Changing Landscapes in Europe's Economic Structure
by Harilaos Mertzanis and George Petrakos

A cross Europe a North-South divide that separates countries according to their level of development—measured by per capita GDP and by the share of agriculture, industry, and services in GDP—is being complemented by a deepening East-West divide.

• The share of the agricultural sector in total GDP in the EU countries is very low, with the exception of Greece, and is decreasing. During 1990-95 it fell by 21.8 percent in the core eight countries of the EU (France, Germany, Italy, and the Benelux countries, United Kingdom, and Ireland), but dropped by only 8.8 per-cent in three Mediterranean states (Spain, Portugal, Greece). In transition economies the overall average share of the agricultural sector in GDP is about four times higher than the EU average. The agricultural sectors of Albania, Croatia, FYR Macedonia, Moldova, and Romania are growing both in absolute and relative terms. Agricultural production is gradually moving away from the northern part of Eastern Europe toward the southern part. (The Baltic states are gradually becoming less dependent on the agricultural sector, while the Balkan states grow more dependent.) The more a country’s industrial share in GDP shrinks, the higher the chance that the agricultural sector share will increase, as, in the absence of an absorbing ser-vice sector, many displaced workers re-turn to the land.
• The share of industrial production in GDP is continuously shrinking in EU countries, with the exception of Luxembourg and Spain where it has increased slightly in the 1990s. The trend is similar in the Eastern European economies, where the share of industry in GDP, on average, has fallen considerably. But in many postsocialist countries this reflects more the detioration of the industrial base than a positive process of industrial re-structuring and faster-than-average development of the service industries. In many transition economies the share of industrial production in GDP exceeds the Are the Acceding Countries Ready? At a seminar organized by the Vienna Institute for Comparative Economic Studies in early 1998, George Kopits, Assistant Director of the IMF’s Fiscal Affairs Department, discussed the requirements that countries acceding to the EU will have to meet and the policy issues that they face. Overall, it seemed clear that the five postcommunist countries invited by the European Commission in July 1997 to meet EU requirements—Czech Republic, Estonia, Hungary, Poland, and Slovenia—are, in many important respects, in a better position than Greece and the Iberian countries were when they acceded to the EU. The countries slated for accession will have to adhere to an exchange rate mechanism currently followed by most EU members before the euro is introduced in 1999. That means keeping their currencies at a parity to the euro with a 15 percent corridor in each direction for two years before adopting the euro. The countries will also have to meet the various Maastricht criteria (including a budget deficit no larger than 3 percent of GDP). It is safe to assume that they will need to adhere to such institutional requirements as using market-based monetary instruments and maintaining central bank independence from political influences. Other tasks include eliminating all trade barriers with the other EU members; establishing the common external tariff; and implementing common procedures for consumer and environmental protection, public procurement, banking regulation, and tax harmonization. As a benefit, the five countries will have access to the Structural Funds (SF), the Cohesion Fund (CF), and perhaps to the Common Agricultural Policy (CAP). While the transfers potentially allocated EU average, indicating that the process of industrial restructuring has not been completed yet.
• The share of the service sector in GDP in every EU country is relatively higher than both the agricultural and industrial sector shares, and has exhibited a steady increase during the 1990s. In some transition economies, including Bulgaria, Estonia, Lithuania, and Romania, the service industry increased by an average 80 percent in the first half of the 1990s having started from a very low level. Other countries—Albania, Latvia, Moldova, Romania, Slovenia, and Ukraine—have seen services fall and then rise considerably. Vigorous development of this sector is hampered by government policies that funnel significant resources to the industrial sector, to safeguard industries that serve the “national interest,” and to prevent acceleration of unemployment. In Croatia, Estonia, Hungary, Lithuania, and Slovakia the service sector has already recorded relatively high shares in GDP, comparable to the EU average. But in the EU countries, banking, financial, and business services, as well as cultural, leisure, and other personal services, have a strong presence, while in many transition economies the service sector is dominated mostly by non-tradable activities such as extensive retail trade and an overstaffed public sector.

Thus the structural composition of GDP across Europe reveals that:

• Homogenization in the EU countries has made significant progress, but disparities along Europe’s North-South divide are still noticeable, with the Mediterranean countries differing significantly from the EU core countries.
• Within and between the transition countries, disparities are widening, with the Visegrad countries adjusting faster than the other Eastern European states. Most Balkan countries lag behind in reform actions compared with their counter-parts in Central and Northeastern Europe.
• On the whole, the development gap between the EU countries and the CEE countries is still widening.

Harilaos Mertzanis is Director, Industrial Liaison Office, and George Petrakos is Assistant Professor, Department of Plan-ning and Regional Development, at the University of Thessaly, Pedion Areos, 383 34 Volos, Greece. For Mr. Mertzanis: tel./ fax 30-421-86229, Email: hmertz@uth.gr; for Mr. Petrakos: tel./fax 30-421-82845, Email: petrakos@helle.uth.gr.

The paper was presented at the International Conference on Integration and Transition in Europe: the Economic Geography of Interaction Supported by the European Union’s Phare ACE Program, organized by the University of Thessaly, Department of Planning and Regional Development; the Hungarian Academy of Sciences, Institute of Economics; and the Lorand Eotvos University, Department of Geography. The conference was held in Budapest, in September 1997.