House of Lords - European Union

Select Committee on European Union Nineteenth Report

The Future of EU Regional Policy

CHAPTER 1: Introduction and Background

1. Economic cohesion has been a policy consideration for the European Community for half a century. In this period it has become increasingly important and it is likely that it will remain a priority: if the Lisbon Treaty is ratified, Article 3 of the Treaty on European Union will state that the Union "shall work for the sustainable development of Europe based on balanced economic growth and … promote economic, social and territorial cohesion, and solidarity among Member States."[1] The Treaty also recognises that it is important that all Member States and regions share in this increasing prosperity and, more specifically, that there is a convergence in living standards across the various regions. The EU seeks to achieve this through its Regional Policy for which the European Structural and Cohesion Funds provide the financing.[2]

2. Article 158 of the Treaty establishing the European Community as currently in force states that the Community will aim to reduce "disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas." The Lisbon Treaty will amend this text, and, if adopted, Article 174 of the Treaty on the Functioning of the European Union will state:

"the Union shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions.

Among the regions concerned, particular attention shall be paid to rural areas, areas affected by industrial transition, and regions which suffer from severe and permanent natural or demographic handicaps such as the northernmost regions with very low population density and island, cross-border and mountain regions."

3. While the rationale for a regional policy is grounded in the Treaty, its current embodiment, summarised later in this Chapter, is being considered—along with all of the Union's policies—as part of the 2008/9 Review of the EU Budget agreed at the December 2005 European Council. It is with the Budget Review in mind that we consider the Structural and Cohesion Funds, and European regional policy in general—the first time that we have focused on this significant European policy for several years.[3]

4. This report is one of several produced by this Committee in preparation for the 2008/9 Budget Review: last year we considered the income side of the budget,[4] and this year we have already looked at the Common Agricultural Policy.[5] Taken together, these reports will cover both the income to the budget and nearly all of its expenditure. When the Commission publishes proposals for budget reform we will consider them in detail, as part of our scrutiny remit.

5. This report is also made in the light of the Commission's Fourth Report on Economic and Social Cohesion[6] which noted some of the challenges with which regional policy may be confronted in the coming years. In his oral evidence to us, Mr Ahner, Director General, DG Regional Policy, suggested that the principal alternative to the current allocation of funds would be to leave regional development to market forces (Q 261). We do not support this alternative prospect, and in this report set out some proposals for change.

6. Regional policy is by its nature difficult to evaluate: it is very difficult to determine what path the economy might have taken without intervention. However, we start this report from the stance of agreement with the European Union's Treaty-based aims to increase growth and to reduce disparities between regions, and we support the use of economic and knowledge transfer from rich to poor regions as a means to undertake this. EU economic growth is not a zero-sum game: the stronger and more competitive the EU economy as a whole, the better for all Member States. But the benefits and costs of the single market are not distributed evenly and we support intervention in the market to counter both unemployment and under-utilisation of resources in poorer regions, and costs arising from issues such as congestion and over-population in richer regions.

The Development of European Regional Policy

7. Although Article 158 of the Treaty establishing the European Community mentions social cohesion, the degree of success of regional policy is largely judged on the reduction of regional differences in Gross Domestic Product (GDP) per head.

BOX 1

Different Measures of Regional Prosperity

A standard indicator of regional prosperity is GDP per head.[7] GDP measures the level of output and GDP per head has the advantage that it is easily understood and widely used in international comparisons of standards of living (when measured using Purchasing Power Parity). GDP per head has, however, a number of disadvantages as a measure of regional disparities:

The figure is distorted by cross regional commuting. The Commission state that "this has not had a significant impact on the allocation of structural funding".[8] Open Europe cited the case of Lüneburg, a prosperous residential area of Hamburg, which because of commuting has a low GDP per head and hence attracted considerable Objective 1 (now Convergence) funding (p 21).

GDP excludes a number of important items of income, especially pensions and unemployment benefits. A prosperous region with a large number of pensioners could have a relatively low value of GDP per head.

A regional life-style where there is a high preference for leisure can lead to a low value of the GDP per head, although the region is relatively prosperous.

For the Cohesion Fund criteria, the Commission uses Gross National Income (GNI) which is GDP less net taxes on production and imports, less compensation of employees and property income paid to other countries plus similar items receivable from abroad. This is a preferable measure of prosperity. It is possible that a country or region with a high level of GDP per head could have a relatively low GNI per head if much of its income goes abroad. This might occur because of high levels of inward investment. GDP per capita would overstate the prosperity of the region or country compared with GNI per capita. The classic example of this is Ireland.

8. Policies to tackle regional disparity have been in place for fifty years. The European Social Fund, European Agricultural Guidance and Guarantee Fund (EAGGF) and the European Regional Development Fund (ERDF) were created in 1958, 1962 and 1975 respectively. Of these, the ERDF was the first explicit regional fund, and was based on the then existing premise that regional policy should be still a national rather than Community concern. Initially there was nothing to stop the Member States substituting the ERDF funds for their own regional expenditure, effectively turning the ERDF payments into a rebate.

9. In 1986, the Single European Act allowed for a regional policy designed to counter any negative repercussions of the single market. An agreement at the February 1988 European Council doubled the funding allocated to the structural funds and increased the emphasis on the poorer regions as part of a significant review of the EC budget. The reforms, made in preparation for the single market, gave the Commission a much greater role in the delivery, implementation and regulation of the Policy. The Funds could no longer be used by the Member States as they saw fit, as how and where they were spent now required Commission approval. The principles incorporated in these reforms still remain at the heart of regional policy.

10. A concern to assist the poorer Member States cope with the challenge of the single market (and in particular the need for adequate investment in infrastructure) without breaching the convergence criteria[9] required for the EMU led to the creation of the Cohesion Fund in 1994. Rather than supporting poorer regions, this focussed on support for the poorer Member States (defined as those countries with a Gross National Income per head below 90% of the EU average).

11. In the late 1990s, some Member States raised concerns about the relatively lacklustre performance of the European Union as a whole in terms of productivity growth and the levels of unemployment. This led to the Lisbon Strategy[10], published in 2000 and relaunched in 2005. It now has two major targets at the European level—increasing the share of public and private investment in R&D to 3% of GDP; and securing an employment rate of 70%, both by 2010. The implications of the strategy for EU regional policy is that it should focus on three priorities: improving the attractiveness of regions and cities in the Member States; encouraging innovation, entrepreneurship and growth in the knowledge economy; and creating more and better jobs. It has two major targets at the European level—increasing the share of public and private investment in R&D to 3% of GDP; and securing an employment rate of 70%, both by 2010.

12. As a consequence, the aim of the Structural and Cohesion Funds became not only the reduction of income inequalities, but also the sustained increase in the growth rates of poorer regions. The Commission stated that "cohesion policy has been recognized as a key instrument at the Community level contributing to the implementation of the growth and jobs strategy—not just because it represents one third of the Community budget, but also because strategies designed at local and regional levels must also form an integral part of the effort to promote growth and jobs. The role of SMEs (small and medium-sized enterprises), the need to meet local skill demands, the importance of clusters, the need for local innovation centres is such that in many cases strategies also have to be built from below, at the regional and local levels."[11]

Measuring Disparities

13. The importance of regional policy has grown with the progressive enlargement of the EU. The States that have acceded in the past five years had lower GDP per head than the Union they were joining and their accession has by itself had the statistical effect of considerably widening disparities between Member States and between regions. The extent of these current differences is visible in Table 1. The poorest regions are to be found in Romania and Bulgaria, where all nine regions have a GDP per head that is below one-third of the EU average. The Nord-Est in Romania has the lowest GDP per head in the EU with an index of 24. At the other end of the spectrum, the richest regions are Inner London, UK (303); Luxembourg (264); Bruxelles-Cap./Brussels Hfdst, Belgium (241); and Hamburg, Germany (202). The GDP per head of some regions, especially the large cities and Luxembourg, is overstated due to commuting patterns: commuters to the region where they work contribute to that region's GDP but are not classed as inhabitants.

TABLE 1

Regional GDP per Head in the European Union, 2005[12]

		GDP per head (PPS, EU27 = 100)
Country	Year of Accession	National	Richest Region	Poorest Region
Bulgaria	2007	35.3	52.2	26.9
Romania	2007	35.4	74.8	24.2
Latvia	2004	49.9	n.a.	n.a.
Poland	2004	51.3	81.2	35.0
Lithuania	2004	53.2	n.a	n.a.
Slovakia	2004	60.6	147.9	43.1
Estonia	2004	62.9	n.a.	n.a.
Hungary	2004	64.3	104.9	40.9
Portugal	1986	75.4	106.3	59.8
Czech Republic	2004	76.6	160.3	59.8
Malta	2004	77.4	n.a.	n.a.
Slovenia	2004	86.9	104.7	71.6
Cyprus	2004	92.6	n.a.	n.a.
Greece	1981	96.4	131.1	59.1
Spain	1986	103.0	133.9	69.7
Italy	1958	104.8	136.7	66.9
France	1958	111.9	172.6	50.5
Finland	1995	115.1	139.5	85.3
Germany	1958	115.2	202.1	74.2
United Kingdom	1973	119.3	302.7	77.4
Belgium	1958	121.1	240.5	79.5
Sweden	1995	123.8	172.2	105.4
Denmark	1973	126.7	161.0	94.9
Austria	1995	128.8	142.7	88.7
Netherlands	1958	131.1	164.0	96.3
Ireland	1973	143.7	158.1	104.3
Luxembourg	1958	264.3	n.a.	n.a.

BOX 2

The NUTS Regional Classification

NUTS—Nomenclature of Territorial Units for Statistics—are the standard regions used in the EU regulations and by the Commission. Most of the regions are based on administrative criteria rather than functional or analytical criteria such as economic and social characteristics. A Member State is divided into NUTS1 regions which in turn are subdivided into NUTS2 regions and NUTS3 regions. If the country is small, such as Luxembourg, it can appear simultaneously as a NUTS1, NUTS2 and NUTS3 region.

The population of the NUTS regions at the same level can differ considerably. At the NUTS1 level, the range is from Nordrhein-Westfalen in Germany with a population of 18 million to Åland in Finland which only has 26,000 inhabitants. At the NUTS2 level, the Île de France has a population of 11 million while 14 regions have fewer than 300,000 inhabitants. At the NUTS3 level the range is from over 3 million (e.g. Madrid and Barcelona) to under 50,000.

There is also considerable variation in the area and population density of the NUTS2 regions. The largest region in terms of area is Pohjois-Soumi in Finland which is 133,580 sq. km. At the other extreme is a region in Spain that is only 13 sq. km. The NUTS2 region with the greatest population density is, perhaps not surprisingly, Inner London with 9,073 inhabitants per sq. km and in stark contrast is French Guiana with only 2 people per square km. (In the United Kingdom, the Highlands and Islands are the most sparsely populated with a density of 9 people per square km.)

The United Kingdom has 12 NUTS1 regions, 37 NUTS2 regions and 133 NUTS3 regions (all listed in Appendix 4). The current regional policy is calculated using the NUTS classifications adopted in 2003: there are 268 NUTS2 regions in the EU. The map on page 15 shows the NUTS2 regional boundaries. The NUTS classification and the regional boundaries are amended from time to time by Eurostat[13].

Our Inquiry

14. The membership of Sub-Committee A that undertook this inquiry is set out in Appendix 1. We are grateful to those who submitted written and oral evidence, who are listed in Appendix 2; all the evidence is printed with this report. Appendix 4 sets out the countries that comprise the EU10, EU15, EU25 and EU27; Appendix 5 lists the United Kingdom statistical regions. There is a glossary in Appendix 6.

15. We also thank the Sub-Committee's specialist adviser Dr John McCombie, Department of Land Economy, University of Cambridge. We make this report for debate in the context of the EU Budget as a whole.

2 'Cohesion policy' is often used synonymously with regional policy (defining the term region broadly to include both individual Member States and their regions) and is distinct from the 'Cohesion Fund' which is one of the financial instruments used in furtherance of Cohesion Policy. To avoid confusion, the term regional policy, rather than cohesion policy, is used in this Report. Back

3 The Funds were discussed in Chapter 4 of European Union Committee, 6th Report (2004-05): Future Financing of the European Union (HL 62). The last report to focus solely on the Funds was European Communities Committee, 30th Report (1997-98): The Reform of the Structural Funds and the Cohesion Fund (HL 138). Back

4 European Union Committee, 12th Report (2006-07): Funding the European Union (HL 64). Back

5 European Union Committee, 7th Report (2007-08): The Future of the Common Agricultural Policy (HL 54). Back

6 COM(2007) 273. European Commission, Growing Regions, Growing Europe. Fourth Report on Economic and Social Cohesion. May 2007. The Commission is obliged by Article 159 of the Treaty establishing the European Community to produce a report every three years on the progress made towards achieving economic and social cohesion. Back

7 This is very closely related to Gross Value Added per head: GVA plus taxes on products less subsidies on products equals GDP. The two measures are so similar that we treat them as equivalent. Back

8 COM(2007) 273. European Commission Growing Regions, Growing Europe. Fourth report on Economic and Social Cohesion, May 2007, (p.11 "The Impact of Commuting on GDP per Head".) Back

9 These were a budget deficit of less than 3% of GDP, public debt below 60% of GDP, an inflation rate within 1.5 percentage points of the three EU countries with the lowest rate, long-term interest rates within 2 percentage points of the three lowest interest rates in the EU, and an exchange rate that was within the normal fluctuation margin of the European exchange-rate mechanism. Back