Green, Smart and Fair: Rethinking European Cohesion in an Era of Structural Change

Europe is in the middle of a Twin Transition. The structural changes that come with making Europe greener and more digital will bring new opportunities to European citizens and businesses. But it will also require huge adjustments to its economies, and the readiness and innovation capacities differ enormously across Europe’s member states and regions. This puts European cohesion – a long-term political goal of the European Union – squarely back on the map. This article is the first in a series on the future of Europe’s cohesion that looks at the resources, potential and vulnerabilities of European regions and at how the EU can better use its policies and funds to strengthen cohesion in turbulent times.

Cohesion in Europe: a long-standing quest

Upward convergence – whereby EU member states’ economic development improves while the gap between countries and regions narrows – has always been an important political aspiration of the European Union.

Countries join the EU with the expectation that socioeconomic objectives will be achieved and that working and living conditions will improve. It is this promise of prosperity that underpins European economic integration and legitimizes the pooling of national sovereignty in this area. Conversely, then, its failure to materialize undermines the very foundations of the European economic project.

The European single market provides the framework for this promise. In the past, it has made a decisive contribution to the economic development of the member states and the well-being of Europeans, so much so that the World Bank in 2012 dubbed the EU the “convergence machine.” But the prosperity generated by the Single Market has led neither to equal nor to convergent growth among individual members and regions of the EU.

Strengthening economic, social, and territorial cohesion and redressing regional imbalances are core tasks of the EU that are enshrined in the EU Treaties (Art. 174-178 TFEU). This goal translates into substantial funding: With a share of about a third of the total EU budget (392 billion Euro over a period of seven years), cohesion policy remains the single most important spending area in the EU’s long-term budget, the so-called multi-annual financing framework, or MFF.

Allocation per heading for the EU’s multi-annual financing framework 2021-2027

The EU's regional funding takes place primarily through the Multiannual Financial Framework (MFF) structural and cohesion funds. These are the European Social Fund, the Cohesion Fund, and, above all, the European Regional Development Fund, which accounts for almost 60 percent of EU cohesion spending (around 225 billion Euro for the budget period 2021-2027).

In 2020, another 47 billion Euros (via REACT-EU) was made available specifically for cohesion policy through the "Next Generation EU" instrument to promote recovery from the pandemic. Cohesion funding is intended to give Europe's structurally weaker regions the opportunity to develop, for example, through better infrastructural networks and to catch up with economically stronger regions.

The figures are both impressive, in that no other regional integration project in the world exists that shows such dedication towards redistributing funds for the purpose of internal cohesion, whilst at the same time modest, in that the EU's re-distributive powers are limited compared to those of national governments. This arguably raises the stakes for an intelligent use of funding and instruments at the European level to maximize their cohesive impact, in line with the objectives set out in the EU Treaties.

European cohesion today: improvement, but gaps remain

The newly released 8^th Cohesion Report by the European Commission provides a comprehensive and timely overview of economic cohesion in the EU. Since the early 2000s, less developed regions in Eastern Europe have been catching up with the rest of the EU, which has substantially reduced the gap in GDP per capita across the EU.

The high regional growth rates in the then-new EU member states were fueled by structural changes out of agriculture and into higher value-added sectors of their economy. As a result, the number of people at risk of poverty has fallen by 17 million between 2012 and 2019 and employment has been growing steadily across the EU.

Converging regions: Average year-to-year GDP per capita change, 2001-2019

Despite the long-term convergence that has broadly taken place in the EU, the promise of prosperity that the European single market is designed to achieve is not being realized everywhere. Capital metropolitan regions perform better than other, more rural regions in the EU. And some middle-income countries and regions, particularly in Southern Europe, have experienced sluggish or declining economic opportunities, social mobility and quality of life.

Many were hit hard by the economic and financial crisis in 2008 and have struggled to fully recover since. Growth drivers such as skills and innovation remain concentrated in more developed regions and urban areas of Europe. As a result, there are large and persisting economic and social disparities across the EU, with some regions – particularly in the Southern EU – experiencing long-term stagnation or even a reduction in economic conditions.

Persistent divergences: Number of years in a "development trap" between 2001 and 2019 by level of GDP per capita in 2000

Most recently, the COVID pandemic has tested Europe's economic and social structures. It has affected EU regions very differently, reflecting different regional healthcare and social capacities, restrictions, and economic structures. The initial phase of the pandemic has dented companies' planned investment and reduced the fiscal space in many member states that is needed for the recovery and economic development going forward.

Recovery and economic development will be made even more difficult with the looming costs to both the public sector and private enterprises (particularly for energy) that are brought about by Russia's invasion of Ukraine and the subsequent sanctions that the EU, together with Western Allies, have imposed.

Social and economic disparities across Europe's regions affect not only competitiveness, but also the political and social fabric of the EU. Overly great disparities in economic opportunities and development possibilities jeopardize the attractiveness of EU membership and, consequently, of the bloc's ability to present a united front externally: For Europe to be a strong actor vis-à-vis China, the USA, Russia, and its neighborhood, it must stick together – politically and economically.

This puts the EU in a dilemma. On the one hand, it must continue to maintain the prosperity of its most dynamic regions to maintain its economic position in the world. On the other hand, persistent regional divergence is economically inefficient and politically and socially dangerous to ignore.

Green and smart, and fair: Fostering cohesion in a transforming Europe

Europe will need to tackle this dilemma against the backdrop of two major challenges: One is the transition to a low-carbon and sustainable economy, and the other is the shift to a more digital economy. If it is true that cohesion is the foundation of European integration, these transitions need to be handled in a way that is maximally inclusive. Put simply, for the EU to be competitive whilst at the same time retaining this foundation, it must become greener, smarter and at the same time fairer.

The green and digital transitions will bring new opportunities to European citizens and businesses. But they will also require significant structural changes and the readiness and innovation capacities differ enormously across Europe. We already know that the next phase of transformation will be felt even more acutely by EU citizens.

We also know that the impact of these transformations will vary across EU countries and regions, depending on, among other things, their location, their populations' skills, their industry structures and, importantly, their innovation systems, where Europe traditionally struggles to capitalize on the power of its ideas.

For example, the effects of climate change – and the goal to be climate-neutral by 2050 – will differ from one region to another. Regions with a particular dependency on Russian oil and gas will face additional pressure to replace fossil fuels in the short term, either by sourcing alternatives or accelerating the deployment of green energy (or both). Similarly, the digital transition is already moving forward at very different speeds across Europe. While some regions are at the forefront of using forms of artificial intelligence, others still struggle to connect their people to the internet. Innovation activity as a whole is traditionally concentrated in already prospering regions.

Additionally, when we look at the drivers for future growth, such as a region's demographic profile or levels of education and skills of its population, we see large variation across Europe. Furthermore, the green and digital transitions, while in many ways complementary, have the risk of playing against each other.

The Green Deal relies on a certain level of technical know-how, skills development, and modernized infrastructure (especially where energy efficiency and the digitization of energy markets is concerned) present even in less economically developed regions.

Meanwhile, the digital transition may increase electricity demands as the EU works towards widespread adoption of advanced computing services, internet and 5G connectivity and the digitization of public services. In summary, without appropriate policy action, new territorial disparities will appear in Europe, which in turn will be exacerbated by the strain of the Twin Transition.

Preparing for the EU's future and managing – or better mastering – the Twin Transitions will be a key task for the EU in the years to come. Yet they may also create new disparities, increase demand on public authorities and feed popular discontent. Identifying these disparities now and tracking them into the future will be key.

The ways in which these transitions are managed will determine whether all regions and citizens, wherever they live, will benefit. In the long run, the European project will only work if prosperity and opportunities for growth from this transformation are fairly distributed across European regions, creating a promising future for all Europeans.

Read more in our EU Cohesion series

A Smart Europe: Digitalization and Regional Economic Development

A Green Europe: Regional Strengths and Weaknesses and the Green Transition

A Fair Europe: Strengthening European Regions for a Just Twin Transition

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About the Bertelsmann Stiftung’s work on cohesion in Europe’s economy

Jake Benford, Nathan Crist, Sabine Feige, Katharina Gnath, and Thomas Schwab are the team that drives forward the Bertelsmann Stiftung’s work on Europe’s economy.

They investigate which economic, social and territorial disparities matter for Europe. They analyze how structural changes that come with decarbonizing and digitizing Europe will affect its economy and its cohesion. This will include identifying the resources, potentials, but also the vulnerabilities of European regions. And they develop proposals on how to strengthen the EU single market and how the EU can better use its policies and resources to strengthen cohesion across Europe.