Economic Integration and Social Cohesion:

the European Union’s experience

Vasco CalMexico – November 2004

Structure of this presentation• Origins of EU cohesion policy• Cohesion policy: value added• Main challenges within the enlarged

Union• Proposals for 2007-2013

Origins of the EU cohesion policy• “In order to promote its overall harmonious

development, the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion.

• In particular, the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas”. (Article 158 of the European Union Treaty, adopted in 1986, after the enlargement to Portugal and Spain)

• Economic and social cohesion became one of the three pillars of European integration, alongside economic and monetary union and the single market

Cohesion – a political decision (1)The very idea of European Union implies the notion of solidarity,

a sense of common concern for the well-being of all countries, regions and ultimately individuals within the Union.

Originally under the EEC Treaty this was to be achieved by market forces in an increasingly integrated economy leading to the gradual convergence of per capita income levels.

Over time the view developed that this market based approach should be augmented by specific policies targeted at problem regions.

Although justified in efficiency terms there was an increasingly overt re-distributional element to these transfers, this was fuelled by the growing inequality in the EU resulting from successive enlargements.

The intensification of economic integration, with the internal market and EMU, provided the justification for the further development of cohesion policies.

Cohesion – a political decision (2)• But there is also a strong economic argument underlying a

regional policy at Community level• The single market project implies there will be greater economic

integration between member states, and hence greater trade. • Competing economic theories suggest that, on balance, closer

integration should lead to a narrowing of disparities between the economies involved.

• However, such convergence is by no means assured and where it occurs, it could take a longer time than is socially orpolitically acceptable.

• Even if in aggregate all participants gain from trade, within each country there are losers in this game; these will often be regionally concentrated, in the same way as particular economic activities are regionally concentrated

What is the cohesion policy for• Cohesion policy is not a redistributive policy

and is not aimed at supporting consumption• It is targeted on competitiveness factors• It is a medium term strategy for each

region/country• It is strategic: it provides for stable financial

framework (seven years) and does not depend on annual budget-setting

• EU promotes the diversity of its peoples, languages and national/regional cultures… we cannot always expect labour to move as entirely freely as legally possible

Categories of expenditure in Structural FundsCategories of expenditure in Structural Funds

Other2%

Human resources23%

Productive environment

34%Infrastructure

41%

4,3 Breakdown of Structural Fund allocation in Objective 1 regions: all Member States, 2000-2006

Source: DG REGIOFor 2007-2013 + strengthening administrative capacityFor 2007-2013 + strengthening administrative capacity

Value added of cohesion policy

• Strengthening administrative capacity

• Promoting convergence

• Reinforcing European integration

• Achieving EU priorities and accompanying other Community policies

Strengthening administrative capacityThe use of the Structural Funds delivers visible qualitative added value:

• Multi-annual programming, evaluation, partnership at local and regional level, in particular with the economic and social partners, better mobilisation of private capital and better exchange of good practice.

• Gains secured through cohesion policy have not derived solely from the financial assistance provided to the weakest regions but also from the process used to manage the transfers and the nature of the implementing programs.

• For a number of reasons, the system for implementing the Funds is widely regarded as making a major contribution to improving administrative policies and structures throughout the Union.

Promoting convergence (1)• The cohesion policies of the European Union financed under the

Structural Funds, with a total allocation of € 213 billion for the period 2000-06, have grown to become the second largest expenditure in the Community budget after the Common Agriculture Policy (with 33% and 47% of the total, respectively). Cohesion policies are principally delivered in a highly decentralised manner through regional development programmes.

• More than two thirds of the total amount of the structural funds available are allocated to the regions lagging behind in development(Convergence objective) and which face the most serious difficulties in terms of income, employment, the productive system and infrastructure.

• The other third is devoted to economic and social restructuring for other regions suffering from structural problems (Regional competitiveness and employment objective). These are areas undergoing economic change (in industry or services), declining rural areas, crisis-hit areas dependent on the fishing industry or urban areas in difficulty. All these areas are facing structural problems that take the form of economic restructuring problems, a high rate of unemployment or depopulation.

Convergence and regional competitivenessThe European Regional Development Fund (ERDF) finances in the framework of the

“Convergence” objective: research and technological development, innovation and entrepreneurship; information society; environment; risk prevention; tourism; transport networks/TEN; energy networks and renewable energies; education and health investments; direct aids to SMEs

“Regional competitiveness and employment” objective:•Innovation and the knowledge economy (RTD, technology transfer, innovation in SMEs)•Environment and risk prevention (NATURA 2000 rehabilitation of contaminated land; promotion of energy efficiency and renewable energies)•Access - outside urban areas - to transport and telecommunication services of general economic interest

Promoting convergence (2)Catching up: Income/head in Cohesion Countries

compared to EU 25 average = 100, 1988-1995-2003

0

20

40

60

80

100

120

140

Ireland Spain Greece Portugal

198819952003

BEDE

DEDE

EL

EL EL

EL EL

EL EL

EL EL

EL ESES

ESES

ES

ES

FR

IE

IE

IT IT

NL

AT PTPT

PT

PT

PT

PT

UKUK

UKnon-Obj. 1

Obj. 1

R2 = 0.156

01020304050607080

0 1 2 3 4 5 601020304050607080

Economic growth and Structural funds allocation % of GDP, 1995-2001

Annual allocation % regional GDP year 1995)

Source: Eurostat, Contas regionais e cálculos DG REGIO

Real GDP growth 1995-2001

Increased economic convergence at Member State and regional level

• GDP per head in Cohesion countries – growth around 3% pa, 8% in IRL – above 2% in others

• GDP in Objective 1 areas – 3% pa higher, more than 2.5% in other regions

• Competitiveness up even where GDPdid not converge

• But large disparities remain and growthis slowing down

Reinforcing European integration (1)Proportion of EU transfers to main beneficiaries spent on

imports purchased from other Member States

17,4 %

18,9 %

26,7 %

35,2 %

42,6 %

14,7 %

0 10 20 30 40 50

Spain

Mezzogiorno

New Länder

Ireland

Portugal

Greece

0

5

10

15

20

25

IE MT DK NL SE CZ SK BE/LU EE EU15 UK CY BG DE FI PL LV PT HU LT RO FR AT SI ES IT EL0

5

10

15

20

25% of GDP

Reinforcing European integration (2) FDI inflows into Member States and

accession countries

BE/LU: data are for 1998; DK: data are for 1999-2000; ES: data are for 1998-1999; HU and SK: data are for 2000-2001; RO: data are for 1997-1999

Source: Eurostat, Balance of payments statistics

average 1999-2001

Regional PolicyEUROPEAN COMMISSION

Third cohesion

report

Third cohesion

report

< 20

20 – 50highly frag.20-50moderate frag.20 – 50low frag.

more than 50%

No data

built-up areas

Territorial diversity - degree of fragmentation of natural areas(all areas (NUTS3 level) excludingbuilt-up areas and agricultural areas.)

% natural areas

Source: COURINELandcover

Contribution to other EU policies -territorial diversity

Regional PolicyEUROPEAN COMMISSION

ENEN

Third cohesion

report

Third cohesion

report

< 4.75

< 4.75 - 7.65

< 7.65 - 10.55

10.55 - 13.45

>= 13.45

No data

Standard deviation=5.86Source:Eurostat and NSI

EU-27 = 9.1

Regional unemployment rate 2002(% of labour force)

The impact of Cohesion policy• Increased public and private investment in

beneficiary regions (growth)• Contribution to increasing GDP (convergence)• Job creation and full exploitation of human

resource potential• Increased physical and human capital• Better regional and local governance• Financial stability over 7 years

Main findings of the Cohesion report (2001)• Compared with the present situation, regional disparities will more than

double in an enlarged European Union:- almost the entire population of 105 million people in the applicant countries

will be living in regions with a per capita GDP of less than 75% of a Community average that will itself be more than 18% down on the present level;

- the standard of living in the least developed regions of the enlarged European Union will be equivalent to about 31% of the Community average, compared with 61% at present.

• There will be three groups of Member States in the enlarged European Union:

- a group comprising the majority of the current applicant countries, which will have a per capita GDP (expressed in PPP) of 40% of the Community average;

- a group made up of the majority of the current Member States, with an average GDP per head of the population of 120% of the Community average;

- an intermediate group, consisting of the cohesion Member States (Spain, Portugal and Greece), plus four of the applicant countries, with a standard of living averaging around 80% of the Community average.

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

LU IE DK NL AT UK BE FR SE FI DE IT ES CY EL PT MT SI CZ HU SK PL EE LT LV RO BG

Average EU25

GDP per head PPS 2002

Source: Eurostat, National Accounts

Index, EU25 = 100

Employment and productivity in the EU - 2003

US

AT

BE

DEDK

ES

FI

FR

GR

IEIT

LU

NL

PT

SEUK

EU15

60

70

80

90

100

110

120

130

140

50 55 60 65 70 75 80

Employment rate

Labo

ur p

rodu

ctiv

ity p

er p

erso

n em

ploy

ed (E

U=1

00)

EU target 2010

Source: Commission services

Regional GDP 2001ENEN

Third Cohesion

report

Third Cohesion

report

< 5050 - 7575 - 9090 - 100100 - 125>= 125No data

Index EU 25= 100

Source: Eurostat

GDP per head(PPS), 2001

Regional PolicyEUROPEAN COMMISSION

ENEN

Third cohesion

report

Third cohesion

report

GDP per person employed 2001

< 25

25 - 50

50 - 100

100 - 120

120 - 130

No data

>= 130

Index, EU-25 = 100

Source:Eurostat and NSI

BE, NL : NUTS0

Commission main proposals for the Financial perspectives 2007-2013 (1)

• Keeping the current expenditure ceiling (1.24% of the Union's GNI).

• The overall amount for payments will be the same as the Berlin decision for 2000-2006 (in % of GNI = 1.12%).

• The structure of expenditure will change, giving more visibility to political priorities of the Union (competitiveness, growth)

• A generalised correction mechanism will replace the British rebate

Historic amounts• The Financial perspectives in 1988 : €45 billion

a year for commitments (with payments corresponding to 1.12% of Gross National Product of the 12 MS)

• Reached €85 billion in 1999 (with payments corresponding to 1.26% of GNP of 15 MS)

• And it is foreseen that in 2006 commitments will be €121 billion (payments corresponding to 1.08% of GNI, Income replacing Product from 2002 on the new national accounts system)

Financial perspectives 2007-2013 (average annual commitments: € 146 billion)

Expenditureper year

2007-2013

13%

34%29%

10%1,8%

9,3% 2,8%

Competitiveness for growth and employment (Heading 1a)

Cohesion for Growth and employment (1b)

Agriculture (Market related expenditure)

Environment, rural development, fisheries

Citizenship, Justice etc

EU as global partner

Administration

(+35%)

0

10000

20000

30000

40000

50000

60000

70000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

0,40

Rural development deductions Expenditure in EU15 (left axis)

Expenditure in N12 (left axis)

EUR million (at 1999 prices)

Expenditure on cohesion policy, 2000-2013

Source: DG REGIO

Expenditure in EU15 as % of GNI in EU25 (right axis)

Expenditure in N12 as % of GNI in EU25 (right axis)

Useful Links• Second cohesion report – January 2001:

http://europa.eu.int/comm/regional_policy/sources/docoffic/official/reports/contentpdf_en.htm

• Third report on economic and social cohesion – February 2004:• http://europa.eu.int/comm/regional_policy/sources/docoffic/official/reports/cohesion3/cohesion3_en.htm

• Third European Cohesion Forum 10-11 May 2004, Brussels: • http://europa.eu.int/comm/regional_policy/debate/forcom2004_en.htm

• The Commission adopted on 14 July 2004 a proposal of five new regulations for renewed Structural Funds and instruments. Over the period 2007-2013, these instruments present about one third of the EU budget or a total of EUR 336.1 billion. The majority of this amount will be spent in less-developed Member States and regions. Structural Funds and instruments aim to promote growth-enhancing conditions for the Union’s economy and will focus on three new future objectives: convergence, competitiveness and co-operation:

• http://europa.eu.int/comm/regional_policy/sources/docoffic/official/regulation/intronewregl0713_en.htm