March 15, 2015 / 9:19 AM / 3 years ago

No more Blue Banana, Europe's industrial heart moves east

BRUSSELS (Reuters) - Once depicted as a “Blue Banana” stretching from Manchester to Milan, Europe’s industrial heartland has moved eastwards just as its political center of gravity has shifted to Germany.

A man walks along the embankment of the river Spree during sunset in Berlin, September 13, 2013. REUTERS/Thomas Peter

The term was coined in 1989 - the year the Berlin Wall fell - to describe French geographer Roger Brunet’s work identifying a manufacturing megacity, visible from space at night as a band of light curving from England to Italy via the Netherlands, Belgium, West Germany and Switzerland.

Brunet was worried that France, a highly centralized economy dominated by Paris, was falling off the map.

He developed the concept to urge the government to invest in infrastructure to connect the Paris-Lyon-Marseille axis to the highly urbanized European backbone of around 110 million people.

A quarter of a century later, the continent’s industrial geography has morphed. A more fitting image might be a golden soccer ball centered on southern Germany and reaching into Poland, Hungary, the Czech Republic, Slovakia, Austria and Romania.

“We have seen a huge relocation and concentration into a central European manufacturing core,” says Michael Landesmann, scientific director of the Vienna Institute for International Economic Studies.

Former-communist countries that joined the European Union in 2004 and 2007 have become the extended production line of German industry, no longer just supplying raw materials and components but assembling cars and some industrial machinery.

Manufacturing employment has declined everywhere in Europe as a share of the workforce but most sharply in Britain, France and Belgium, with the post-2008 economic crisis accelerating a trend driven by the globalization of supply chains.

The shift in the balance of trade inside the now 28-member EU in the decade since its eastward enlargement began offers a striking illustration.

The golden football region - Germany, the Netherlands, the Czech Republic, Slovakia and Romania - increased its share of intra-EU trade by a total of 5.3 percentage points between 2004 and 2013, the latest year for which final data is published. The biggest gains accrued to Germany with 2.2 percentage points.

Over the same period, the Atlantic Arc region englobing Britain, France, Ireland, Spain and Portugal lost a cumulative 4.4 percentage points in intra-EU market share, led downwards by Spain and the UK. Italy also lost 1.7 percentage points.

How much this all matters is open to debate. To some extent, industrial jobs have been replaced by the growth of business services, especially in Britain, which has just overtaken France as the EU’s second biggest economic power.

Manufacturing jobs in advanced economies have become increasingly highly skilled, while those parts of production for which high skill levels are not needed have been shifted to regions with lower labor costs.

In the knowledge economy, location may become increasingly irrelevant and industrial plants may wither in Europe as coal mines and steel mills largely did in the late 20th century.

Yet Germany has built out its economic dominance of Europe by maintaining the largest manufacturing base.

More worryingly, Landesmann says, Europe’s southern periphery has become largely disconnected industrially from the core since the euro zone debt crisis forced Greece, Spain and Portugal to seek bailouts for their governments or banks.

“The periphery and lower income regions are not linked to cross-border production networks. That is not easily reversible and it’s not just an exchange rate issue,” he said.

Economists assume too blithely that such trends will balance themselves out over time, Landesmann said, arguing that the loss of manufacturing capacity on Europe’s southern fringes calls for policy action to build up peripheral countries’ export capacity.

Not everyone is quite so gloomy.

Latest figures from Eurostat, the EU’s statistics office, show exports from Spain, Portugal and Ireland are rising again. Ireland was the fastest growing economy in the euro zone last year with 4.8 percent growth, and Spain grew 2 percent, finally starting to turn the tide of mass unemployment.

U.S. auto giants Ford (F.N) and General Motors (GM.N) have just made major investments to increase car production in Spain. Ironically, Spain has increased its share of Europe’s industrial gross value added even as it has lost manufacturing jobs due to big gains in productivity.

These shifting patterns pose conundrums for EU policymakers and the European Investment Bank as they consider how to target a planned 315 billion euro strategic investment fund intended to attract private capital into long-term infrastructure projects.

Should the priority be to counter the growing north-south economic divide, reindustrialize the rust belt and the olive oil belt, focus on reducing dependence on fossil fuels such as imported Russian gas, or promote research and development in the industrial heartland?

While acknowledging that trying to reverse the tide of industrial concentration would be futile, Vincent Aussilloux and Arno Amabile of the French government’s policy planning agency France-Strategie, argue in a forthcoming paper that the EU needs to target strategic investment at the most depressed regions.

They also advocate a specific fund for the euro zone to provide loans and subsidies to develop research, small business and vocational training in the poorest peripheral areas.

“This is also a political imperative so that Europe is once again identified with positive, future-oriented projects and not just with enforcing budget austerity,” they say, warning that the widening industrial gap could otherwise cause a political explosion.

Writing by Paul Taylor; Editing by Tom Heneghan

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