and economic activity. In some cases such as Spain and Ireland where some regions have a relatively low population base, this phenomenon will result in dramatic increases in overall spending power. In other cases involving larger populations such as Sweden, Denmark, and Netherlands, the result will be more muted, but will enable the regions to broadly maintain their positions vis a vis their peers.
Third, in “emerging Europe”, the consequences of negative demographic change (population decreases) will unexpectedly be prosperity, not decay. In many, though not all, regions of Hungary, Poland, the Slovak Republic, and the Czech Republic, regional population decline or stagnation will be accompanied by increases in per capita income. The reason: the shedding of lower income, less skilled, older workers and the ascendance of higher skilled, more productive, and higher paid younger workers.
These three narratives are illustrated as Europe “30 by 30” lists of the biggest winners (Figure 1) and losers (Figure 2) in changes in European per capita income between today and 2030. Considering changes in the rank order of per capita income can give an indication of how rapidly a region is growing and how attractive it may be as an investment and business destination compared to its peers.
Figure 1: Europe’s Top 30 Biggest Winners
Changes in annual Income per capita 2018-2030 (EUR PPP)
Figure 2: Europe’s Top 30 Biggest Losers
Changes in annual Income per capita 2018-2030 (EUR PPP)
(click to enlarge)
A flipping of fortunes?
From even a cursory review of these lists, it is obvious that in just ten years’ time Europe’s peripheral regions in Eastern and Northern countries will grow in prominence, while peripheral regions in the core, more established states will see their fortunes diminish.
Among the biggest losers are the lagging regions in Italy. The Mezzogiorno is expected to be hit the hardest. In per capita terms, many Italian regions (such as Lazio, Sardegna, Bolzano, and Valle d’Aosta) will experience absolute declines compared with 2018 levels of income. Others (Basilicata, Calabria, and Puglia) will have at best marginal growth. Europe’s leaders should plan accordingly.
[As the Fed and other major central banks begin raising rates, some emerging market central banks would be forced to follow suit. Otherwise, capital would flee and their currencies would plunge in value, further aggravating inflation.] You could have a crisis if investors all decide to run for the exits at the same time.