Ensuring shared prosperity in a changing world

As the world and Europe confront successive crises stemming from the climate emergency, post-pandemic recovery and Russia’s aggression towards Ukraine, regions are under renewed pressure. These events have asymmetric territorial impacts and converge at a time when many regions were already grappling with ongoing structural transformations, notably the decarbonisation and digitalisation of the economy. While they offer opportunities to shape new patterns of growth, they also present formidable challenges that risk the emergence of new divides leaving some parts of Europe behind. To address them, we need a new place-based approach to policy making, taking into account the territorial dimension.

The past two decades: mixed effects

Over the last twenty years, the EU has succeeded in delivering growth and enhancing prosperity across its diverse regions. This has been supported by the EU’s cohesion policy, which has helped less developed regions to catch up: their annual growth rates were on average 0.5 percentage points higher than the EU average.

However, this convergence has stalled or even reversed in the face of the headwinds of major crises. For example, the 2008 financial crisis and its aftermath caused a decline in EU GDP per capita, and the worst hit regions were often the poorest. Economic convergence only resumed in 2013, but some regions (especially in the South) have experienced stagnation and decline since then and are not yet back at pre-crisis levels.

Growth of GDP per head, 2001-19

The next two decades: opportunities and risks

It is impossible to foresee how the world will change over the next twenty years. Yet some profound transitions are already underway. Every country, region, city and village in Europe will feel the effects of digitalisation, innovation, greening and shifting demography. They need to take place-based action to ensure a successful transition.

First, digitalisation has accelerated remote working and learning practices. In the long-term this will trigger new patterns of settlement and daily mobility. For local development, this is exciting news. There is an opportunity to change the paradigm, moving people and jobs from congested cities to more affordable, more spacious small towns or rural areas. However, for the transition to benefit everyone, all places must be able to access digital infrastructure such as high speed broadband, and the training and opportunities to make the most of it.

Second, as the knowledge economy progresses, innovation becomes critical to maintain prosperity. However, the innovation divide has widened in recent years, and has gone hand in hand with a concentration of high-value activities, wealth and well-paying jobs in advanced areas.

Regionally targeted policies will be needed to support all regions to innovate, notably the less advanced, drawing on unique strengths to promote a more modern and diversified economy, and build resilience to future crises.

Third, our planet demands that we change the way we produce and consume. The green transition has now acquired a global geopolitical dimension. Russia’s invasion of Ukraine has underlined the heightened security risks associated with oil and gas imports. The shift to a climate-neutral and circular economy will increase energy security and generate economic opportunities. This includes the creation of new industries and jobs, which must reach all parts of Europe and bring gains to all citizens. However, those regions more dependent on energy-intense activities will need support to weather this transition.

The fourth transformation is slower and less visible: shifting demography. Currently, 1 in 3 Europeans live in a region with a shrinking population. By 2040, this will be 1 in 2 Europeans. At the same time, young people continue to leave small towns and rural areas for large cities, draining those areas of talent and undermining the long-term prospects of those regions. Policy makers need to identify ways to manage and counter these trends by making all regions attractive, so that when young people leave their hometown it is by choice, not by necessity.

Putting the local and regional level at the centre

Tackling these challenges and transformations in a way that is mindful of local characteristics is a process that must be bottom-up. The EU cohesion programmes are built on solid regional and territorial development strategies and aim to ensure that no region is left behind. Investment is directed towards closing the urban-rural gap, promoting multi-polar development and supporting territories in the green and digital transitions.

It is at the local level where all the different systems interact, from the innovation and business networks to the energy grids, from transport and mobility to schools and hospitals. A development strategy that unblocks bottlenecks will only work if it is designed, implemented and co-owned with local stakeholders. Co-operation between different administrative levels is crucial if this is to be successful.

But it does not stop here. All structural policies, European and national, from innovation to climate policy, can have important spatial impacts. That is why, if we are to succeed in tackling regional inequalities and ensuring that no place is left behind, all policies must be “regional proofed”. They should “do no harm to cohesion”, that is, they should not hamper convergence or increase inequalities.­­­

A renewed policy effort is essential as regions continue to struggle against the headwinds of major crises. While longer term transitions can bring many opportunities, they also risk leaving some places behind. The reward will not only be the economic success of those places, but replacing the emerging “geography of discontent” by a “geography of opportunities”, leading to a stronger Europe in which every region can be proud of its place.

Find out more on the “Do no harm to cohesion” principle.

To learn more about the OECD’s work on regions, go here.

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