Select Committee on European Communities Thirtieth Report



  27.    The Committee's last report on the Structural Funds and the Cohesion Fund recommended a reduction in the number of Objectives under the Structural Funds. The Commission's proposals include such a reduction, which the Government welcomed. The proposals also include the extension of Objective 2 programmes from three years to seven, which in the Government's view "allows for a more sensible approach to the regions planning and programming";[10] and a simplified system for payments and commitments (Q 66).

  28.    The simplification of the Structural Funds and the streamlining of their complicated administrative procedures must help to make them easier to understand—a point made in evidence to us by Mr Pawel Samecki, Deputy Minister of Finance in Poland. "This is . . . important from the point of view of transparency in Brussels and the operations of the European Union institutions, and this would probably be helpful for the average man in the street to understand how Brussels functions, how the EU institutions function" (Q 206).

  29.    Any reform of the Funds is bound to leave losers as well as winners. Mr Marc Vanheukelen, a member of Commissioner Wulf-Mathies's Cabinet, said that Member States understood the case for concentration of the Funds (Q 239), but so far no agreement had been reached on where this concentration should take place—"we have heard fifteen definitions of fairness" (Q 276). He pointed to the success of the Funds in helping to achieve convergence among Member States over the past decade, adding "if someone leaves the medical intensive care unit it should be a source of joy, not of resentment" (QQ 240-241).

  30.    Dr Wilhelm Schönfelder, Director General for European Affairs, Federal Foreign Office, Germany, said that the German Government agreed for the most part with the Commission's proposals for Objective 1 assistance. He called for a strict application of the proposed 75 per cent EU GDP criterion. "To give an example, it would be very difficult to explain to a citizen from Lüneburg, a city in northern Germany, a region with 85.8 per cent of the average EU GDP, which has never been assisted as an Objective 1 area, that Ireland, now with (and I think this is very good) 87.9 per cent or Lisbon and Tejo Valley with 88.4 per cent should continue to receive assistance" (Q 371).

  31.    In principle, the Department of Trade and Industry (DTI) agreed that funds should be targeted on the areas of greatest need (QQ 55-56). The DTI said that "it is easier to have a clearish picture on Objective 1 than it is on Objective 2, looking at the Commission's proposals, because they propose a strict cut-off of 75 per cent of GDP. Looking at the latest GDP figures, it looks as if . . . Merseyside and South Yorkshire will be in Objective 1." Ministers believed that Northern Ireland and the Highlands and Islands should also be included in Objective 1. There is already an exception for the sparsely populated areas in Scandinavia, and the Government believed that there were similar considerations in the Highlands and Islands (Q 53). The Trades Union Congress (TUC) argued the case for giving more United Kingdom areas Objective 1 status, including Cornwall, which it pointed out would achieve a much lower figure for GDP per head if it were considered separately from Devon (p 131).[11]

  32.    Highlands and Islands Enterprise put the case for the Highlands and Islands of Scotland retaining the Objective 1 status which it currently enjoys. It pointed out that the area is one of the most sparsely populated regions within the European Union, and that the use of GDP as the sole measure of disadvantage failed to reflect the severe cost impacts resulting from the region's sparsity of population, or the cost burdens of the isolated rural communities—including over 100 inhabited islands—which make up the Highlands and Islands (p 112). The Convention of Scottish Local Authorities (COSLA) also argued that the Highlands and Islands of Scotland should continue to be included in Objective 1 (Q 85).

  33.    To lessen the blow to the losers, the Commission has proposed a six year transitional period for regions losing Objective 1 status and a four year transitional period for regions losing Objective 2. The DTI said that Ministers thought the transitional periods were necessary firstly because of the essentially long-term nature of the Structural Funds in improving the economic climate in a region and second, because a gradual decrease was needed to allow regions time to plan. They argued that Objective 2 regions should have the same six year transitional period as those in Objective 1 (Q 73). The Backbench Structural Funds Group and the Confederation of British Industry (CBI) supported this approach (pp 97 and 100).

  34.    The Alliance for Regional Aid said that the Commission's proposed safety net would limit the effect of the proposals in the United Kingdom so that about 13.5 million of the population would be covered by the new Objective 2. This was "as low as it can go in the United Kingdom, but that still implies that perhaps six million in areas that currently enjoy Objective 2 or 5b status are set to lose that status in the new spending round" (Q 160).

  35.    In addition to the main Programmes, there are a number of Community Initiatives. The Commission proposes to reduce the number of these to about three (Q 126). Approximately 90 per cent of Wales is currently designated either Objective 2 or 5b. Wales is also covered by 11 of the current Community Initiatives and by the United Kingdom Objective 3 and 4 programmes. The Welsh Development Agency (WDA) was concerned about the threat to the assistance which Wales would receive under the proposed reforms. It said that under the criteria proposed for the new Objective 2 its understanding was that no parts of Wales would qualify although this would be alleviated by the operation of the "safety net" provisions (p 134).

  36.    Leeds City Council, which had also in the past appreciated the flexibility of Community Initiatives such as those for inner city issues (URBAN), coalfields (RECHAR) and defence area restructuring (KONVER), said that it accepted the case for the simplification of Community Initiative procedures. Nevertheless, it wished to see the retention of the URBAN initiative, and argued the case for the proposed initiative to tackle industrial restructuring (RESTRUCT) (p 118).

  37.    The Department of Economic Development, Northern Ireland, on the other hand, said that with "the smaller Community initiatives . . . the amount of administrative effort seems sometimes disproportionate to the amount of money you are actually delivering on the ground in Northern Ireland". The comparatively small area of Northern Ireland, with 1.5 million inhabitants, was currently covered by one Programme, with nine sub-programmes, plus an INTERREG Programme, the Peace Programme and nine other Community Initiatives. In total there were about 18 programmes running in Northern Ireland, all with monitoring committees ranging in size from 20 to 50 or 60 people (Q 124).

  38.    COSLA accepted the case for reform of the Structural Funds, but questioned its timing. "You do need to prepare for change. We cannot keep arguing for more of the same. There is a body of opinion within the United Kingdom which is lobbying, as far as Structural Funds are concerned, for the Structural Funds to continue without any thought to the future. We think that is wrong . . . we do not think you can justify funds forever and a day . . . our argument is . . . this is not the right time". COSLA emphasised the need to prepare for enlargement, to adjust to monetary union and to recognise the fact that Britain was now the fourth poorest country in the EU. "To try and substantially shift funds from the fourth poorest country in Europe to some of the richest countries in Europe at this stage . . . would be potentially economically . . . [and] politically damaging" (Q 87).

  39.    In contrast, the Alliance for Regional Aid (ARA) wanted to retain the present coverage of the Structural Funds. It argued that natural growth in GDP would allow both this and the increase in funds made necessary by future enlargement (Q 147). "The whole idea of greater concentration of the Structural Funds really gained momentum because, if you go back to 12 months ago, people were thinking that the only way you could finance enlargement of the EU, in terms of the Structural Funds at least, was by cutting back on expenditure in the existing 15 Member States. That momentum for concentration—which implies reduced aid in the United Kingdom—really now looks quite irrelevant because what the Commission itself is proposing is a budget that will finance enlargement at least until 2006 out of growth . . . There is still broadly the same amount of money there for the existing 15 Member States in the new spending round as there was in the last spending round, so we really do not see the need for big cuts in aid to the UK or in the eligible areas in the UK" (Q 149).

  40.    The ARA would prefer the Funds to be spread widely but thinly rather than for them to be concentrated on a few areas which were perceived to be those most in need. "There is nobody yet self-sufficient enough to be weaned off the European money" (Q 174).


  41.    The United Kingdom is now the fifth poorest Member State in the EU in terms of GDP per capita (QQ 43-49). The Department of Trade and Industry (DTI) said that there were two main arguments about the budget—the share out, where the United Kingdom considered that richer countries should get less than poorer ones, and the size of the overall budget. "Not only in the UK but as you would expect the northern contributing Member States are all arguing that it should be held down, some are saying at 0.46 per cent and some are saying below 0.46 per cent[12]. There is, as you would expect, a fairly clear north/south split in the EU on this" (Q 43). The United Kingdom Government's view was that the total budget should be kept "well below 0.46%"—a figure which officials were unprepared to quantify—both in the period up to 2006 and beyond (QQ 50-52).

  42.    The figure of 0.46 per cent of GDP can, of course, vary in cash terms, making planning difficult. The DTI said that a number of finance ministries in other Member States would welcome a cash limit rather than a percentage figure. "I am sure our ministers will wish to see an absolute amount as well as a percentage figure when we get to that stage in the negotiations. Whether it is an absolute amount for the whole package or an absolute amount for the EU15 I do not know" (Q 63).

  43.    Dr Wilhelm Schönfelder said that although in absolute terms the assistance received by the East German Länder made Germany the second largest recipient of Structural Funds after Spain in the current assistance period, Ireland, Greece and to some extent Spain enjoyed much higher per capita receipts. Outlining Germany's position, he said:

  "We think that EU assistance should be based on regional, not on national, prosperity. National prosperity is already taken into account in calculating the contributions which the EU Member States make to the budget—the so-called fourth source of income of the European Union. We are, therefore, calling for an equal per head assistance for all EU regions which fulfil the criteria for assistance". (Q 371).

  44.    The Backbench Structural Funds Group thought that reform of the Funds was unnecessary. It supported "maximum coverage of Objective 1 in order to reflect the United Kingdom's low relative per capita GDP within the EU15", and considered that "pro rata the United Kingdom should be attracting an Objective 1 population of some eight million". The Group was opposed to relying solely on unemployment statistics in selecting Objective 2 areas, and considered that the use of a longer reference period for measuring the change in industrial employment would help Britain to maximise its industrial Objective 2 eligibility (p 97).

  45.    The Local Government Association (LGA) and Local Government International Bureau argued that the criterion adopted "should not be the crude one of employment statistics but per capita GDP and resources should be allocated accordingly." They pointed out that the United Kingdom had slipped down the league table in terms of per capita GDP (QQ 2-3). The LGA welcomed the change from six to three objectives as it was more likely to facilitate a strategic approach (Q 23). Most witnesses, including the Confederation of British Industry (CBI), expressed a similar view (p 98).

  46.    Highlands and Islands Enterprise (HIE) also criticised the basis on which resources were allocated. Like several other witnesses, it believed that if unemployment rates were to be used increasingly as a key indicator of need in Europe it was essential that definitions were standardised so that a level playing field was created (p 114). HIE emphasised that its concern was an even more fundamental one:

  "unemployment by itself is only a partial measure of need. There are many remote communities in the Highlands and Islands which are suffering from loss of population; have fewer than average economically-active people; offer limited local job opportunities; have low per capita incomes; and, above all, are seeing community confidence about future prospects decline. Yet some of these communities have comparatively low unemployment. The reason is simple—young people leave rather than be unemployed in a small village or township. It is imperative, therefore, that measures such as unemployment rates are used sensibly in making broad inter-regional comparisons, and that a more sophisticated approach is adopted when considering the true nature of regional problems." (p 114).

  47.    The CBI was also concerned that unemployment should not be the sole or main criterion for designating Objective 2 eligibility. It considered that the International Labour Office (ILO) measure of unemployment reflected labour market structure as much as economic prosperity, and was therefore not a very good international comparator. The CBI recommended that if unemployment were used as the criterion, it should include measures of long-term unemployment, as this highlighted the underlying problems of local labour markets. The CBI pointed out that the new Objective 2 was wider than its predecessor, and thought that it "should therefore be accompanied by careful use of a wider selection of eligibility criteria. GDP per head is a better measure of competitiveness than unemployment, and is available in the UK at the county level . . . We believe this should be used, together with other measures of competitiveness (or barriers to competitiveness) in assessing eligibility. These could include measures of deprivation, dereliction, productivity and changing employment patterns" (p 99).

  48.    Further criticism of unemployment as the main Objective 2 criterion came from the Alliance for Regional Aid and COSLA, which also recommended GDP as a more accurate reflection of need. COSLA pointed out that some of the factors in the calculation of unemployment were not consistent across Europe, and therefore Britain would be singularly disadvantaged. It also argued that "if GDP is accepted as the basis for allocation to the national Member States . . . within the Member States national governments should have the flexibility to . . . allocate the resources" (Q 85).

  49.    COSLA made the additional point that Britain had a low wage economy linked to relatively low unemployment, and could thereby be further disadvantaged in comparison with Member States with nominally higher unemployment but also a higher waged economy (Q 101).

  50.    The Alliance for Regional Aid (ARA) said that Britain was particularly disadvantaged by the way in which the ILO measure was constructed. At a superficial level the ILO criteria were internationally standardised, "but the problem is that in every Member State the figures that you get out are biased by the way that the social security system works . . . in Britain . . . we have mechanisms in the social security system which divert long term unemployed people out of unemployment into long term sickness. When they go on various sickness benefits, particularly incapacity benefit, they are no longer required actively to seek work and therefore they do not meet the ILO criteria."[13] The ARA also drew attention to research by the Institute for Employment Research at Warwick, which indicated that the ILO measure encapsulated about 50 per cent of Britain's unemployment, compared with 75 or 80 per cent of that of Germany and France and slightly over 80 per cent in the case of Spain. It said that "hidden unemployment" was especially concentrated in the traditional industrial areas of Britain, the old coal mining, steel and heavy engineering areas (Q 162).

  51.    COSLA considered that the main issue when examining unemployment in relation to Objective 2 criteria was to do so over the full economic cycle of 10 years rather than the three years proposed by the Commission (Q 101).

  52.    The Welsh Development Agency also called for a wider set of eligibility criteria for the new Objective 2. It pointed out that "this new Objective will have industrial, rural, urban and fishing strands with indicative coverage of 10 per cent, 5 per cent, 2 per cent and 1 per cent of the EU population respectively . . . Without the inclusion of GDP statistics in the eligibility criteria it is likely that the UK would only secure 24 per cent population coverage under the new Objective—compared to 35 per cent population coverage under the existing Objective 2 and 5b" (p 134).


  53.    The CBI said that "above all, the emphasis of the Structural Funds must be on improving the competitiveness of recipient regions rather than short-term job creation. This is the key driver to achieving sustainable economic growth and social cohesion. If funding eligibility means that outputs have to be achieved during the lifetime of a programming document, this could lead to the rejection of projects with longer-term benefits in favour of those which offer early but unsustainable job creation." The CBI considered that "greater individual employability will be key to improving the competitiveness of a region. Continuous human resource development, for those in work and the unemployed, will be core to ensuring that the skills base of the local economy remains relevant to changing competitive needs. Lifelong learning should be supported to ensure that workers are better able to adapt to any future structural changes, when there is likely to be less EU funding available." (p 99).

  54.    To the Department of Economic Development, Northern Ireland, the significance of the Funds to the peace process was "substantial". The Department emphasised the importance to the wider peace process of the INTERREG Programme, which had fostered cross-border relationships, and the European Peace and Reconciliation Programme (PRP) which included specific reconciliation objectives as well as social inclusion objectives. It also drew attention to another aspect of European funding: "people . . . in Northern Ireland from both sectors of the population are willing and keen to apply for European money and to meet to discuss its use. That is probably most manifest in the attention paid to it by our three MEPs. Mr Nicholson, Mr Hume and Dr Paisley work very closely together and co-operate well on the Structural Funds and always have done" (Q 119). The PRP had supported nearly 10,000 projects, most of them quite small and "quite distinctive from the normal run of things that you would expect European Structural Funds or mainstream public expenditure to address themselves to". The PRP was administered by very highly devolved delivery mechanisms, using 26 district partnerships and intermediary funding bodies which were "at arm's length from government and which actually adjudicate on project applications at arm's length from government" (Q 123).

  55.    COSLA said that "the whole raison d'etre of these funds is to have an impact, to be a catalyst for change. If you use the funds for a significant period and you demonstrate no change then either you have not used the funds properly or else there are structural weaknesses in your community and in your national economy that the Government should be addressing" (Q 106).

  56.    Witnesses cited road building as an example of infrastructure projects made possible by the Structural Funds (QQ 105, 181). COSLA also emphasised the importance of training projects. Councillor Henry, Leader of Renfrewshire Council and the spokesperson for COSLA on European and International Affairs, said that European funding had been used to train lone parents in the delivery of community care for the elderly and disabled. "We have linked that to a fairly flexible use of the benefit system so that European funding helps to pay the cost of the training. The women with children stay on benefit during the period of that training. Our results show that at the end of it many of the women then go into either full time education and get further qualifications or start to go into a range of part time employment reflecting the children's needs of a particular age and indeed in some cases then go into full time employment" (Q 105).


  57.    The Committee discussed with several witnesses the question of whether the Structural Funds delivered sufficient "added value" to compensate for the bureaucracy involved. There was general agreement that there was. COSLA said that the Structural Funds were worth about £200 million a year to Scotland, which was less than the funding received from the Common Agricultural Policy but this money would be difficult to raise domestically. It added that "European funds have allowed a great degree of flexibility. They have allowed additionality, they have allowed complementarity so that what we were able to bring from local government sources and indeed sometimes from private sources were matched against European funds. It enabled projects to take place at local level that would not necessarily always be that easy when central Government was directing the show" (Q 94).

  58.    The Alliance for Regional Aid said that "the worst of all worlds but undoubtedly the simplest system would be for the Commission to hand over a very large blank cheque to the UK Government and the UK Government simply put in whatever receipts it wished to put in. That, though a simple system, would not really be an effective one at delivering the sorts of development we all want to see" (Q 173).

  59.    Mr Marc Vanheukelen said that a number of people had criticised the Commission for "pumping around money", and had proposed instead a net fund where the Structural Funds would operate only in poor countries, rather than in poor regions. He responded to this suggestion:

  "As an economist I have some sympathy with that point of view but then politically and legally the Council should start changing Article 130a of the Treaty which says since 1957 that it is an explicit task of the European Union to look after the economic fate of the regions in the Union, it does not say regions in poor countries or at the exclusion of regions in rich countries. We have the regional task that was given to us by the founding fathers that has been reconfirmed three or four times at revisions of the Treaty and the only thing we are doing is to carry out our obligations under the Treaty" (Q 277).

  60.    He added: "one ought not to under-estimate the political visibility of the Structural Funds" (Q 278).


  61.    Leeds City Council (LCC), representing an area which is currently excluded from Objective 2, supported the Eurocities organisation's proposal that a minimum of 5 per cent of the EU population should be eligible for the Urban Areas strand of Objective 2, a share equivalent to that proposed for rural areas. It argued that the United Kingdom should attract at least double the average EU share under this strand, on the grounds that the United Kingdom is the second most urbanised Member State, it has the second highest EU share of urban population in cities over 500,000 population (where concentrations of deprivation are particularly acute), and a high incidence of relative poverty. Leeds City Council also drew attention to the fact that unemployment in Leeds inner wards had exceeded the EU average by 50 per cent for a considerable period (p 117).

62.  Leeds City Council said that the Commission's proposal to make Structural Fund and State Aid areas coincide threatened to undermine the Commission's acceptance of the need to tackle social cohesion problems in urban areas in difficulty, which would not necessarily be defined as Assisted Areas. LCC considered that the two sets of policies had different objectives and procedures, and it therefore strongly opposed the proposal that areas should only be eligible for Objective 2 status if they were also eligible for state aids (p 118).[14]

63.  COSLA expressed even stronger opposition to the Commission's proposed definition of urban areas. "They do not reflect the Commission's own thinking in the document Towards an Urban Agenda, which they adopted a year or so ago. We would argue that a couple of the indicators proposed are not actually capable of measurement. If they are not capable of measurement, I think that starts questioning the validity of what the proposals actually are" (Q 101).

10   The CBI expressed a similar view (p 100). Back

11   Cornwall and Devon are currently grouped together as a NUTS 2 region. (NUTS is an acronym for the "Nomenclature of territorial statistical units"-see Appendix 4 for further details.) On 29 June 1998 a new classification of United Kingdom areas for European purposes was agreed with Eurostat, the Statistical Office of the European Union. The major changes agreed include the separation of Cornwall and Devon into two separate areas and changes to boundaries in Scotland to recognise the area represented by Highlands and Islands Enterprise. The separation of East and West Wales for statistical purposes is also likely to have a significant impact. Back

12   The German Government's position is that 0.46 per cent "is a ceiling which should not be exhausted" (Q 371). Back

13   The United Kingdom has recently adopted the ILO definition of unemployment. It is also worth noting that income benefit as well as sickness benefit can conceal high levels of unemployment. Back

14   See COM(98) 131 Final, p 15. Back

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