Mind the Gap – The Twin Transition Threatens to Increase the Urban-Rural Divide in the EU

In a recent study, we together with the Vienna Institute for International Economic Studies assess the readiness of regions to manage the green and digital transition. The results show a clear pattern favouring urban and metropolitan regions specialised in knowledge-intensive and high-tech sectors to the disadvantage of rural and remote regions specialised in agriculture and low-technology. These results are all the more discomforting from a cohesion perspective because of already existing disparities between regions with different economic profiles.

Sectoral specialization patterns divide urban and rural regions in the EU

Regions in Europe have taken different paths of economic development, and despite EU efforts to reduce disparities, economic specialisation – and in particular sectoral specialisation – remains a major determinant of prosperity and economic potential.

The sectoral specialisation describes the technological base of a region’s dominant economic segments, and it depends on a variety of the region’s individual characteristics. These characteristics can be either inherent to regions, like geographic conditions or the availability of raw materials. Or they are historical and path-dependent, such as investment, demography, innovation or productivity.

The combinations of these individual characteristics have led to a variety of complex specialisation outcomes in regions. However, there is a general regional specialisation divide in Europe that can be broadly classified as a dichotomy between urban and metropolitan areas on the one side and remote and rural regions on the other.

Urban and metropolitan regions are more likely to be specialised in high-technology and knowledge-intensive services with high productivity, such as internet and communication technologies, complex engineering or electronics. In contrast, remote and rural regions tend to specialise in sectors of low-technology or in agriculture, which include textile manufacturing, food production, fishing or forestry.

These uneven settings of regional specialization have contributed to the agglomerations of capital and employment in urban regions to the detriment of rural ones. A process that has strong implications for the distribution of regional well-being.

Urban innovation centres outperform agricultural and remote regions

With its freedom of movement and removal of trade barriers, the EU single market enables a concentration of highly skilled labour in regions with the best employment opportunities. Similarly, as innovative firms concentrate in urban areas, rural regions are confronted with a lack of productive capital and investment, as well as generally low levels of business sophistication. This clustering of capital, innovative firms and high-skilled employment in urban and metropolitan regions has given rise to a significant productivity divide that is reinforcing territorial prosperity gaps.

Therefore, uneven specialisation patterns translate into large income disparities between European regions (figure 1). Of all European regions with a GDP per capita income of above €32,000, most are specialised in either knowledge-intensive services or high-technology. And what stands out is that most are metropolitan regions – with capital regions being particularly successful.

There are only a few regions that are rural and specialised in agriculture or low-tech manufacturing that can display similar income levels. Now, against the backdrop of the digital and green transition, this urban-rural divide is likely to even increase.

Figure 1: Economic prosperity and sectoral specialisation

Notes: The figure shows GDP per Capita, with regions grouped into four categories according to their sectoral specialisation and level of income | Map: Bertelsmann Stiftung  Source: Own calculations

Twin transition – A challenge for some and opportunity for others

The study The Future of Cohesion finds evidence for a divergence in the “readiness” of regions to manage the challenges of the green and digital transitions. The study shows that urban and metropolitan regions that are mostly specialised in knowledge-intensive services show higher levels of readiness for the digital and green transition. In contrast, rural and agricultural regions have the lowest levels of twin transition readiness. Therefore, they are most likely to fall further behind as a result of adapting their economies to the twin transition or being unable to capitalize on a green and digital economy.

The green transition will be a particular burden for regions specialized in agriculture and low-technology sectors. Because these sectors are mostly associated with carbon-intensive production, this is where the costs of climate adaptation will be the highest.

This applies to, for instance, agricultural regions in Romania and Poland and carbon-intensive industry and mining regions in France, Czechia, Slovakia or Sweden. On the other hand, metropolitan regions are not only less challenged by the transition, but they are also better positioned to benefit from it. As centres of innovation, which facilitates the development of green technologies, they hold the keys to products and services that will be in high demand over the decades to come.

Figure 2: Green Readiness of EU regions

This figure shows NUTS 2 regions grouped into four categories according to their level of green readiness
Map: wiiw and Bertelsmann Stiftung  Source: Own calculations

Similar findings apply to the impacts of the digital transition. Digitalisation can create new opportunities for generating economic growth, as it contributes to new and better employment with higher productivity. It can also enhance societies’ well-being by improving public services and healthcare. However, regions strongly differ in their ability to profit from digitalisation.

First, populations with higher educated and trained workforce can better respond to new skill requirements and adapt to complex production methods. Second, to fully benefit from the opportunities of digitalisation, regions need to have the right infrastructure that guarantees wide-ranging connectivity for people and businesses.

Sectoral specialisation is key to understanding which regions benefit most from digitalisation. Metropolitan regions that specialise in knowledge-intensive services show the highest potential to benefit because they have a more developed technological infrastructure at their disposal.

Also, as they are home to concentrations of innovative firms and a higher-educated labour force, these regions have better prospects for engaging in new digital products and services. In contrast, regions specialized in low-technology manufacturing show much less potential for participating in the digital economy.

Rural regions specialised in agriculture are expected to benefit the least from digitalisation, as they have weaker digital infrastructure, a lack of productive firms and lower levels of digital skills in their workforce.

Also, many jobs in industrial regions show a higher risk of automation because of greater substitutability, rendering their employment sector more vulnerable against the digital transition.

Figure 3: Digital Readiness of EU regions

This figure shows NUTS 2 regions grouped into four categories according to their level of digital readiness
Map: wiiw and Bertelsmann Stiftung  Source: Own calculations

Conclusion: The urban-rural specialisation divide presents challenges to cohesion

The differences in prosperity along regional economic specialisation lines present a challenge for cohesion policy. Urban regions specialised in knowledge-intensive and high-technology are better equipped to benefit from the twin transition, while rural regions will face more transition challenges.

This divide threatens to diminish the prosperity of regions that are already economically lagging. Against this backdrop, policymakers must find a way to leverage the unused potential of rural regions in order for them to overcome their disadvantages in the face of the twin transition.

About the author

Lucas Resende Carvalho is Junior Project Manager in the Europe’s Future Program at the Bertelsmann Stiftung working on the Europe’s Economy Project.

More about the twin transition and EU cohesion policy

Digital and Green Transition Threatens to Widen the Gap between EU Regions (globaleurope.eu)

Digital Transition: New Impetus for Improving Gender Equality in Europe - Global & European Dynamics (globaleurope.eu)

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