The making of regional inequality: Market stages in an Integrated or Fragmented world

The current geopolitical landscape is highly fragmented and complex. It is characterized by rising tensions, shifting alliances, and by a largely uncertain global governance. This turbulence has dire consequences, especially at territorial level: it may contribute to widening interregional disparities. Prior ex ante assessments of the way these instabilities may find a solution suggest that a scenario with the EU deepening its internal integration, coupled with tighter global economic linkages (Integration scenario), would yield stronger economic performance, associated with smaller increases in cross-country disparities. By contrast, a scenario with looser internal integration within the EU, coupled with a fragmented global economy (Fragmentation scenario), would bring about comparatively larger within-country disparities, as slower economic expansion would keep internal inequality more contained. In this paper we propose a set of simulations aiming at disentangling the role played by premarket, in-market, and post-market factors in driving regional inequalities. Simulations are based on the fifth generation of the MAcroeconometric Social Sectoral Territorial (MASST5) model. Our results suggest a mosaic of often contradictory effects. Should either state of the world depicted in the two scenarios prevail, our simulation results provide a detailed picture of the mechanisms driving overall results, thereby informing policy interventions aiming at minimizing the negative effects of specific development patterns.