The economic geography

of Europe
Joeri Gorter*

Agglomeration economies
Agglomeration economies are positive spillover effects
between agents that locate close to each other. What comes
readily to mind are knowledge spillovers. In the course of
business activity, firms contribute to and benefit from a local

Abstract

stock of knowledge that allows them to produce at lower

This paper describes trends in specialisation of regions and

costs. Other examples are reduced search efforts on pooled

concentration of industries within the European Union. It

labour markets, and the emergence of specialised markets for

complements existing empirical studies that tend to focus on

intermediate goods. The influential new economic geogra-

country data. Both specialisation and concentration have

phy literature (Fujita et al., 1999) highlights backward and

declined, indicating that at the regional level there is a conver-

forward linkages. Firms benefit from geographical proximity

gence of economic structures and a dispersion of economic

because, in addition to having access to pooled markets for

activities of industries. This is surprising, since country

labour and final products, they save on transport costs in local

studies tend to find the opposite. A tentative explanation for

markets for intermediate goods.

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this empirical paradox is that European Integration allows

22

A salient quality of agglomeration economies is that they

specialisation and concentration forces to work at the interna-

are self-enforcing. If a firm decides to locate close to other

tional level, where they had before been confined to regions

firms it becomes more attractive for the next firm to do so as

within countries.

well. A snowball effect arises which may lead to different

production structures of a priori similar regions.
Localisation economies (or MAR economies, after

Introduction

Marshall (1890), Arrow (1962) and Romer (1986)) are agglom-

Changes in the location of economic activity have always been a

eration economies that are confined to firms of the same

policy concern. The EU Member States and the European

industry. It implies that although it pays off for banks to

Commission alike acknowledge advantages, such as gains from

locate close to each other, there is no reason for textile plants

trade through exploitation of comparative advantages, or

to also be where they are. On the contrary, centrifugal forces

increased productivity through exploitation of agglomeration

such as congestion and high living expenses give an incentive

externalities. These advantages constitute the economic rationale

to locate elsewhere. Thus, localisation economies drive the

of the Single Market Program.

European economy towards a possibly large set of economi-

Changes in the location of economic activity may, however,

also carry costs. They thwart economic convergence if comparative advantages prompt lagging regions to specialise in technolog-

cally significant regions, each hosting a limited range of

industries.
Urbanisation economies (or Jacobs economies after Jacobs

ically regressive industries, or if agglomeration externalities

(1969)) extend to firms from different industries. This implies

enforce a wedge between core regions attracting economic

that it pays off for a variety of firms to locate close to each

activity, leaving behind a periphery of depressed regions with

other. Thus, urbanisation economies drive the European

limited employment opportunities. Indeed, European Cohesion

economy towards a situation in which core regions attract

Policy is geared towards mitigating the negative impact of the

business activity at the cost of the periphery.

Single Market on regional equality. In addition, specialisation

increases the probability of asymmetric shocks.
European integration gives prominence to economic geography. As Brlhart and Traeger (2002) note, many perceive that the

scope for spatial relocation of economic activity is inversely

related to the costs of distance. As policy initiatives and technological advances have conspired over the last half century to reduce
the costs of economic transactions across region and country bor-

* For more information, contact Joeri Gorter (tel: +31-70-3383382;

ders, economic activities are thought to have become increasingly

e-mail: j.gorter@cpb.nl)

footloose (p.1).

Table 1

Top ten and bottom ten regions ranked according to their specialisation index

Region

Specialisation index a

Industrya, b

Share of gross
value addeda

Groningen

0.40

Fuel and power products

43

Ceuta y Melilla

0.36

Non market services

40

Alentejo

0.31

Agricultural, forestry, and fishery products

23

La Rioja

0.30

Food, beverages, tobacco

25

Algarve

0.30

Recovery, repair, trade, lodging and catering services

33

Baleares

0.28

Recovery, repair, trade, lodging and catering services

41

Aores

0.28

Agricultural, forestry, and fishery products

15

Flevoland

0.25

Agricultural, forestry, and fishery products

17

Madeira

0.25

Recovery, repair, trade, lodging and catering services

24

Luxembourg

0.24

Services of credit and insurance institutions

17

Abruzzo

0.10

Rhone-Alpes

0.10

Centre

0.10

Scotland

0.09

Nord-Pas-de-Calais

0.09

Midi-Pyrenees

0.09

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Yorkshire and Humberside

0.09

23

Pays de la Loire

0.09

South West

0.09

Austria

0.08

a Mean over 1980-1995.

b The industry with the highest difference between its share in the regions gross value added and its mean share in the other 118 regions.

This general belief is fed by considerable differences between the

relatively fine grid of output data of manufacturing industries

US and the EU. In particular, the US is economically more inte-

(Barrios and Strobl, 2002; Haaland et al., 1999; WIFO 1999;

grated than the EU, and US regions are more specialised than

Middelfart-Knarvik et al., 2000). They tend to conclude that

their European counterparts (Braunerhjelm et al., 2000). In other

countries specialise and industries concentrate.

words, the EU may be on the eve of a catching-up process in

terms of specialisation, which inevitably involves relocation of

There is no consensus on the explanation of the these

trends. Haaland et al. (1999) find a strong correlation between

economic activity as industries would seek to concentrate in a nar- industry concentration and the location of final demand, which
row range of regions.
The formal framework of the new economic geography

points in the direction of the agglomeration externalities stressed

by the new economic geography literature. Barrios and Strobl

literature (see box) has done much to increase also academic

(2002) claim, on the other hand, that random differences in

interest in the location of economic activity. Progress has,

industry growth rates explain most of the variation in industry

however, been largely confined to theoretical contributions.

concentration.

Among the empirical studies, the majority use country data with a

This paper contends that before inclining towards either

The specialisation index

The specialisation index of region i equals

Table 2 Top ten and bottom ten regions ranked

according to the change in their
specialisation index
Region

Change of specialisation index a

where yik denotes the share of industry k in the gross value

added of region i, yik and the mean of the shares of industry k

Noord-Brabant

0.08

in the gross value added of all other regions. The difference

Ceuta y Melilla

0.07

yik yik is the extent of over- or under representation of indus-

Limburg (NL)

0.06

try k in region i. Adding up the absolute values of these differences indicates the degree of specialisation of this region.
A weighted average constitutes the specialisation index for

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a set of regions:

24

Friesland

0.05

Overijssel

0.04

Antwerpen

0.04

Canarias

0.03

Brabant Wallon

0.03

Limburg (B)

0.03

Bayern

0.02

:
where the weight wi denotes the share of region i s gross

Friuli Venezia Giulia

0.06

value added.

Rhone-Alpes

0.07

Northern Ireland

0.07

Piemonte

0.07

explanation, one must get the stylised facts straight. The trend

Norte

0.08

towards specialisation and concentration is observed at the coun-

Luxembourg (B)

0.08

try level, and the industry data are confined to manufacturing. It

Alentejo

0.09

Centro

0.13

Algarve

0.15

Groningen

0.19

remains possible that at the regional level other dynamics prevail,

and that services exhibit a different pattern. This provides the
motivation for describing trends of regional specialisation and
concentration with data including both manufacturing and

a Difference between specialisation indices in 1995 and 1980.

services.
Specialisation

one region cant be found anywhere else, the index takes the value

This paper follows Hallet (2000) in describing regional specialisa-

one. It indicates that specialisation is at its maximum.

tion between 1980 and 1995. It is the period in which Single

The mean value of the EU-wide index over the sample period

Market Program which constitutes the heart of the Maastricht

is approximately 0.15. In the absence of theoretical guidance, this

Treaty was prepared and implemented. The panel comprises the

could be considered as a normal value. It corresponds to the

gross value added of a comprehensive set of seventeen industries1

economic structure of, for example, Vlaams Brabant. To give an

in 119 European regions.2 The relative importance of these

idea, in 1986 the smallest industry (Ferrous and non-ferrous ores

industries corresponds to a regions economic structure.

and metals, other than radioactive) made up a mere 2.5 per mill of

A commonly used specialisation index (see box) measures

the degree of dissimilarity between regional economic structures.
At one extreme, where the relative importance of any of the

its gross value added. The largest industry (Other market services)
accounted for as much as 25.9 percent.
Table 1 lists the top ten and bottom ten specialised regions in

seventeen industries is exactly the same in all regions, the index

the EU. The Dutch province Groningen is most specialised, with

takes the value zero. It indicates that there is no specialisation

the large natural gas deposits at Slochteren accounting for the

whatsoever. At the other extreme, where any industry present in

dominance of the industry Fuel and power products. The

Spanish governments involvement in its Moroccan enclaves

The concentration index

Ceuta y Melilla drives the prominence of the industry Non mar-

The concentration index of industry k is

ket services there. It is comforting to note that the specialisation

index yields further results that are by and large consistent with
casual observation. It is hardly surprising to see Agricultural,
forestry, and fishery products playing a dominant role in the

where xik denotes share of region i in the gross value added of

sparsely populated, rural region Alentejo. The same holds true for

industry k, xik the mean of the shares of this region for all

food, beverages, and tobacco in La Rioja, a region covered by

other industries. Thus, where Si measures whether some

vineyards and bodegas, for Recovery, repair, trade, lodging and

industries tend to be over represented in region i, Ck meas-

catering services in tourist destinations Algarve and Baleares, or

ures whether some regions tend to be over represented in the

for Services of credit and insurance institutions in Luxembourg.

production of industry k.

The bottom ten specialised regions are in terms of economic

structure closest to the European average. Note, however, that

A weighted average constitutes the concentration index for

a set of industries:

among them are depressed ones such as the Nord-Pas-de-Calais

as well as high performers such as Scotland. Thus, the results do
where the weight wk denotes the share of industry k in total

performance.

gross value added.

moved towards more specialisation, while 85 moved away from it.

Figure 1 suggests that European regions have become more simi-

Table 2 lists the top and bottom ten regions ranked according to

lar in economic structure between 1980 and 1995. It is consistent

the change in specialisation index.

with the findings of Hallet (2000), but clashes with studies at the

cpb Report 2002/4

not suggest a relation between specialisation and economic

Member State level (Haaland et al., 1999; WIFO 1999; Middelfart-

25

Is there a trend towards specialisation? The regional data

show a wide variety of changes in economic structure: 34 regions

Summing up the indices of the individual regions, weighted

by the relative economic size of the regions, yields the EU-wide

Knarvik et al., 2000). It makes clear that what is true at the

index. Figure 1 depicts its time series. It shows that between 1980

national level is not necessarily true at the regional level, in spite

and 1995 specialisation gradually declines.

of the observation of Brakman et al. (2001) that stylised facts in

economic geography are often of a fractal nature. It also demon-

Figure 1 Regional specialisation in Europe

strates that predictions based on rough and ready comparisons

between the EU and the US are hazardous. This holds true for

.160

economic geography in particular, since its dynamics are often

characterised by path dependencies, giving prominence to histori-

.155

cal accidents. Brlhart and Traeger (2002) tentatively explain the

paradox of specialisation at the country level, and despecialisation

.150

at the regional level. They note that is in line with the view that
.145

European integration opens scope for between-country specialisation which hitherto had existed only at the within-country level

.140

[p.14].

.135

Concentration
.130
1980

The mirror image of specialisation is concentration, the degree to

1982

1984

1986

1988
S

1990

1992

1994

which industries are over-represented in some regions, and

under-represented in others. If regions specialise in a limited
number of industries, then industries must necessarily concen-

trate on a limited number of regions, provided that size differ-

Figure 2 Industry concentration in Europe

ences between regions or industries are not too large.

A concentration index for industries can be calculated along
the same lines as the specialisation index for regions. At one

.170
.165

extreme, where any regions share in an industrys total gross

value added is exactly the same as this regions share in all other
industries total gross value added, the index takes the value zero.

.160
.155

It indicates that there is no concentration whatsoever. At the other

extreme, where any region with a positive share in one industry
has a zero share in others, the index takes the value one. It indi-

.150
.145

cates that concentration is at its maximum.

The mean value of the EU-wide concentration index is, just
as the specialisation index, equal to 0.15. It corresponds, for exam-

.140
1980

1982

1984

1986

1988

1990

1992

1994

cpb Report 2002/4

26

Table 3

Industries ranked according to their concentration index

Industry

Concentration indexa

Regionab

Share of gross value addeda

Ferrous and non-ferrous ores and metals,

other than radioactive

0.35

Nordrhein-Westfalen

13

Textiles and clothing, leather and footwear

0.34

Lombardia

Agricultural, forestry, and fishery products

0.33

Greece

Transport equipment

0.23

Baden-Wrttemberg

Chemical products

0.23

Nordrhein-Westfalen

10

Fuel and power products

0.21

Nordrhein-Westfalen

Non-metallic minerals and mineral products

0.20

Bayern

Paper and printing products

0.19

South East

0.18

Baden-Wrttemberg

and plastic

0.17

Baden-Wrttemberg

Services of credit and insurance institutions

0.17

le de France

Transport and communication services

0.16

South East

Food, beverages and tobacco

0.16

Niedersachsen

Non market services

0.14

Sweden

Other market services

0.12

le de France

services

0.11

le de France

Building and construction

0.08

South East

Metal products, machinery, equipment, and

electrical goods
Products of various industries including rubber

Recovery, repair, trade, lodging and catering

a Mean over 1980-1995.

b The region with the highest difference between its share in the industrys gross value added and its mean share in the other 17 industries.

Table 4 Industries ranked according to the change in their concentration index

Textiles and clothing, leather and footwear

0.08

Services of credit and insurance institutions

0.03

Transport equipment

0.03

Paper and printing products

0.01

Non-metallic minerals and mineral products

0.01

Food, beverages, tobacco

0.01

Chemical products

0.00

Recovery, repair, trade, lodging and catering services

0.00

Other market services

0.00

Building and construction

0.00

Agricultural, forestry, and fishery products

0.00

Transport and communication services

0.01

Metal products, machinery, equipment and electrical goods

0.01

Non market services

0.01

Ferrous and non-ferrous ores and metals, other than radioactive

0.01

Products of various industries, including rubber and plastic

0.02

Fuel and power products

0.03

a Difference between concentration indices in 1995 and 1980.

27

ple, to the concentration of the Food, beverages, and tobacco

there, and the difference between this share and Nordrhein-

industry. Since there are 119 regions, the industry on average

Westfalens mean share in all other industries is the highest of all

generates 100 / 119 = 8 per mill of its output in a single region. At

119 regions. The industry textiles and clothing, leather and

the extremes, it produces less than one per mill in Ceuta and

footwear concentrates on the Italian region Lombardia. This is

Melilla, and six percent in Nordrhein-Westfalen.

also consistent with casual observation.

Table 3 lists the seventeen industries ranked according to

their concentration index. The blast- furnaces of the industry

Does the trend in concentration confirm the downward

trend in specialisation? Table 4 lists the industries ranked accord-

Ferrous, and non-ferrous ores and metals, other than radio active ing to the change in concentration index. It shows that nine
imply a production process with high fixed costs. The industrys

industries moved towards more concentration against eight mov-

first rank should therefore not come as a surprise. After all, the

ing away from it. This more or less equal distribution suggests

new economic geography literature (Fujita et al., 1999) stresses

that if there is a downward trend in EU wide concentration, it is

the importance of fixed costs for clustering of economic activity.

not pronounced.

Many associate Ferrous and non-ferrous ores and metals, other

Size differences between industries or regions may, however,

than radioactive with the German Ruhrgebiet. Indeed,

tip the balance in favour of either concentration or deconcentra-

Nordrhein-Westfalen the region that hosts this industrial area

tion. Figure 2 displays the EU-wide concentration index.

contributes most to the high concentration index. No less than

thirteen percent of the industrys gross value added is generated

cpb Report 2002/4

Change of concentration indexa

Industry

The index shows a more or less constant degree of concentration

location of European industry, Report prepared for the Directorate General for Economic

during the 1980s, and a sharp drop at the beginning of the 1990s.

and Financial Affairs of the European Commission.

Thus, just as regions have become more specialised, industries

Romer, P.M., 1986, Increasing returns and long run growth, Journal of Political Economy,

have become more concentrated, although the trend towards con-

94, 1002-37.

centration is less pronounced. This is consistent with the findings

WIFO, 1999, Specialisation and (geographic) concentration of European manufacturing,

of Brlhart and Traeger (2002), but again points in another direc-

background paper for the competitiveness of European industry for the Enterprise

tion as the country studies.

Directorate General of the European Commission.

Conclusion

Notes

Agglomeration economies appear to push the economic geography of Europe towards a situation in which regions become less

1 The industries are classified according to NACE-CLIO RR17, which obeys the European

specialised and industries become less concentrated. This is

System of Integrated Economic Accounts (ESA).

contrary to what one might expect on the basis of the results of

2 Most regions are NUTS 2 (Nomenclature of Statistical Territorial Units). Data limita-

country studies. They tend to report that countries become more

tions force usage of larger NUTS 1 regions for some Member States.

cpb Report 2002/4

specialised and that industries become more concentrated. This

empirical paradox implies that the stylised facts that are to be
explained are more complex than a one-dimensional trend
towards either specialisation and concentration, or the reverse. A
tentative account of the paradox is that European integration
allows specialisation and concentration forces to work between
countries, where they had before been confined to regions within
countries.

28
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