This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of the European Union were reviewed by the Committee on 29 April 2021. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 9 June 2021.The Secretariat’s draft report was prepared for the Committee by Álvaro Pina and Filippo Gori with contributions by Sofia Amaral-Garcia, Andrés Fuentes Hutfilter, Sahra Sakha and Patrizio Sicari under the supervision of Pierre Beynet. Statistical research assistance was provided by Paula Adamczyk, Mauricio Hitschfeld, Markus Schwabe and Patrizio Sicari and editorial assistance by Poeli Bojorquez, Jean-Rémi Bertrand, Emily Derry and Alexandra Guerrero. The previous Survey of the European Union was issued in June 2018.Information about the latest as well as previous Surveys and more information about how Surveys are prepared is available at http://www.oecd.org/eco/surveys.

European policies reacted forcefully to the crisis, but risks remain high.

The COVID19 pandemic has raised multiple challenges for the European Union (EU) and often compounded existing weaknesses. The EU has been worse hit than most other economic areas, suffering in 2020 its largest-ever recession (Figure 1.1). Territorial inequalities risk increasing across countries and regions, potentially worsening divergent economic trends over the past decade. The disproportionate impact of the crisis on sectors with abundant low-skilled jobs, such as hospitality and trade, could increase inequality and poverty.

Progress in regional convergence in the EU has been uneven over the last two decades. While Central and Eastern Europe has been catching up, Southern Europe has often lost ground, especially after the global financial crisis. Furthermore, within most countries, gaps between large cities and rural areas have widened. Some challenges to convergence have stemmed from worldwide factors – such as globalisation, digitalisation, global warming, and, more recently, COVID19 – but others are European-specific, like incomplete financial integration, less effective fiscal governance and subpar innovation performance. This chapter proposes policy action to reduce regional divergence by helping regions upgrade their productive specialisation. Building on new approaches to regional and industrial policies, Europe needs to exploit the full potential of cross-country cooperation in innovation and of urban agglomeration economies. Competition and trade policies need to ensure a level playing field to enhance the benefits of open and competitive markets while responding to new challenges, such as digitalisation or foreign subsidies. Finally, Cohesion Policy and the Common Agricultural Policy, the two largest EU budget instruments, need to become more effective at promoting productive upgrading.