The future of cohesion: The digital and green transition widens the gap between European regions

Europe is undergoing a twin transition that is changing the way its economy works. The structural changes emanating from digitalising and greening the European Union will play out differently across European regions, potentially redrawing the EU’s economic landscape as we know it. They will present fresh opportunities for some regions, while posing enormous challenges for others to adjust.

To shed light on the future of regional growth and cohesion across the EU, the study presents novel evidence for 230 NUTS-2 regions on their general growth potential and their readiness to deal with the specific opportunities and challenges of digitalising and greening their economies. The study, which was prepared in cooperation with The Vienna Institute for International Economic Studies (wiiw), uses a scoring system consisting of 14 key factors that shape medium-run growth on the back of the twin transition.

The starting point of the study is an estimation of the potential for general economic growth. Regions in Eastern Europe, which have exhibited prolonged periods of growth in recent decades, have a worse outlook when it comes to their potential for future growth, as they have lower scores for key growth drivers such as high-skilled employment, investment or innovation. Together with Southern European regions, which already experienced stagnating economic development in the past, their future growth potential falls behind those of their counterparts in Western and Northern Europe.

In addition, regions are unevenly prepared for reaping the benefits or shouldering the costs of digitalising and greening and their economies. For example, regions with high levels of labour productivity, good internet access or high levels of business sophistication are poised to benefit more from a digitalised economy. Other regions are better prepared to decarbonise their industrial production, transport sector or housing stock. Some regions are well suited to tackle both transitions, and many are not particularly ready for either.

The study assesses how the twin transition may alter the prospects of future economic development. It finds that especially urban and metropolitan regions that are mostly specialised in knowledge-intensive services show high levels of readiness for the digital and green transition in addition to a high general growth potential. These regions will most likely pull ahead in the face of the twin transition. They include Lisbon, Berlin, Bratislava, Budapest, Warsaw, Prague, Stockholm and Cologne to name a few, but also regions around the Alpine area in Europe’s core.

The study also shows that particularly rural and agricultural regions in Spain, Greece, Southern Italy or Romania, but also mining regions in Poland or Slovakia have low levels of digital and green readiness on top of a low potential for general growth. These regions will therefore most likely fall further behind on the back of the twin transition.

Overall, the study finds that regions with higher GDP per capita today have higher potential for economic growth in the face of the twin transition, while regions with lower GDP per capita are more likely to stagnate in their economic development. Economically strong regions are thus set to pull further ahead while economically weak regions will fall further behind.

The twin transition may therefore contribute to increasing economic disparities across European regions. This calls for action to gear future EU cohesion policy better to the fresh convergence challenges created by the twin transition. If measures are not tailored to regions’ specific transition challenges, digitalising and greening the European economy may work against the overarching goals of economic convergence and cohesion in Europe.