The Reform of the EU's Cohesion Policy

Theme

In part due to the natural convergence of the average Spanish income with the EU average and in part due to the arrival of new, poorer partners to the EU (the statistical effect), the resources allocated to cohesion will be directed towards the new members. As a result, Spain will no longer benefit from the cohesion fund and several regions could lose their structural aid after 2006. The Commission is finalising its proposals and the Council will decide on them in the coming months. What are the elements, the options and the consequences of this debate?

Summary

An enlarged EU requires a reformulation of the basic structure that has so far characterized the EU’s institutions, finances and common policies. This analysis focuses on the proposal that the EU Commission has made to reform the cohesion policy. There are significant economic implications for Spain and the economic agents must properly understand the key issues and terms of the Commission’s proposal and also of the process that enlargement has set in motion in terms of community cohesion –a process that occurs simultaneously as average income increases in Spain as a whole and in each of the country’s regions in relation to the average income in the Union, both before and after enlargement–.

Analysis

The Cohesion Policy and Enlargement

As is well known, the new members of the European Union are countries whose per capita income is considerably lower than that of the Fifteen that were members before last April 30. This shifts the priorities of the Community’s cohesion policy towards these countries and, given limited resources, this is to the detriment of those who have been beneficiaries to date. The change will come about over a certain amount of time, not immediately, and the final form it will take will depend on the result of current negotiations on the Commission’s proposal among member states.

Since the late eighties (after the Single European Act was adopted in 1987, bringing with it, among other changes, a strengthening of the structural funds and the formulation of the current community cohesion policy), the European Union has been practicing a cohesion policy based mainly on a regional scale, through structural aid to less favoured regions, also known as Objective 1 regions. Other priority areas have been considered, such as assistance to areas in decline, retraining workers in sectors undergoing restructuring and the development of rural structures and infrastructures in remote or sparsely populated areas, but the bulk of the aid has been aimed at regions whose per capita income is less than 75% of the community average.

Figure 1 provides an idea of the resources involved in the EU’s cohesion policy. It shows that in 2000-06 these resources will take 29% of the community budget. The consolidated budget for the entire period is equivalent to Spain’s gross domestic product (GDP) in 2003. Therefore, very significant resources are allocated to cohesion, though the community budget is only 1.1% of the Union’s GDP. Of the 211.8 billion euros (at year 2000 prices) projected for 2000-06, Objective 1 regions will absorb nearly two thirds through the different structural funds. In the same period, Spain will receive 56.2 billion euros (at year 2000 prices), that is, 26.5% of the total. For funds destined to Objective 1 regions, this rises to 28.0% and to 62.0% of resources in the case of the Cohesion Fund. Spain is the main beneficiary of the cohesion policy through the different structural funds and the Cohesion Fund, which was created in 1996 as a result of the enlargement that included the Nordic countries and Austria.

Figure 1. The EU’s Cohesion Policy: Resources for 2000-06

	Objective 1 Regions	Cohesion Fund	Rest	Total
Total resources of cohesion policy (a)	135,954	18,000	57,900	211,854
Percentage of EU budget (b) (c)	18.62%	2.47%	7.93%	29.02%
Cohesion resources allocated to Spain (a)	38,096	11,160	6,949	56,205
Percentage of total cohesion resources (b)	28.0%	62.0%	12.0%	26.5%

(a) In millions of (year 2000) euros.

(b) As a percentage.

Source: EU Commission and the authors.

Unlike agricultural policy, where aid is multiplied as agricultural production increases, stimulating productivity and surpluses, structural aid is reduced with the economic success of the beneficiary regions and countries, eventually disappearing when the region or country is no longer ‘poor’. Structural aid finances infrastructure of all kinds, the training of human capital and action supporting the productive activities of private enterprise. In short, the cohesion policy focused on the structural development of less developed regions is one of the main community policies and Spain is the main beneficiary.

EU Enlargement, Spain and Cohesion

The recent enlargement of the European Union is another very significant step in the community-building process. Among many other types of development, this process includes strengthening the economy and governability of the Union to assure its place in larger, global processes. But all these kinds of development must be as mutually compatible as possible. Therefore, the big community policies, including cohesion, must be restructured keeping in mind the growth and competitiveness of the EU’s economy in the global context, as well as the need to facilitate the cohesion of new members who are considerably poorer. Also, a fundamental limitation must be considered: the fact that the community budget has a ceiling of 1.27% of the EU’s Gross National Product (GNP).

This very important limitation, which some countries would like to see reduced to 1% of community GNP, means that enlargement will not only significantly increase EU budget resources, but will also put considerable pressure on the various spending policies for which many applications have been received in the enlarged Union, due to the great predominance of continental-style agriculture and the greater relative poverty of the new members. In the case of the cohesion policy, the mere application of the eligibility criteria that govern the allocation of nearly two thirds of expenditure under this policy (for Objective 1 regions) will cause a huge shift in aid towards the new members, especially to the detriment of some regions of Spain that are beneficiaries until 2006.

Figure 2 shows how the distribution of regions under the limit of 75% of EU per capita income will change as the Union moves from 15 to 25 members or to 27 in 2007, when Bulgaria and Romania are expected to join. If the current 75% rule is maintained for a country to receive Objective 1 aid, all the regions included in the calculation will qualify as such. However, it must be kept in mind that several regions that are now above 75% (and which have not been included in Figure 2) will continue to benefit from this aid until 2006. Furthermore, as long as current criteria are maintained, the per capita GDP used as the benchmark for determining the eligibility of a region will be the average per capita GDP of the region over the three-year period 2004-06. This could affect some Spanish regions which, based on 2001 data, would now qualify to continue as Objective 1 regions in a 27-member Union in 2007.

The table clearly shows how 44 regions of the 15-member EU before May of this year were below the 75% level in 2001. Today’s 25-member Union would have 65 such regions, although only 30 of them belong to the former Fifteen. If a 27-member EU had existed in 2001, 77 regions would be below 75%, only 23 of them in the Fifteen. This makes it clear how the per capita GDP of the enlarged EU drops as new, poorer, less developed members join and how the poorest regions in these countries are increasingly distant from the average of the new Union. The number of Spanish regions below the 75% level would drop from four in today’s 25-member Union (EU-25) to two in the enlarged 27-member Union (EU-27) of 2007, as long as their positions in 2001 were maintained. By contrast, the last row of the chart shows that per capita GDP in the ten richest regions in the Union is three times higher than in the 65 regions below 75% of the EU-25 level and nearly four times higher than in the 77 poorest regions of the EU-27.

Regions (NUTS II) below 75 % of community per capita GDP (situation in 2001, current euros for EU-15, PPP adjusted)

In the EU-15	In the EU-25	In the EU-27
Per capita GDP	23,338	21,288	20,319
Number of NUTS II regions (a)	213	254	268
Number of regions below 75%	44	65	77
Their average per capita GDP (EU = 100, in brackets)	15,131 (64.83)	13,392 (62.91)	10,521 (51.78)
Number of regions of the former EU-15 under 75%	44	30	23
Their average per capita GDP (EU = 100, in brackets)	15,131 (64.83)	14,697 (69.04)	13,567 (66.77)
Number of Spanish regions under 75%	6 (b)	4 (c)	2 (d)
Their average per capita GDP (EU = 100, in brackets)	15,123 (64.80)	14,842 (69.72)	14,449 (71.11)
Per capita GDP of the 10 richest regions (EU = 100) (e)	171.58	188.10	197.07

(a) Nomenclature of Territorial Statistical Units (NUTS) officially adopted by the EU to establish an administrative hierarchy of regions in the community. For more details, see http://europa.eu.int/scadplus/leg/es/lvb/g24218.htm.

(b) From highest to lowest per capita GDP: Asturias, Murcia, Castilla-La Mancha, Galicia, Andalucía and Extremadura.

(d) From highest to lowest per capita GDP: Andalucía and Extremadura.

(e) From highest to lowest per capita GDP: Inner London (RU), Bruxelles-Cap. (B), Luxembourg (Grand-Duché), Hamburg (D), Ile de France (F), Wien (A), Berkshire, Buckinghamshire and Oxfordshire (RU), Oberbayern (D), Stockholm (S) and Autonomous Province of Bolzano (IT). The average per capita GDP of them all in 2001 was 40,043 euros, adjusted for purchasing power (PPP).

Source: Eurostat (2004a and 2004b).

The table clearly illustrates how enlargement profoundly alters the shape of community cohesion, at least at two levels: flows of aid are shifting towards the new, less developed regions (strictly within the budgetary limits mentioned above) and the very concept of cohesion focused at the regional scale is being revised. This revision would mean focusing cohesion and convergence policy at the national scale, leaving member states to match community policy with their own regional policies, as is suggested, for example, in the ‘Sapir Report’ (Sapir et al, 2004, p. 177). Transitory solutions would, however, be established, as we will see later.

As for Spanish regions benefiting from Objective 1 aid, it should be noted that, based on 2001 data and, therefore, prior to this year’s enlargement, regions such as the Valencia, the Canary Islands, Cantabria and Castilla y León have not been below the 75% level for years, though they maintain their status as Objective 1 regions until the end of the present programming period in December 2006. If the 75% level in terms of the per capita GDP of the Fifteen prior to May of this year were maintained, six Spanish regions would continue to be Objective 1, but when this is calculated in terms of 25 members, before 2007, or 27 members after, the number of beneficiary regions in Spain drops, respectively, to four (Castilla-La Mancha, Galicia, Andalucía and Extremadura) and two (Andalucía and Extremadura). The others are eliminated, in each case, by the statistical fall in the community average.

The Commission’s Proposal to Reform Cohesion Policy and Post-2006 Financial Prospects

With the European Union headed towards integration on almost a continental scale and immersed in a global process that is very demanding in terms of competitiveness, in February of this year the Commission issued a communiqué to the Council and the Parliament detailing a number of issues regarding the new challenges and presenting its proposal for the financial perspective for 2007-13 in the following terms: ‘A new stage is thus opened for the community budget. It is not a matter of redistributing resources among member states, but rather finding the way of guaranteeing that our common policies have the greatest possible impact in order to increase the added value of each euro spent at the European scale’ (EUC , 2004a, p. 4). The new logic means moving from the current objectives (among them, Objective 1 for the convergence of less developed regions) to new priorities (EUC, 2004a, pp. 18 and 19, incomplete quotations):

· Convergence. ‘The main efforts must be focused on the least developed member states and regions of the enlarged Union; also included among these will be those regions that have not completed the convergence process but can no longer receive aid because their level of per capita income has risen in relative terms in the enlarged Union (the so-called “statistical effect”).’

· This priority covers the action assigned to the Cohesion Fund and to the Objective 1 programme, which will instead be financed through three distinct funds: the Cohesion Fund, the European Regional Development Fund (ERDF) and the European Social Fund (ESF). This priority will receive 78% of cohesion resources, estimated at 48 billion euros a year during 2007-13.

· Regional competitiveness and employment. ‘Regional competitiveness and employment programmes should cover the rest of the member states and regions… interventions should be focused on a limited number of strategic priorities related to the Lisbon and Goteborg agendas… employment programmes would be organized at the national level… the system by virtue of which the Commission must select among small areas at the sub-regional level would be abandoned and replaced by establishing an appropriate balance among the geographical and thematic aspects of the interventions… this heading would cover support for regions that no longer meet the criteria established for the convergence programmes, regardless of the statistical effect of enlargement.’

This priority will cover 18% of the cohesion resources mentioned above. It includes Objective 2 and 3 actions and will be implemented at both the regional and national levels, in the latter case to support the European Employment Strategy. The resources will come from ERDF and the ESF.

· European territorial cooperation in the form of cross-border and trans-national programs. The purpose of these programmes is to tackle the specific problems involved in building a competitive and sustainable economy in areas of member states that are divided by national borders.

This priority will cover the work of the INTERREG, URBAN, EQUAL and LEADER+ resources. Its resources, equivalent to 4% of the total allocated to cohesion, will come exclusively from the ERDF.

This list of priorities is short but nevertheless marks an appreciable change in the logic of the EU cohesion policy, most importantly in the establishment of a new scale for implementing the policy, that is, at the level of member states instead of regions. This change is known, inappropriately in our opinion, as the ‘re-nationalization’ of the cohesion policy. The Commission is working on this new basis, anticipating approval by the European Council in June of the financial prospects for 2007-13, before an inter-institutional agreement is reached between the Council and the Parliament before the end of 2006. In a recent speech at the opening of the Cohesion Forum[1] on May 10 in Brussels, President Prodi rejected lowering the budgetary ceiling to 1% of community GDP, as a number of countries had requested, while confirming that the resources for the cohesion policy will be maintained during 2007-13 at 0.41% of the gross national income of the new Union, as has been the case until now, with average annual amounts totalling 48 billion euros.

The Commission’s proposal is also laid out in detail in the 3^rd Report on Cohesion (EUC, 2004b) published on February 18, 2004, shortly after the communiqué to the Council on February 10. Along with the general arguments given, it is significant that of the three priorities that will hereinafter govern the allocation of budget resources for cohesion, the convergence of the least developed regions will absorb 78% of the total (compared with 70% until 2006). Fifty (50) of these 78 percentage points will go to the twelve new members in 2007, with 18% allocated to fomenting competitiveness in the other regions and member states of the Union to help them meet the Lisbon objectives (productivity and employment) and the Goteborg objectives (sustainable growth). The remaining 4% will be for territorial cooperation within the Union. The Commission believes that it will be necessary to establish transitional resources (to be gradually phased out) for regions that lose community aid as a result of the ‘statistical effect’. The budgetary appropriations for this will be found within the 78% of resources allocated to convergence. In Spain, these regions will be Asturias, Murcia, Castilla-La Mancha and, most likely, Galicia.

These proposals have an economic correlation with the financial prospects for 2007-13, also proposed by the Commission in its recent communications. The first test of this will be the debate at the European Council in June. The prospects, in fact, include the entire community budget, of which the resources for economic and social cohesion are nonetheless a very significant part. Figure 3 shows the prospects prepared by the Commission and which will be on the table of the European Council to be held in Brussels next June 17-18. It is clear that the ceiling on own resources remains at 1.24% of community GDP, while the new nomenclature of the main expenditure headings is designed to aim the budget as a whole towards active measures.

Figure 3. The New Financial Prospects 2007-13 (millions of euros at 2004 prices)

Commitment Appropriations	2006 (a)	2007	2008	2009	2010	2011	2012	2013
1. Sustainable development	47,582	59,675	62,795	65,800	68,235	70,660	73,715	76,785
1a. Competitiveness for growth and employment	8,791	12,105	14,390	16,680	18,965	21,250	23,540	25,825
1b. Cohesion for growth and employment (b)	38,791	47,570	48,405	49,120	49,270	49,410	50,175	50,960
2. Preservation and management of natural resources (c)	56,015	57,180	57,900	58,115	57,980	57,850	57,825	57,805
3. Citizenship, freedom, security and justice	1,381	1,630	2,015	2,330	2,645	2,970	3,295	3,620
4. The EU as a global partner (d)	11,232	11,400	12,175	12,945	13,720	14,495	15,115	15,740
5. Administration and adjustments (e)	4,477	3,675	3,815	3,950	4,090	4,225	4,365	4,500
Commitment appropriations – Total	120,688	133,560	138,700	143,140	146,670	150,200	154,315	158,450
Appropriations for payment – Total (b)(d)	114,740	124,600	136,500	127,700	126,000	132,400	138,400	143,100
Appropriations for payment as a percentage of GNP	1.09%	1.15%	1.23%	1.12%	1.08%	1.11%	1.14%	1.15%
Available margin	0.15%	0.09%	0.01%	0.12%	0.16%	0.13%	0.10%	0.09%
Ceiling of own resources as a percentage of GNP	1.24%	1.24%	1.24%	1.24%	1.24%	1.24%	1.24%	1.24%

(a) Expenditure for 2006, in the current financial framework, has been adapted to the new nomenclature to facilitate comparisons.

(b) Includes expenditure from the Solidarity Fund starting in 2006 (one billion euros in 2004 at current prices).

(d) The European Development Fund will be included in the community budget in 2008. The commitments for 2006 and 2007 are included for the purpose of comparison, but payments in these years are not included in total payments.

(e) The Commission’s administrative costs are included in the four first chapters. The administrative costs of the other institutions, pensions and the European College are all included here, as well as an adjustment of 1.04 billion euros for 2006.

Source: EUC (2004a, p. 29).

Conclusions

Now more than ever in the process of community-building, the economic and social cohesion of the new Union is in question, due to the widening of regional differences in per capita income and the need to concentrate resources on new members. Although the European Commission’s proposal to restructure the cohesion policy represents a significant effort to concentrate and rationalize structural costs, partially diluting the regional foundations of this policy, the financial prospects for 2007-13 show relative continuity, remaining below the absolute ceiling of 1.24% of community GDP. This leaves little margin for implementing the Commission’s desire –still unquantified– to maintain diminishing aid for regions that lose structural aid because of the statistical effect on average community income resulting from enlargement until 2007. In Spain, these regions are Asturias, Castilla-La Mancha and perhaps Galicia. Except for Andalucía and Extremadura, which would keep cohesion aid after 2006, the other current Objective 1 regions would no longer meet eligibility criteria in 2007 due to the natural convergence process even in absence of the enlargement. The Commission’s proposal will surely stimulate an intense debate both within and beyond European institutions on the future of European regional policy and any sensible initiative must be taken into consideration. Significantly, this proposal will be debated at the European Council in Brussels this coming June 17-18. Some member countries are asking for the ceiling on own resources to be dropped to 1% of community GDP and for the basis of the cohesion policy to be entirely national instead of regional. Insufficient resources for this policy could endanger its effectiveness as an instrument for developing the most unfavoured regions, with the resulting negative effects on the process of reducing economic and social disparities in the Union. The challenge to the restructured cohesion policy consists of harmonizing the objectives of obtaining the maximum benefits from the enlargement and contributing to the prosperity of Europe, its member states and its regions. The different players involved must present their proposals in this regard to help guarantee the future standard of living of their citizens, the continuity and deepening of the integration process and the sustainability of the European model.

José A. Herce and Simón Sosvilla-Rivero, FEDEA and Universidad Complutense de Madrid

Bibliographical References

EUC (2004a), Building our common future. Policy challenges and budgetary means of the enlarged Union (2007-2013), Communiqué of the Commission to the Council and the European Parliament, COM (2004) 101 final, Brussels, 10/2/2004. This can be downloaded at: http://europa.eu.int/comm/budget/furtherinfo/index_en.htm.

EUC (2004b), A new partnership for cohesion. Convergence, competitiveness, cooperation, European Union Commission. Available in pdf format at: http://europa.eu.int/comm/regional_policy/debate/forum_en.htm.

Eurostat (2004a), ‘Regional Gross Domestic Product in the European Union 2001’, Statistics in focus, General Statistics Theme 1 – 1/2004.

Eurostat (2004b) ‘Regional Gross Domestic Product in the Candidate Countries 2001’, Statistics in focus, General Statistics Theme 1 – 2/2004.

Sapir, André et al. (2004), An Agenda for a Growing Europe, Oxford University Press, 2004.

[1] The debate can be found at: http://europa.eu.int/comm/regional_policy/debate/forcom2004_en.htm.