This One Major Factor Makes Germany Richer Than Italy

Europe’s economic crisis has thrown into relief the economic disparity between the Continent’s richer, northern half and its poorer, southern half.

There are numerous causes for this inequality, such as the industrial makeup, demographic profile and human capital potential in each country, but among the most important is infrastructure.

Transport infrastructure has a significant effect on a country’s trade costs and its economic development. Due in part to the investment in man-made infrastructure like highways and rail networks along with natural transport networks like rivers, Northern Europe — defined here as France, Germany and the Netherlands — is considerably more developed and richer than Southern Europe.

The countries of Southern Europe — Italy, Spain, Portugal, Greece and the Balkan countries — have higher trade costs because they lack integrated waterways or extensive road and rail networks, in part due to the mountainous geography separating them from the Northern European core.

Even if the eurozone’s financial problems disappeared tomorrow, Southern Europe would still be at a severe economic disadvantage compared to its northern counterpart due to its less-developed transport infrastructure.

Europe’s Natural Transport Networks
Europe’s waterway network is more than 50,000 kilometers (30,000 miles) long but very unevenly distributed across the Continent. Except for the Danube, which flows to the east into the Black Sea, Europe’s waterways are located in and flow through its northwest.

The industrial areas of Germany, Switzerland and northeast France are connected via the Rhine and its branches, and the Maas River and adjoining navigable waterways connect Belgium, Luxembourg and northern France.

The channel between the Main and Danube rivers, linking the North Sea with the Black Sea, connects the larger industrial areas in Austria, the Czech Republic, Hungary, Croatia, Serbia, Romania and Bulgaria with Germany. And via the Elbe and the Oder, the industrial areas in Germany, Austria, Poland and the Czech Republic are linked.

(click here to enlarge image) This interconnection is important, as water-based transport is less expensive than land-based transport; depending on the particular circumstances and construction costs for the specific type and location of man-made infrastructure, it can be more than 10 times cheaper. Possessing a navigable waterway network has historically allowed a country to spend the capital it would otherwise need to put toward building transport networks on other investments that could increase its economic potential, such as education, energy or technology.

Though present-day waterways play a relatively minor role with respect to freight flow (only around 5 per cent of freight is transported via inland waterways), they enable industries to acquire intermediate products and expertise from farther away, increasing competition among the local suppliers and creating more complex supply chains.

In contrast to Northern Europe, Southern Europe is completely disconnected from the dense waterway network in the northwestern plain. This makes it difficult to reach internal consumer markets in a cost-effective manner without first investing resources in constructing rail or motorway networks. Due to the extensive coastline and seaports controlled by these territories, the Mediterranean has historically been the richest part of Europe, and the Po River Valley in northern Italy is still among the richest areas in the world. About 40 per cent of freight is still transported over sea within the European Union.

However, deepwater navigation allowed the more plentiful (but disconnected) rivers of Northern Europe to knit their systems together. This contributed to the Atlantic Ocean’s overtaking the Mediterranean as the more significant trade system in the 16th and 17th centuries, linking Europe to Africa, the Americas and Asia, and Northern Europe’s wealth consequently eclipsed that of the southern countries on the Iberian Peninsula and below the Alps. Greece, which is at the epicentre of the eurozone’s debt crisis, is in an even more difficult situation because it lacks Spain’s and Italy’s export bases and has been plagued by debt crises for much of its modern history.

The Challenge of Topography
Mountainous topography in part determines where these waterways form and thus plays a significant role in this division between Europe’s north and south. On the Iberian Peninsula, the Pyrenees form a natural barrier between Spain and Portugal and the rest of Europe. To the eastern and western edge of the mountain chain there are thin coastal strips that allow traffic to flow between France and Spain, but this is more time-consuming and costly than a route through the Pyrenees (which the European Union has tentative plans to construct). Almost all of Spain’s industrial and population centres are located along the coast, with the exception of Madrid. The capital functions as a transport hub with roads and rail lines linking it to the coastal cities, but Spain lacks any comprehensive internal transport network.

Italy is cut off from the rest of Europe by the Alps, which are even more difficult to bypass than the Pyrenees. The mountain chain forms a half-circle around the fertile Po River Valley, and there is no coastal strip of flat land in Italy’s northwest providing the space to build transport infrastructure connecting Italy to France, though the northeastern border of Italy leaves a thin strip of coastal land between the Alps and the Adriatic Sea that can be used as a passage to the east. The Po River in the north is the only navigable waterway in Italy. South of the Po River Valley, the Apennine Mountains run to the southern tip of Italy, preventing extensive east-west infrastructure from being built in Italy and forcing most cities to be located along the peninsula’s coasts.

Greece lies farthest south in Europe and is cut off from the north by several mountain chains. The Dinaric Alps run vertically through the entire Balkans, and the Rhodope Mountains run horizontally and form the northeastern border between Greece and Bulgaria. Both of these chains are difficult to cut through to gain access to the Hungarian Plain and Danube River. Within Greece, the Pindus Mountains are a barrier to domestic connectivity among cities. The Carpathian Mountains, which form a crescent through the Balkan Mountains and multiple Eastern European countries (mainly Slovakia, Poland, Ukraine and Romania), leave a gap, called the Iron Gate, allowing the Danube to flow into the Black Sea.

This mountainous terrain drives the inequality in Europe, not only by separating the poorer southern countries from their northern neighbours, but also by putting up obstacles to commerce within the countries themselves, which can only be overcome through expensive infrastructure investments.

Infrastructure Investments

(click here to enlarge image) Whether or not a country possesses natural transport networks in the form of navigable waterways or ports, it has a strategic incentive to build up its man-made transport infrastructure. Today, the main purpose is to facilitate trade, but in the past expanding transport networks has also been pursued by national governments to facilitate the movement of military forces within a country’s borders.

In the 19th century, rail was the most important of these transport systems. With no great topographic difficulties to overcome and many industrial centres that had to be connected, the railway network was most easily developed and dense in northwestern Europe. Countries like France, Spain and the United Kingdom have a network centered on the capital, while Germany, with industrial pockets spread throughout, has a more extensive network throughout the country. (Eastern European countries from Moldova north through Ukraine and the Baltics are disconnected from the industrial base in the northwest because the Soviet Union constructed railways using a different gauge.)

(click here to enlarge image) While rail is a cost-effective method of transporting goods, it is inefficient at gradients of more than 4 per cent, which effectively severs rail networks at mountain ranges like the Apennines and Alps. The development of the road allowed this topographical challenge to be overcome for countries lacking navigable waterways, though at considerable cost. One kilometer of motorway costs between 600,000 and 800,000 euros ($820,000 to $1.09 million), but the maintenance costs for Alpine-area roads is 20-50 per cent higher than the maintenance cost for normal roads.

Around 1,000 kilometers of motorway were built in EU member states per year during the 1990s. However, no significant progress was made connecting the Mediterranean nations to the northwestern countries. Roads were mostly built to improve domestic connectivity, but they have not substantially contributed to cross-border traffic.

(click here to enlarge image) The historical evolution of the transport infrastructure explains why freight flows in Europe are concentrated in the northwest. The industrial base in that region greatly profits from the dense infrastructure, and the lower transportation costs offer a substantial competitive advantage, contributing to the area’s wealth compared to Europe’s south.

Future Projects
The European Union is well-aware of the importance of transport infrastructure as an element of European integration. Even on a national level, infrastructure projects take a long time to plan and construct. On a multinational level this challenge is even greater, particularly now given the sensitivity of richer EU states like Germany or France, where domestic populations are hostile to the idea of subsidizing the bloc’s poorer countries whether in the form of bailouts or infrastructure investments.


(click here to enlarge image) The Trans-European Transport Network Executive Agency, which was created by the European Commission in 2006, is supposed to plan and partially finance a number of projects intended to connect the European continent. That it took the European Union 10 years to create this agency after having decided on the guidelines for the Trans-European Transport Network in 1996 shows how difficult it is to take the development of infrastructure from a national to a supranational level.

For most of the projects, financing is still not secured and there are bilateral cross-border disputes to be overcome. Even in the most optimistic outcome for the eurozone crisis, it is unlikely this will happen until the 2020s.

The fact remains that of the European Union’s 66,000 kilometers of road, nearly half — 31,000 kilometers — is located in France, Germany, the Netherlands, Belgium, Poland and Denmark. Of the European Union’s 212,000 kilometers of railway, 92,000 kilometers are in France, Belgium, the Netherlands, Germany, Poland and Denmark. And of the 41,000 kilometers of inland waterways regularly used for transport in the bloc, 24,000 kilometers are in Belgium, France, Germany, the Netherlands and Poland. Taking transport infrastructure as an indicator, it is apparent that European integration still has a long way to go.

This post originally appeared at STRATFOR, the world’s leading private intelligence firm. To get access to more intelligence from STRATFOR, click here.

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