Regional Growth and Disparities in the Era of Economic Security: European Regional Dynamics in the New Normal Trade Policy Scenario

Recent geopolitical conflicts in Europe and the Middle East, coupled with a geopoliticization of trade, triggered the transition toward a new trade policy, moving away from managing interdependencies to managing dependency through economic security principles, embracing Open Strategic Autonomy. While a New Normal Trade Policy may be fundamental in restoring the European level playing field in international trade, it will not be exempt from costs that will affect regions differently, as geoeconomic fragmentation may significantly hurt low-income regions, negatively affecting living standards. In this paper, we assess the regional income distribution of the New Normal Trade Policy scenario, through MASST5 model simulations. The model simulates GDP growth rates at NUTS2 level for all EU member countries?+?UK under the assumptions of the new trade policy. Simulations are based on a combination of internally coherent assumptions formalizing the EU's approach to the New Normal Trade Policy, mostly dealing with the risk diversification of trade partners in industries deemed strategic by the EU, with the extra investment in digital technologies, and with a reduction in within EU trade barriers. Estimated gains are spatially heterogeneous. Regions growing fastest include noncapital urban areas, Western European regions, manufacturing regions, and regions with strong institutions. Growth drivers differ, with high-level functions boosting Western regions, while Eastern regions focus on production-related ones. Between-country disparities increase, yet within-country inequalities tend to grow less due to the advantages of nonmanufacturing areas in Western countries; overall these trends would lead to a slowdown in territorial inequalities.