It takes two to tango: Competitiveness and Cohesion

October 2024

The EU has long sought to strike a balance between competitiveness and cohesion, ensuring that economic growth benefits all member states and regions, not just the most prosperous. The European Single Market and Cohesion Policy have played a crucial, intertwined role in achieving this delicate balance. However, debates about their shape and evolution, especially in times of budgetary constraints and global competition, suggest that this balance may be shifting. It is therefore worth exploring the interplay between the two and reflecting on the importance of maintaining both to ensure a prosperous, competitive and inclusive EU.

The interplay between competitiveness and cohesion

Since their inception, the European Single Market and Cohesion Policy have been designed to work together to promote economic integration while mitigating the potential inequalities that may result from it. Established in 1993, the European Single Market removed internal borders and harmonised rules to promote the free movement of goods, services, capital and people. It has created a huge integrated market, boosting competitiveness and efficiency across the EU. However, with greater competitiveness comes the risk of regional disparities, as economically stronger regions are more likely to reap the benefits of market liberalisation.

This is where Cohesion Policy comes in. Designed to promote economic, social and territorial cohesion, the policy helps especially less developed regions to catch up by providing targeted financial support to boost their development potential. Cohesion Policy aims to help that the benefits of the Single Market are spread more evenly across all member states, especially those at risk of being left behind.

The global context: Competitiveness and strategic autonomy

In today's global landscape, maintaining competitiveness is not only about internal cohesion, but also about positioning the EU as a strong player on the world stage. The rise of new geopolitical powers such as China, the ongoing technological race with the United States and Russia's invasion of Ukraine have reshaped the global order. In response, the EU has embraced a vision of strategic autonomy, seeking to reduce its dependence on external powers and strengthen its capacity in key areas such as defence, green transition and industrial transformation. Moreover, strengthening global competitiveness will be one of the mantras of the new Commission.

The green and digital transitions are expected to be at the heart of this vision. By taking the lead in these areas, the EU aims to secure its future prosperity while setting a global example in tackling climate change and fostering technological innovation. But this also poses new challenges for the cohesion objective. For example, the green transition will have an uneven impact across regions, with some areas more dependent on carbon-intensive industries than others. Policies striving towards economic, social and territorial cohesion must evolve to address these disparities and ensure that no region is left behind in the transition to a more sustainable economy.

Cohesion Policy: A balancing force

Cohesion Policy is essential in countering the agglomeration effects of the Single Market. Agglomeration, or the concentration of economic activity in certain regions, is a natural consequence of liberalised markets, where firms cluster in areas with the best infrastructure, access to talent and markets. Left unaddressed, this can lead to widening regional disparities, with wealth concentrated in already prosperous areas and underdevelopment in others.

Cohesion Policy helps to redress this balance by making strategic investments in development potential especially in less developed regions. For example, investment in transport networks, digital infrastructure and education systems makes these regions more attractive to businesses and talent, thus increasing their competitiveness. This is not just about redistributing wealth; it is about creating the conditions for sustainable, long-term growth in all regions, thereby improving the overall competitiveness of the EU as a whole. At the same time, it has to be acknowledged that the objectives of economic, social and territorial cohesion, are too big a task for a single policy – even one as big as Cohesion Policy.

The benefits of Cohesion Policy go beyond economic development. It also fosters cooperation, solidarity and better governance across the EU. These non-monetary spillovers are just as important as the financial ones, as they help to create a more cohesive and united European community.

Cohesion Policy plays a crucial role in improving cross-border cooperation, strengthening governance capacities at all levels and ensuring that regional voices are heard in EU decision-making processes. In this way, the policy promotes not only economic growth but also social and territorial cohesion, creating a more resilient and adaptable EU in the face of crises.

Current challenges and future directions

As the EU navigates an increasingly complex global environment, the relationship between the competitiveness – incl. the Single Market – and cohesion is more important than ever. Technological advances, geopolitical tensions and the twin transition to a green and digital economy all challenge the current model of cohesion and competitiveness.

The prospect of EU enlargement, in particular the potential accession of countries such as Ukraine and the Western Balkans, adds another layer of complexity. These countries will require significant investment to fully integrate into the Single Market, raising the question of how to balance the needs of existing member states with those of new entrants. Responding to these changes will require a rethink of funding mechanisms to ensure that resources are allocated fairly and efficiently to promote both competitiveness and cohesion.

A new vision for the future

Looking ahead, the EU faces a fundamental question: What kind of Union does it want to be? The choices made by policy-makers, the degree of cooperation between member states and the willingness to embrace long-term strategic goals will determine the path the EU takes. EU policies to peruse the objective of economic, social and territorial cohesion, with a focus on reducing regional disparities and promoting solidarity, has the potential to be at the heart of this vision.

First and foremost, the EU must continue its efforts to achieve cohesion while increasing its efforts to strengthen competitiveness. For this EU policies need to evolve and adapt to new economic and social realities, such as the growing importance of environmental sustainability, digital transformation and demographic change. It also means being proactive rather than reactive, anticipating future challenges and ensuring that EU policies are fit for purpose in an ever-changing global landscape.

Conclusion: A tango between competitiveness and cohesion

The European Single Market and cohesion are like partners in a tango - each reinforces the other, but neither can succeed alone. While the Single Market drives competitiveness and economic growth, policies supporting cohesion objectives ensure that the benefits of this growth are shared across all regions and that all places can contribute to boosting competitiveness, thereby promoting a more balanced and inclusive EU.

As the EU stands at a crossroads, facing new global challenges and opportunities, the relationship between these two policies will be more important than ever. By maintaining and strengthening this delicate balance, the EU can ensure that it remains competitive on the world stage while promoting social and territorial cohesion within its borders.

In others words, it takes two to tango.

by Kai Böhme