EPIC Publishing Updates: The European Union Explained Chapter 10: Regional Policy and Cohesion
1. Is EU cohesion simply a side payment to buy support for European integration? 2. Has EU cohesion reduced economic disparities in the EU? 3. Should the EU be concerned with cohesion at all? 4. Why were some countries (such as Ireland) able to use their cohesion money effectively to promote economic growth, whereas others (most notably Greece) were not? The Rationale behind Cohesion Why does the EU's cohesion policy focus on the economic development of regions and not of individual member states? Cynics would argue that the former offers the European Commission an elevated position because it is able to bypass the authority of national governments by directly communicating with regional authorities. More realistically, however, the emphasis on regions as economic units is explained by the fact that some member states are simply too big to make one unified approach toward economic development a practical solution. For instance, countries such as Spain have a wide inner cohesion gap. On the one hand, Catalonia has considerable foreign direct investment and attracts high-tech businesses, whereas Andalusia suffers from high unemployment and a weak infrastructure. Both regions are in Spain, but each demands a completely different approach to foster further economic development. The emphasis on regions, therefore, is a practical necessity and not a supranational plot to undermine national sovereignty. Cohesion represents a desirable goal for any given society for three reasons. First, from an economic perspective, in a liberal market economy market forces alone cannot solve long-standing regional problems; the market will always go where the most affluent consumers are and where the highest profit margins are to be expected. Across Europe, one often sees a core with a very active and successful economy surrounded by a periphery incapable of reaching comparable standards of living. Underutilized resources in the periphery, mainly human capital, could significantly contribute to growth and productivity if used more efficiently, which is the precise aim of cohesion. Second, from a social perspective, attempts to reduce the long-standing trend of people moving away from the periphery and into core urban areas could result in fewer urban problems, including overcrowding, housing shortages, traffic congestion, and crime. Moreover, efforts to preserve rural communities, as well as cultural and social traditions seem worthwhile against the backdrop of the streamlining trends of globalisation. And third, from a political perspective, one might argue that every member of a society should have the possibility of sharing a country's wealth. Any political system able to distribute wealth in a just manner will enhance its democratic legitimacy. Why should the European Union tackle such idealistic objectives? Cohesion and closing the gap between rich and poor regions would result in a more unified Europe, which is certainly in line with the ideals that brought the European project into existence some seventy years ago. Cohesion could also compensate for the negative effects of other EU policies, particularly the Common Agricultural Policy that mainly benefits large-scale producers, whereas the small-business farmers, so prevalent in Greece, Ireland, Poland, Spain, Southern Italy, and Portugal, find it hard to achieve acceptable standards of living. Another example is the Single Market initiative and a subsequent need for a so-called policy spill-over. Ever since the Single European Act was signed in 1986, economic activity has tended to concentrate on the so-called blue banana, with outlying regions missing out. It only seems justified that the Single Market policy, which tends to favour people and businesses in north-western Europe, is complemented by a cohesion policy designed to enhance the economic prospects of other parts of the union. In addition, growth and economic prosperity in disadvantaged regions would lead to reduced unemployment and higher tax revenues for the state. And because the EU budget is the sum of national contributions in the region of around 1 percent of every member state's GDP, the EU has a vested interest in spreading prosperity. Most important, however, is that the EU is the only entity in the position to tackle cohesion. With bilateral aid the exception rather than the norm, poorer member states and their regions depend on support from Brussels.
How Does the EU Implement Cohesion?
Cohesion is organized around a number of funds (see Table 9.1) and the process can get complicated, as often happens when money is at stake. Any investigation of how cohesion works will encounter a multitude of funds, some with confusing names, and most with unique programme objectives and their own bureaucratic jargon. For example, referring to this policy as cohesion, but then also attaching the identical name to one of the policy’s key funds can hardly be described as user-friendly.
Table 10.1. Cohesion Policy Funds, 2021 – 2027.
ERDF (European Regional and Development Fund): Social and economic development of all regions: 214 bn€ESF (European Social Fund): Support for the creation of jobs for all regions: 99 bn€CF (Cohesion Fund): Support for the environment and transport of regions in less prosperous countries: 37 bn€JTF (Just Transition Fund): Support for regions that are most affected by the EU’s target of climate neutrality : 19 bn€Total: 368 bn€
Source: European Commission, DG Regio.
In making its financial projections for 2000 - 2006, the EU's cohesion policy did not properly address the integration of twelve new and largely poor countries from central and eastern Europe. With the enlargement rounds of 2004 and 2007, the subsequent multiannual budget for 2007 - 13 had to consider the vastly changing circumstances of a union that had never before witnessed such a wide gulf in prosperity and development. In July 2004 the Commission published its first proposal calling for funding to be concentrated only on the neediest regions. Brussels argued for an increase to 336 billion Euros - about one-third of the EU's budget - which was still only the same share spent on cohesion in the previous financial projections for 2000 - 2006. The European Council meeting of December 2005 largely approved the Commission's proposal. After much negotiating, the member states agreed to set a financial ceiling for cohesion at 308 billion Euros with 82 percent of the money earmarked for convergence project in the poorest regions (those with less than 75 percent of the EU average GDP).With the new member states now firmly integrated, it was only logical that the member states and the Commission embarked on a subsequent reorganisation. Ever since the ‘Big Bang’ enlargement of 2004, some new entrants, such as Slovenia, or Czechia were in the process of remarkable economic transitions, while others, most notably Bulgaria and Romania continued to struggle. With an allocated 325 billion Euro for the financial period of 2014 - 2020, the budget stayed by and large at the same level, yet some working mechanisms underwent significant changes. First, a new category of so-called ‘transition regions’ was introduced, which targeted those areas that despite notable prosperity advances still had noticeable pockets of deprivation. Transition regions were classified as those with a GDP of 75 to 90 per cent of the EU’s average GDP. Second, funding for projects was now explicitly linked to the Europe 2020 strategy, including such headlines as employment rate, research and development, climate change, reduction of early school leavers, as well as poverty reduction. Third and most strikingly, upon the insistence of Germany, the concept of macro-conditionality was introduced, which allowed the Commission to suspend payments in case a particular member state failed to correct financial and monetary imbalances. This policy innovation was a direct consequence of the sovereign debt crises that had affected many southern European countries from 2011 onwards. The message was obvious: If you cannot establish stable macro-economic conditions, don’t expect the EU to bail you out. Soon after the new Commission team under President Ursula von der Leyen assumed office, Europe was hit by the Covid pandemic. Regions with an over-reliance on tourism, most notably areas in Portugal, Spain, Italy, Croatia, Greece, or Cyprus were naturally hit hardest by travel restrictions and the general slow-down in economic activity. Unsurprisingly, the new cohesion policy for 2021 – 2027 reflected these monumental developments (see Table 10.2). Just as with EU agriculture, the policy’s objectives were aligned with the European Green Deal, which aims for carbon neutrality by 2050. A heading referred to as ‘Digital Age’ continued to represent one of the key targets. New on the agenda, however, were the notion of an ‘Economy that works for the people’, as well as a ‘Stronger Europe in the World’ (see Table 9.2). As to the different prosperity categories, the benchmarks for less developed regions stayed at 75 per cent of the average EU GDP. But the boundaries for transition regions (75 percent to 100 percent) and developed regions (above 100 percent) were moved upwards (see Table 9.2), allowing for a larger allocation of funds to the poorest regions of the EU. Thus, out of a total budget of 368 billion Euro, the 19 billion of the ‘Just Transition Fund’ was earmarked for regions that struggled with meeting the Green Deal’s climate neutrality targets. The Cohesion Fund’s objective (37 billion Euro) to support transport and the environment exclusively for regions with a GDP of less than 90 percent of the EU average remained unchanged. And as to the European Regional Development Fund and the Social Fund, only 30 billion Euro were saved for the more developed region (those of with a GDP of at least 100 percent of the EU’s average), amounting to just over 8 percent.
Table 10.2. Objectives of EU Cohesion 2021 – 2027
European Green Deal: Climate neutrality, climate adaptation, low carbon economyDigital Age: Digitalisation, Broadband provision, SME support, digital skillsAn Economy that works for people: Economic, social, and territorial cohesion, health and social care, education, skills, housingA stronger Europe in the World : Collaboration with EU candidates and non-EU states, external borders, dialogue, Source: European Commission, DG Regio.
How Is Money Distributed?
Cohesion in the EU requires that all projects adhere to a set of principles, regardless of the fund they relate to. In the past, these principles included concentration (where funds must be spent primarily on regions with the greatest needs), connection (with projects set to improving the connection of peripheral regions), or cooperation (with projects being implemented within the triangle of the Commission, the region, and the national government). For 2021 – 2027, the principles were amended slightly and now constitute the following: 1. Alignment: projects must pay explicit reference to current EU priorities, such as the 2050 target of climate neutrality.2. Concentration: the majority of funds must be spent in less developed or transition regions.3. Multi-annual: projects must be part of a wider, and long-term regional strategy designed to improve socio-economic and environmental potential. 4. Place-based: the projects must be in line with a region’s resources and address specific challenges present in the region. 5. Multi-level governance: projects must have the support of local, regional, and national authorities. 6. Inter-regional cooperation: projects that are proposed between several regions.
Arguably the most crucial player in the distribution of financial support is the European Council (the get-together of the member states’ heads of government), which determines the allocation of funds and the policy objectives. It also sets the financial limits and decides, in often acrimonious debates, the amount of money each member state will receive. It is then up to each member state to divide the funds between its own regions. Countries might use cohesion money to finance thematic programmes covering the whole country (such as environment or transport), or they might concentrate on individual regions to which they channel a majority of their allocation. The Commission, however, cannot influence a member state's decision on how and where to spend cohesion money.
Table 10.3. Project Financing in the European Union by Types of Regions, 2014 – 2027.
Type of Region 2014 - 2020 2021 - 2027 GDP average EU Share GDP average EU ShareDeveloped region more than 90% 50% more than 100% 40 - 50%Transition region 75 – 90% 60 - 80% 75 - 100% 60 - 70%Less Developed Region less than 75% 80 – 85% less than 75% 85%
Source: European Commission, DG Regio.
Each region shoulders the responsibility for getting projects started, but first each must design the project, identify partner organisations, develop an implementation plan, draft a budget, and then lobby its regional and national governments to approve the project. The plan is then passed to the European Commission, which starts a close dialogue with the regional authorities over funding, organisation, and planning. It is important to realize that the EU does not fund projects in its entirety (see Table 9.3). When assessing the projects, the Commission checks on the above-mentioned six criteria, and the degree of adherence to these can make or break a proposed project.
The Challenge of Enlargement to Central and Eastern Europe
With the accession of twelve new member states in 2004 and 2007 the EU population grew by 128 million people, or around 32 percent, to 485 million. Most of these new EU citizens lived in less developed regions with a GDP of less than 75 percent of the EU average. But even among the new member states, a widespread gap existed. For instance, in 2006, Cyprus had reached 91 percent of the EU's average prosperity levels, while Bulgaria and Romania lingered at the bottom of the table with 36 percent and 38 percent, respectively (see Table 10.4). With the integration of those two countries in 2007, the EU's GDP per capita had actually dropped by around 18 percent relative to the EU's original fifteen-member states. Given this widened cohesion gap, it seemed astonishing that the EU made no special arrangements when the financial perspective of 2000 - 2006 was agreed upon at a summit in Berlin in March 1999. Back then, enlargement was still deemed a distant possibility. In fact, the EU-15 still believed that, were any countries to be added, perhaps only five candidate countries (Poland, Hungary, Czechia, Estonia, and Slovenia) would make the grade in the medium-term future. In Berlin, therefore, the member states agreed to offer relatively modest financial assistance, delivered through various programmes, amounting to 21.8 billion Euros for the years 2000 - 2006, or around 3 billion Euros per year. Already prior to Berlin, Europe Agreements had been signed with all candidate countries to gradually establish free trade and monitor the implementation of the EU acquis. The candidate countries were also invited to participate in existing EU programmes for education, training, the environment, transport, and research. Brussels also established the Technical Assistance Information Exchange Instrument (TAIEX), which delivered information on all aspects of the EU acquis through seminars and conferences. Finally, a twinning programme was launched, in which member states offered the secondment of their civil servants and advisers to the accession countries. By 2002, however, it became clear that the surprisingly speedy progress of the candidate countries would permit ten states to join in 2004. The EU therefore was forced to somehow find the resources in its current seven-year budget to establish further financial programmes. At the Copenhagen summit in December 2002, the member states agreed on a new financial formula and increased the total volume of funds available to the candidate countries to 9.9 billion Euros in 2004, which rose to 14.9 billion in 2006.
Table 10.4. GDP per Inhabitant (in Purchasing Power Standards)
2006 2011 2022
Luxembourg 272 274 261Ireland 145 127 234Denmark 124 125 136Netherlands 131 131 130Austria 124 129 125Belgium 118 115 121Sweden 121 126 119Germany 116 120 117Finland 115 116 109Malta 77 83 102France 109 107 101Italy 104 101 96Cyprus 91 92 92Slovenia 88 84 92Czechia 77 80 91Lithuania 55 62 90Estonia 65 67 87Spain 105 99 85Poland 52 65 79Hungary 63 66 77Portugal 76 77 77Romania 38 49 77Latvia 52 58 74Croatia --- --- 73Greece 93 82 68Slovakia 63 73 67Bulgaria 36 45 59
EU Average: 100Source: Eurostat
Does the Cohesion Policy Work?
Cohesion in the EU is torn between politics and policies. In policy terms, funding should be focused on backward areas requiring support. But politics dictates that cohesion must be supported by a majority of member states. Thus, we still have parts of the cohesion budget that is earmarked for developed regions which are at or above the EU’s average GDP, which in the past prompted observers to remark that the Cohesion Policy gives "something for everyone." This analysis might have been cogent in 2006, when prosperous regions were still able to tap into 18 percent of cohesion funding. Alas, for the current financial perspective of 2021 – 27, that figure decreased to a paltry 8 percent, which renders this line of argumentation largely irrelevant. A look at prosperity levels across the individual member states also reveals that some of the 2004 entry cohort made substantial and indeed very impressive progress. As illustrated in Table 10.4, Malta’s GDP per capita jumped from 77 percent of the EU average in 2006 to 102 percent in 2022, with the Mediterranean islet now on average more affluent than France. Lithuania (from 55 to 90 percent) and Estonia (from 65 to 87 percent) also made enormous strides. Even bottom of the table Bulgaria managed to improve matters, rising from 36 to 59 per cent. Pockets of prosperity have emerged in central and eastern Europe, most notably in Prague in Czechia (the EU’s fifth most prosperous sub-region), but also in Warsaw (Poland) and Bucharest (Romania), which are jointly ranked at position 10 with a GDP of 166 percent of the EU average. Yet, Table 10.5 also demonstrates that regions in Bulgaria and Greece (the latter being massively affected by the country’s sovereign debt crisis) can barely reach a fifth of the prosperity levels of the top regions. A look at unemployment figures (see Table 10.6) adds further nuances to the EU’s cohesion landscape. Not surprisingly, the high GDP performers in Czechia, Poland and Hungary have economies that are very close to being full employment entities. Yet, in parts of Spain, Italy, and Greece close to one in four people are out of work. Hence, it is fair to say that the cohesion gap between east and west has shrunk significantly, and in some parts has disappeared altogether. Completion of the Single Market has led to, and will continue to spur, increased specialization. And regions with lower wage and price levels – such as the ones in Poland, Hungary, and Czechia - will benefit from these competitive advantages. But when looking across the EU, cohesion remains an unattainable target, that is often painfully out of reach. Two countries illustrate this dichotomy in an exemplary fashion: Ireland and Greece. The former is often cited as an example, where the cohesion policy is widely seen as a major reason for the country's astonishing economic success. When Ireland joined the EU in 1973, its GDP languished at 64 percent of the EU's average. By 2022 its GDP had reached 234 percent of the EU average, the second highest in the Union. In contrast, cohesion sceptics present the case of Greece, which in 1983 had a GDP that was almost identical to that of Ireland (62 percent of the EU average). Before the sovereign debt crisis ravaged the country, GDP level increased to 82 per cent of EU average, only to plummet down to 68 per cent by 2022. Hence, in comparison with its European partners, Greece was not able to make any significant economic strides. After all, how can a cohesion budget of a modest 50 billion Euro per year combat structural deficiencies and social malaise in the face of the persistent pressures of automation and globalisation? Table 10.5. Regions with the Highest and Lowest GDP per Inhabitant, 2021 (in PPS)
Highest GDP Lowest GDPLuxembourg 268 Mayotte (France) 28Southern (Ireland) 261 Severozapaden (Bulgaria) 39Eastern & Midland (Ireland) 239 Severen tsentralen (Bulgaria) 39Brussels 204 Voreiro Aigaio (Greece) 42Prague 203 Severoiztachen (Bulgaria) 43Hamburg (Germany) 191 Anatoliki Makedonia (Greece) 45Hovedstaden (Denmark) 178 Yugoiztochen (Bulgaria) 45Ile de France 176 Ipeiros (Greece) 46 EU average: 100Statistics of EU regions are organised along 3 categories: The so-called ‘Nomenclature of territorial units for statistics’ (NUTS) are major socio- economic regions (NUTS1), basic regions (NUTS2), and small regions (NUTS3). The figures in these statistics refer to NUTS2. Source: Eurostat.
It remains difficult, then, to determine the success of cohesion, since economic progress is influenced significantly by non-EU factors. Again, the case of Ireland offers further insight. The country propelled itself from the economic backwardness of the seventies to become the Celtic Tiger of the nineties. But Ireland is an English-speaking country with strong links to the U.S., and so even before EU money began pouring in, Ireland had low wage levels, a highly educated workforce, and relatively harmonious industrial relations. These factors, in the age of globalisation and the European Single Market, are highly conducive to attracting business regardless of any EU cohesion policy. And to give more recent examples, a geographical location close to the most affluent, and most densely populated areas of the EU, account for much of the economic success of Poland, Czechia, and Hungary. Coupled with a skilled workforce, low transport costs, and low wages these member states offer a winning formula within a highly competitive European market. Greece, on the other hand, was unable to attract the same level of foreign direct investment as Ireland, Poland, Czechia, or Hungary did. Frequent strikes, corruption, but also an awkward geographical location, far removed from the rich markets of the blue banana, meant that a Greek miracle never happened. Clearly, then, cohesion and economic success not only depend on a well-managed and coherent allocation of funds from Brussels but also on efficient coordination between the EU and national and regional authorities, as well as on sensible macro-economic policies, a favourable international economic climate, and a fortuitous geographical location.
Table 10.6. Unemployment in EU regions, selective, 2022 (percentages).
Lowest Unemployment Highest UnemploymentWarsaw (Poland) 2.1 Canary Islands (Spain) 23.2Central Transdanubia (Hungary) 2.1 Andalusia (Spain) 21.7Wielkopolsie (Poland) 2.2 West Macedonia (Greece) 19.8West Transdanubia (Hungary) 2.2 Extremadura (Spain) 19.5Moravia (Czechia) 2.2 Campania (Italy) 19.3Pomoskie (Poland) 2.3 South Aegean (Greece) 18.8Prague (Czechia) 2.3 Sicily (Italy) 18.7
The Spain exclaves of Ceuta (26.6%) and Melilla (19.8%), which are surrounded by Moroccan territory, also feature prominently in this statistic. The high degree of unemployment can to a considerable degree be explained by their challenging geographical situation of being isolated from the markets of mainland Spain.Source: Eurostat.
Hence, even enthusiasts of the EU's cohesion policy cannot ignore the challenge posed by the core vs. periphery problem. Economic activity in the EU remains centred on the blue banana, the area marked by low assembly costs, an affluent consumer base, good market access and transport links, and the presence of multinational companies, all of which allows for brisk intra-industrial trade. In contrast, the EU's periphery is characterized by a lack of competition, with detrimental effects on labour skills and infrastructure. Also, labour migration in the EU will never reach U.S. levels, which means that any competitive advantage in the periphery (lower wages, lower taxes) might not lead to economic gains. The periphery might always be engaged in a permanent game of catch-up. Projects to improve the infrastructure of the periphery will undoubtedly move it closer to the richer European markets of the centre, and indeed this has been the EU's focus in the post enlargement era. Furthermore, the new member states also offer an attractive option for EU-15 industries: instead of relocating or outsourcing production to India or China, businesses might prefer the political stability and closer geographical proximity of the peripheral regions of Central and Eastern Europe. Yet, a study by the European Parliament highlights some of the pitfalls of economic transformation. Less developed regions (those with a GDP of less than 75 percent of the EU average) will find it relatively straightforward to increase growth, chiefly because of lower wage levels. But once an entity moves up to the category of a transition region (with a GDP of between 75 and 100 percent of the EU average), further growth is stymied by a weak industrial fabric and declining population figures, prompted in large parts by a brain drain of young people who moved to more promising regions and urban areas. The study described this phenomenon as a ‘geography of distrust’. But even in those areas where cohesion is starting to have an impact, a recent long-term study by researchers at the university of Mannheim (Germany) and Aarhus (Denmark), as well as the Berlin-based Jacques Delors Centre concluded that any income gains from cohesion funding went disproportionally to the richest economic actors, and not the poorest. To be fair, a more equal income distribution is not the target of EU cohesion. Any member state who wishes to achieve this aim, ought to do so through national tax and welfare policies. Nonetheless, growing inequality as a spill over from EU-funded projects could potentially represent a legitimacy problem for Brussels. The study acknowledges that between 1989 and 2017, cohesion was indeed effective from a cross-regional perspective and contributed to the average economic growth in regions, and in particular in previously ‘left-behind’ areas. When analysing the data more closely though, a rise in income levels predominantly ended up in the pockets of highly educated and affluent economic actors. As a likely explanation (although the study did not investigate this), the authors suggested that cohesion beneficiaries tend to work in firms that have the financial resources and the administrative capacity to go through the often complicated and arduous project application process. Hence, we are witnessing a rise in overall inequality across Europe, despite decreasing inequality amongst regions. Solutions come in the form of awareness raising, easier eligibility criteria, a more egalitarian distribution, but above all, a new ‘people-based’ approach that ought to replace the current ‘place-based’ objective. In short, invest in people, and not in areas. Despite the persistent debate over the efficacy of EU cohesion, the policy continues to remain one of the crucial cornerstones of the European integration project. Few other EU policies can match the positive impact that the building of roads and railways, or the retraining of formerly unemployed people, has on the lives of European citizens. Through cohesion the EU can for once demonstrate tangible results beyond the abstract image of a faceless bureaucracy. Still, in a union of twenty-seven members stretched across the map of Europe, and with the existing sizable gap between rich and poor, the cohesion policy in the EU still has a long way to go before it can fulfil its laudable objective.