1

Regional Policy in the EU

2

EU Regional Policy Concerns

• Concern for Europe’s disadvantaged regions hasn’t always been part of EU priorities => not in the Treaty of Rome (1957); different reasons:– responsibility of Member States for their own problems,

– Emphasis on free trade and the importance of competition rules: regional policy deviates from free market approach.

• EU always had poor regions (Mezzogiorno, etc.).

• 1973, Ireland (poor at the time it joined); 1981, Greece joined but no major reorientation of EU spending priorities.

• Pre-1986, most spending on regions was national– much spending on poor EU regions by member states: rural electrification, phones, roads, etc.

3

EU Regional Policy• In 1986, entry of Spain & Portugal created voting-bloc in Council (with Ireland and

Greece) that induced a major shift in EU spending priorities, away from CAP towards poor-regions: spending priorities changed.

• As a consequence, the importance of ‘Structural spending’ to reduce economic and social disparities has been increasing during the last two decades.

• Cohesion policy first set out in Single European Act (1986) while Treaty on European Union (1992) names cohesion as one of the EU’s main goals, as well as introducing the Cohesion Fund.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Structural Funds

Poor Vote-Share

CAP

Enlargement and structural spending:Increasing “Structural spending” thru enlargement phases:

1970 EU-6: 3%; 1981 EU-9: 10%;

1990 EU-12: 32%; 2000 EU-15: 35%;

Arguments for EU Regional Policy

• Three main arguments to justify why regional cohesion is

EU responsibility:

1. Regionally unequal effects of deeper economic integration

(FTA → CU → CM → MU): new economic geography.

2. All regions could be positively affected by Cohesion

(developing poor regions increases income in rich ones

also: exports, tourism etc).

3. Reducing differences improve acceptance of the EU (or

not reducing them increases tensions across the EU

reducing support for integration).

5

6

Impact of 2004/2007 Enlargement

• New members are much poorer than EU15: All of entrants had less than 75% of GDP per capita of EU25 average (except Cyprus) and some were below 40%: the 75% threshold is important in distributing Regional Funds.

• Challenges:– Cost of structural spending could rise substantially,

– 10 new poor nations make some poor regions in EU15 look relatively rich: pushes them above 75% of EU25 average (phasing-out regions).

– Challenges have intensified with Bulgarian and Romanian accession.

– Political power in Council likely to shift spending priorities.

7

EU27 income disparity (by State)

• Very uneven income distribution, geographically (between and within countries).

• Income/head by state.

– Ireland is 142 % richer than average EU27.

– Bulgaria only aprox 40% of average.

Studies have shown national convergence in the EU-15 accompanied by

increasing regional disparities within countries

8

•50 - 75

•75 - 90

•90 - 100

•100 - 125

•≥≥≥≥ 125

•Index, EUR27 = 100

•<50

•Regional Disparities in EU27

•GDP per head in % in PPP (2002)

EU27 income disparity (by region)

Income distribution more

uneven at regional level

below 75% in EU25

statistical effect below 75% in EU15 Above 75% in EU25

"naturally" above 75% because of growth

other regions

Index EU 25 = 100

Source: Eurostat

GDP/head average 2000-2001-2002

Geographical disparities in the EU25Regions below or close to 75% threshold

10

Impact of 2004/2007 Enlargement

• Taking into account data of GDP per capita at PPP

for the year 2007 (EU-27 = 100) we can distinguish

three groups of countries:

– 9 poorest countries (between 40 and 70%): Estonia (72), Slovakia

(69), Hungary (63), Lithuania (60), Latvia (58), Poland (54),

Romania (41) and Bulgaria (38)..

– An intermediate group (between 75% and 105%): Spain (107%),

Italy (101), Greece (98), Cyprus (93), Slovania (89), Chech Rep.

(82%), Malta (77) and Portugal (75).

– Rich ones (more than 110): Luxemburg (276%), Ireland (146),

Holand (131), Austria (128), Sweden (126), Denmark (123),

Belgium (118), U.K. (116), Finland (116), Germany (113) and

France (111).

11

EU Regional Policy 2007-2013

• For historical reasons, EU Regional Policy has the following “Funds”,

– “Structural Funds”: European Fund for Regional Development (EFRD) and European Social Fund (ESF),

• Spent in any qualified region (see next slide: objective 1 and 2). Region NUTSII: Spanish Autonomous Communities.

– “Cohesion Fund”.

• Spent only in poor countries (whose GNI is lower than 90% of the EU average).

Since 2006 were: Ireland, Spain, Portugal and Greece.

Now are the following countries:Bulgaria, Czech Republic, Estonia, Greece, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Portugal, Romania, Slovenia, and Slovakia.

• Historically many programs, initiatives, and objectives, BUT over 90% is spent on two priority “objectives.”

12

Objectives EU Regional Policy 2007-2013

Convergence (old Objective 1) about 81,5% of SF spending. •spending on basic infrastructure in less developed regions (with incomes lower than 75% of the EU27 average): 84 regions, 154 million population.

•Additionally affects 16 regions with 16 million inhabitants and incomes lower below 75% of EU-15 but above this threshhold in EU-25 average due to statistical effect of the larger EU (phasing out regions)

Competitiveness and Employment (Objective 2) 16% of SF. •All regions which are not covered by the Convergence objective are eligible.

• A phasing-in system is granted until 2013 to regions which were covered by the former Objective 1 but whose GDP exceeds 75% of the average GDP of the EU-15 naturally, due to growth (so with or without enlargement would not be eligible under Objective 1).

This objective is designed to help regions to anticipate and promote economic change through innovation, improve accessibility and protect environment and support the workforce investing in human resources.

European Territorial Cooperation 2.5% of SF spending (trans-frontier cooperation)

2007 - 2013

14

EU Economic Geography: Facts

• Europe is highly centralised in terms of economic activity.

– western Germany, Benelux nations, N.E. France and S.E. England: representing 1/7th land, but 1/3rd of pop. & ½ GDP.

• Periphery has lower standard of living.

– More unemployment.• Especially among youth.

– More poverty.

Periphery

Centrality of EU25

Regions

Intermediate

Core

Periphery

Centrality of EU25

Regions

Intermediate

Core

What theory says about (1)

Two major approaches linking economic integration to

change in the geographic location of economic activity:

• “Comparative advantage” suggests nations specialize in

sectors in which they have a comparative advantage due to

technology or resource endowments,

• “New Economic Geography” suggests that integration tends

to concentrate economic activity spatially because of scale

economies & transport costs & “demand linkages”and thus

increasing geographical differences

15

16

What theory says about (2)

Many agglomeration forces:• Scale economies: Internal and External (technological spillovers, Silicon Valley)

• Demand linkages:

- manufacturing concentrates near large market

- market large where manufacturing concentrates (where workers live andconsume)

• Supply linkages:

- The presence of a large number of suppliers increases overall productive efficiency.

Other forces lead to a tendency of firms to avoid agglomerations of economic activity (dispersion forces):

• Rents and land prices,

• High cost of other non-traded services,

• Competition with other firms.

What theory and data says about

New Economic Geography suggests dominance of

agglomeration forces => proximity of producers

and consumers draw workers into the core; rest of

the region rural hinterland.

Applied studies on EU data find evidence of the

importance of efficiency gains due to

agglomeration (bigger than the effects of the

dispersion forces)

17

18

Efficiency and redistribution

According to EU, main goals of Regional Policy are economic growth and regional convergence…

but these goals do not always complement each

other.

• To promote growth efficiently, SF should be allocated

where the productivity of capital is highest (more developed

regions)

• To promote regional convergence, SF should produce a

redistribution across countries and regions (financing

poorer regions)

19

Discussion: Role of EU in redistribution

The pursuit of conflicting goals (growth and redistribution) with just

one instrument may create inefficiencies. But it depends on the

type of redistribution aimed at:

- Inter-country and inter-regional redistribution : Redistribution from

richer to poorer countries/regions fosters convergence and creates

major benefits for the rest of EU in the form of new and wealthier

markets and steadier democracies. So it may be compatible with

economic growth and it makes sense that EU regional policy

undertakes this type of redistribution.

- Interpersonal redistribution

The economic rationale for EU involvement in intra-country

redistribution is more questionable because national governments

have more instruments (their tax and transfer system) for

redistributing income within their borders.