House of Lords - European Union

Select Committee on European Union Written Evidence

Memorandum by Jorge Núñez Ferrer, Centre for European Policy Studies

The opinions expressed are solely those of the author and are not necessarily endorsed by the Centre for European Policy Studies

THE FUTURE OF EUROPEAN STRUCTURAL FUNDS

Fundamental principles

1. All EU budget expenditures should follow certain underlying principles which are presented below.[2]

Subsidiarity:

Proportionality:

Additionality:

Value for Money:

In addition, all policies and specially those aimed at fostering growth should:

create a value added at European level:

be aimed at European public goods:

2. Presently the policy is not living up to the listed principles due to the highly politicised manner in which funds are allocated and the policy implemented. The policy needs a thorough review. This short paper presents a list of possible reforms to improve the structural policy interventions, and the coherence with the aforementioned principles.

SUBSIDIARITY

3. Interregional support for underdeveloped regions in the EU should be run at EU level, and thus the underlying concept meets the subsidiarity principle. However, the present rationale is flawed and the implementation suboptimal.

ELIGIBILITY, PROPORTIONALITY, ADDITIONALITY

4. For a policy to attain objectives efficiently, those have to be achievable and clear. However, various economists have pointed out that the theoretical underpinning is based on flawed notions of economic theory.[3] It aims at the convergence of GDP per capita, which is a measure of production, not incomes, thus implying that the value of production per capita should become similar. This is rather utopian given the heterogeneity of endowments of regions. Not surprisingly, GDP per capita divergence between regions within member states has increased rather than decreased. As Martin (2005) clearly points out, growth is still strongly affected on the efficiency gains of economic concentration.[4] High EU wide GDP equalisation while trying to avoid drastic structural change is utopian. Fostering EU growth by avoiding agglomeration and forsaking the impacts of economies of scale is not a plausible strategy either. One can argue that the actual objective is not convergence but that regions reach a minimum of 75% of EU GDP per capita level at PPP (purchase parity prices), an objective that has some considerable flaws, especially after the enlargement. 75% per capita income at GDP PPP gives a very limited vision of the development needs in the regions. The situation in convergence regions in the EU 15 is not worse (and probably better) than in regions in new member states with a higher GDP per capita at PPP, even of those no longer eligible for convergence funds.

5. Even keeping a GDP per capita target, structural policy should aim better at fostering the endogenous (and sustainable) growth potential of regions. The word potential is critical and does not imply convergence in GDP per capita. Eligibility and the measures allowed should be based on a composite measure, taking into account the level of existing infrastructures, human capital and access to finance private or public, in addition to GDP per capita figures. This is in line with the proportionality principle. This principle requires interventions in the regions to be proportional to the needs to develop the region. This requires that the EU in coordination with the national and regional authorities deploys the means necessary to help regions have the necessary basis to reach their potential growth in the most efficient way.

6. Such an approach would in fact question the need for EU support for regions in wealthier member states. For such regions, growth is determined more by national and regional development strategies and national policies rather than the availability of EU funds. This is also the case for ESF funding with at times seems to "compete" rather than complement national schemes. It is also questionable whether it is pertinent to maintain a grant system from the EU: support for those regions can be devised using other financial instruments such as loans of the EIB or EIF.

7. The principle of additionality as applied today is rather crude and flawed. It just requires that public expenditure is not reduced when EU funds are used. For the poorest countries, the principle of additionality is generally present by default and the rules are sufficient to ensure that EU funding is generating more investment than in the absence of support. The governments have to use all of their resources to co-finance the EU assistance and this generates a considerable improvement in the infrastructures compared with a non-EU intervention scenario.

8. This is not the case for regions in wealthier EU member states. There the EU funds allow governments to invest less in the eligible regions. Suspicions exist that those member states increase less their investments in the regions as their factor in the EU receipts. Formally, additionality is guaranteed, but the facto there is a substitution effect compared to a base scenario without EU support. In addition, regions with higher levels of infrastructure, services and even social support, gain less for each additional investment from the EU, in particular when directed to such popular infrastructures as additional roads. The opportunity costs are higher. Moreover, the more developed regions tend to have better access to other financial operators. There is a certain substitution effect in place that reduces the value of interventions. There is thus certainly some rationality in considering that regions in wealthier member states should not be supported by the EU budget, or at least not using the usual infrastructure investments. The opportunity costs of structural interventions in relatively well endowed convergence regions may be higher for the EU than the resulting impact of the intervention. As a result, there is a need to have more stringent eligibility criteria.

VALUE FOR MONEY, EUROPEAN PUBLIC GOODS AND EUROPEAN VALUE ADDED

9. Developing the poorer regions in particular in the poorest countries can potentially generate economic and social benefits for the EU. At low levels of development, investments tend to create strong economic impacts and high returns to investment with relatively low opportunity costs. Investment in the development of those European regions increases the future potential of these regions to generate rapid growth, which in turn increases wealth in the regions and increases the demand for good and services from other regions. Thus fostering the development of poorer regions can be considered targeting a European public good generating a European value added. For regions already relatively well developed in infrastructures and services, regional strategies and national policies are the main factors affecting their development.

BETTER OBJECTIVES, REINFORCED EARMARKING AND IMPROVEMENTS IN IMPLEMENTATION

10. Most of the problems of the structural operations of the EU are not related to the measures, but to the quality of implantation. Strategic planning, appropriate monitoring and appropriate implementation are crucial, and the EU's system is suboptimal at all levels.

11. Strategic planning is the main element determining the impacts of the structural policies, which includes the need for coherence of national macroeconomic policies, such as fiscal or labour market policies. Incoherent programmes with badly integrated investments can reduce considerably the impact of EU investments.

12. It is necessary that national strategies are evaluated by an independent body, separate from the European Commission, and also drafted nationally by institutes independent from the main state administration. The European Commission, for example, has clashing responsibilities in the area of policy formulation, evaluation and monitoring implementation. For policy formulation, the evaluations for the impacts assessments should not only be undertaken externally, but also the process of supervising the evaluators should be run by an external agency. It is not possible that evaluations of Community policies are demanded, evaluated and paid by the same organisation that prepares the policy proposals, controls the budget and supervises implementation; it affects the neutrality of the process. The Commission is also influenced by the pressures to have national strategies for the structural funds approved on time and ensuring the absorption of the funds, with quality and the achievement of objectives taking a secondary place.

13. The European Commission can then concentrate on policy-making, budget control and implementation issues alone. The Commission would retain the mandate to prepare regulatory proposals and monitoring the correct implementation of the programmes.

14. For the Planning process at national level, it is highly advised that member states use also an independent national agency to draw the strategy and evaluate the implementation, reducing political interests and the wish of the administration to have a strategy based on fast absorption rather than impact quality.

15. For the implementation, there is a very complex and illogical shared-management structure with the European Commission, in which national authorities are in charge of implementation, but the Commission is held responsible for the financial implementation which it does not control directly. This reduces the member states' responsibility on the quality of implementation. Cipriani (2006 and 2007) explains at length the implications of such a system.[5] In fact, as EU funding is supranational in nature, implementation and financial flows could be better managed and controlled by agencies at national level funded and controlled by the European Commission, or jointly run with the national administration.

16. There is also a need to make sure that the actual objectives are reached by member states, rather than using absorption capacity as the only measure of success. The intensity of EU assistance should also be decided based on the quality of implementation and the achievement of objectives. "Sunset" clauses should be placed on spending programmes. Funding would be discontinued after a certain period unless the usefulness of the investment can be ascertained.[6]

NEW PRIORITIES

17. The present Financial Perspectives have very much the same priorities and mechanisms as the previous one. Even if the headings of the budget have been altered, the contents is largely the same. Very little discussion on the underlying substance has taken place during the negotiations besides the division of the funds between member states. It is still very much the "relic" which the Sapir report (2003) described.[7]

18. New challenges are clear and pressing. Adapting the budget to promote growth at EU level, rather than supporting agriculture or development only at regional level, has been recognised as one main objective. Work on ensuring that all policies are growth-enhancing or at least not incompatible with a growth approach is necessary.[8] Another challenge is to protect the environment and particularly combating climate change.

19. A political will to liberate the EU budget from considerations on a "fair" share of returns is necessary, in particular for R&D investments. The recent disputes on the allocation of a share of the Galileo programme to each member state are a sign that the potential economies of scale of EU action can be eroded significantly. The EU budget investments have in several areas a theoretically large potential to generate a European value added compared to individual action by member states. In practice, the politicised way in which the funds are allocated can erode much of the benefits. This in turn reduces also the justification for using the EU budget for any actions.

20. Given the rising environmental challenges, action against climate change to reduce CO2 emissions and adapting to expected changes is an urgent priority. CO2 emissions are a clear cross-border issue, not only in terms of impacts but also because many cross-border activities generate emissions, from transport to energy supply. As such, combating climate change should in many areas be handled at supranational level. It is clear that there is a role to play by the EU, including for the EU budget.

21. The first action starts by properly integrating climate change concerns into the budget. Presently climate change is squeezed into the programmes ex-post, or by relabeling existing expenditure as climate change investments. There is no clear integrated approach in place yet. Issues such as energy efficiency or investments to reduce emissions in transport should become better integrated into structural funds and imposed on the strategic planning of member states for the use of EU funds. Earmarking funds for climate change could be one approach. This should not only affect structural funds (including the rural funds, for example for investments in the food industry and farms).

22. In addition, for important and central climate change investments, a specific budget heading could be introduced, this would ensure that countries invest a clear minimum share of funds in this area. Funds for improving the energy sector efficiency could become a part of this fund, as well as funds to promote transport by rail or waterways. Elements already exist in the Trans-European Networks.

9 January 2008

2 See Nuñez Ferrer, J (2007), "EU budget and policy reforms in order to promote economic growth", ITPS working document R 2007:015; and Nu«n¥ez Ferrer, J (2007), "The EU Budget, The UK Rebate and the CAP-Phasing them both out?", Task Force Report, CEPS, Brussels. Back

3 See Boldrin M and F Canova (2003), "Regional Policies and EU Enlargement", in European Integration, Regional Policy, and Growth, eds Funk, B and Pizzati L, The World bank, Washington DC, and Tarschys, D (2005), "The Enigma of European Value Added", Sieps 2005:4. Back

4 Martin P (2005), "The geography of inequalities in Europe", Swedish Economic Policy Review, Vol 12, pp 83-108. Back

5 Cipriani G (2006), "The Responsibility for Implementing the Community Budget", Working Document 247, CEPS, Brussels; Cipriani, G (2007), "Rethinking the EU Budget: Three Unavoidable Reforms", CEPS, Brussels, pp 150. Back

6 Gross, D and Micossi, S (2005), "A Better Budget for the European Union-More Value for Money, More Money for Value", Centre for European Policy Studies (CEPS) Policy Brief No 66 (www.ceps.be) Back

7 Sapir, A, P Aghion, G Bertola, M Hellwig, J Pisani-Ferry, D Rosati, J Vin¥als and H Wallace (2003), An agenda for a growing Europe: Making the EU economic system deliver, Report of an independent High-Level Study Group established on the initiative of the President of the European Commission, Brussels, July. Back

8 see Nu«n¥ez Ferrer, J (ibid). Back