ABSTRACT

Why should we be concerned about high dependency on external funding in the regional context? In order to answer this question we can recall, for instance, two alternative analytical frameworks which examine the problems arising in this context. A first theoretical scheme, put forward by Sinn and Westermann (2001) to explain the EG situation, is the so-called ‘Dutch disease’ metaphor. According to this scheme the deindustrialisation post-1990 in EG had effects analogous to the well-known Dutch disease phenomenon, which occurs in countries ‘affected’ by a resource discovery.4 Indeed, public transfers from the central government (the so-called Solidarpakt) to the new Bundesländer can be seen as a ‘discovery’ of natural resources. Within the Dutch disease scheme (pioneered by Salter, 1959; Swan, 1960; Meade, 1951), when a country discovers or receives a large amount of natural resources, it experiences a large currency evaluation and a subsequent decline of the tradable goods sectors (such as the manufacturing sector), followed by an increase of economic dependency on imports from foreign countries. After the reunification of 1990, the German authorities decided not only to put in place a massive system of welfare state interventions in favour of the East, but also decided in most of the cases to use a one-to-one ratio for the conversion between the Ostmark and the Deutschmark, which resulted in an immediate and considerable real appreciation of the EG products.5 At the same time, EG firms entered immediately into the EMU market and had to face full competition with both West German and European firms. All these effects together produced a large drop of the exports of the new Bundesländer. However, while the change in the conversion rate of the two currency had a (relatively) short-term effect, the large inflows of public resources have contributed to a medium/long-term deindustrialisation process with effects, as mentioned above, similar to the so-called ‘Dutch disease’ (Sinn and Westermann, 2001). An alternative scheme, used in the context of the Italian Mezzogiorno, is the so-called ‘leaky bucket’ metaphor put forward by Savona (1970; 1991).6 According to this scheme, regions with persistent high external trade deficit (and their politicians and authorities of regional policy) are affected by a ‘compensation stress’: i.e. they require persistent high public spending in order to compensate for structural imbalances (the ‘leaky bucket’). This ‘compensation stress’ implies:

1 crowding out of loanable funds: i.e. lower loans to GDP ratio compared to Centre-Northern regions;

2 crowding out of private investments and weakening of local manufacturing sector compared to Centre-Northern regions;

3 worsening of local firms credit risk: i.e. higher nonperforming loans to GDP ratio compared to Centre-Northern regions.