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Regional Funding of the European Union: A Policy Analysis

November 28, 2011

When analyzing the effects of the Regional Policy of the European Union, it is important to look at a number of issues concerning the implementation and objectives of the programs that are in place. European Regional Policy is, at its core, a policy aimed at promoting solidarity within the EU. It aims to improve the competitiveness of the territories by meeting the objectives defined in the Lisbon strategy, while respecting the preservation of the environment for future generations. Although the EU is one of the most prosperous economic zones in the world, economic and social disparities among the member states and regions weaken the overall dynamism of the Union, and the disparities continue to grow as the EU continues to expand. Any thorough investigation should ultimately show that, while EU Cohesion Policy is somewhat effective as a catalyst for the development of domestic economies throughout the Union, it is far from perfect. Regional Policy serves primarily as a facilitator for domestic modernization processes, but cannot currently come close to guaranteeing that a given country will catch up to the economic status quo of the Union. As a result, there are two main questions that sit at the core of the effort to reform Cohesion Policy. The first question is simple: what works? The second question subsequently becomes apparent: how do we fix what doesn’t work? To find the answers to these questions, we must garner a deeper understanding of how the policy is implemented.

Part I: Who Controls Regional Funding?

Regional Policy allocates more than a third of the budget of the EU, with €347 billion at its disposal. These expenditures are dispersed in order to fulfill three main objectives: ‘Convergence’, ‘Regional Competitiveness and Employment’, and ‘European Territorial Cooperation.’ These objectives are met primarily through the involvement of three EU funds: the European Regional Development Fund (ERDF), the European Social Fund (ESF), and the Cohesion Fund.

The ‘Convergence’ objective commands the vast majority of the funding, with €282.8 of the €347 billion. It aims to speed of the economic ‘Convergence’ of the least-developed regions. ‘Convergence’ funds are supplied to regions with a per capita GDP that is less than 75% of the community average, regions with a GDP only slightly above that due to the statistical shifts caused by the enlargement of the EU (these regions are referred to as ‘phasing out’), the outermost regions. Funding can also be given to member states whose gross national income is below 90% of the EU average through the Cohesion Fund.

The ‘Regional Competitiveness and Employment’ objective aims to use Cohesion Policy to strengthen the attractiveness to competition and employment. Only the ESF and ERDF are used to fulfill this objective. The regions that fit under this objective, which commands €54.96 billion of the Regional Policy budget, include any regions not covered by the ‘‘Convergence’’ objective, any regions that are lagging behind in development but who are no longer eligible due to economic progress already achieved, which are referred to as ‘phasing-in’.

The last objective, ‘European Territorial Cooperation’, receives only €8.72 billion of the budget, and is implemented primarily through the ERDF. Regions eligible for this objective include regions lying along internal land borders and some sea borders, some trans-national zones. Some level of funding is available for the entirety of the EU territory.

Understanding how Regional Policy affects domestic development in the member countries requires understanding how the funds operate. The ERDF aims to strengthen the economic and social cohesion within the Union by correcting imbalances between the regions, financing infrastructure, job creation, investment, local development projects and aid for small firms, and is capable of intervening in all three objectives. The ESF sets out to improve employment and job opportunities in the EU through the promotion of the return of unemployed and disadvantaged groups to the workforce by financing training measures and systems of recruitment assistance, and can intervene within the framework of the ‘Convergence’ objective and the ‘Regional Competitiveness and Employment’ objective. The Cohesion fund is aimed primarily at member states whose per capita gross national income (GNI) is less than 90% of the community average.

In addition to the funds, there are also three joint initiatives that use international financial institutions and the financial sector to provide additional financing and technical expertise in the implementation of funding. These initiatives are called Financial Engineering Instruments (FEIs). These FEIs are JASPERS, which advances large infrastructure projects through aid to national and regional authorities of the ‘Convergence’ regions, JEREMIE, which aims to improve access to small to medium-sized enterprises, or SMEs, and JESSICA, which provides solutions to the financial problems of urban renewal projects and development through a combination of grants and loans.

The structural funds, the ESF and ERDF, can fund a veritable plethora of projects with a number of objectives in mind. Such projects can range from improving access to broadband infrastructures to companies in rural areas to promoting the use of new building materials that are more environmentally friendly to expansion of public transportation to rural areas. The Funds, however, outsource the management of most of their financial resources to national and regional authorities, which control 76% of the Regional Policy budget. Only 22% of the funding is controlled directly by the European Commission in Brussels, and third countries and international organizations control the remaining two percent.

Part II: How Effective is EU Regional Policy?

It is necessary to point out that EU Regional Policy has gone through a radical shift with the accession of 10 countries in 2004. Such a drastic expansion of the Union’ s population brought on the need to rapidly expand the means of dispersion for the funding, and this has been at best a rocky process. Some of the countries that have acceded have displayed a deficiency in their ability to account for funds or guarantee their effective and fair dispersal. Furthermore, the recession has put unprecedented strain on the mechanisms of Cohesion Policy. As a result of the ever-shifting political landscape, the objectives and means of the policy’s implementation must be continuously reassessed in order to assure optimal efficiency.

A 2008 budget review concluded that radical reform was necessary in a number of areas to assure the efficiency of Regional Policy. According to the European Policies Research Centre (EPRC), one of the most important conclusions to come out of the budget review is a shift in priorities in favor of competitiveness, environment, and energy. The Directorate General of Regional Policy (DG REGIO) has developed a set of key principles in light of the budget review’s analysis, which includes, amongst other things, the simplification and strengthening of funding delivery mechanisms and a greater focus on results. Should DG REGIO follow through by implementing shifts centered around these two principles, it would hopefully result in a far more efficient and accountable distribution system for regional and Cohesion Policy funding.

One of the largest debates in Regional Policy is that concerning the funding received by the wealthier states in the union; some states wish to end such funding, which they claim to be wasteful, while others believe that it is of vital importance that all member states see some benefits in order to maintain political viability. While the latter argument seems compelling from a political perspective, it seems that any regional funding that goes to such wealthier states or regions serves a primarily redistributive capacity, since those regions tend not to lack the kind of infrastructure that Cohesion Policy serves to advance. Members of European Parliament (MEPs) from wealthier states desire the ability to return to their districts and show them money that has been received by their district from the structural funds, and compliance of the parliament is essential in any reform of the distributive capacities of Regional Policy. While such funding may be unnecessary from an efficiency-oriented perspective of the matter, political hurdles may prove difficult to overcome.

Any analysis of future goals for Regional Policy must also be given some level of flexibility within the system. Over the past year, the primary task of the EU has been responding to the economic crisis, and Cohesion Policy has played a significant part in the European recovery package. Understanding of the gravity and length of the crisis are still hazy at best, and the distribution of its regional impacts is still uncertain. The relative rigidity of the framework that dictates funding expenditures has proven to be a liability in times of unforeseen economic hardship, and it has become apparent that the formation of a more efficient crisis response mechanism would be a crucial part of any budgetary reform measures.

Part III: How to Reform the System?

There is certainly no shortage in suggestions for how to reform the system to make it more efficient and effective. Amongst the reforms suggested by the EPRC are included the expansion of the portion of the budget that is allocated to research and development and radical administrative reform. They also strongly recommend that policy be applied on a case-by-case basis, avoiding any “one-size fits all” approach that has proven less than ideal in the recent past.

A further reform option posited by Alina-Stefania Ujupan of the Bureau of European Policy Advisers is that the EU should cut the “pork barrel policy” that assures “something for everyone” out of the budget, because it “contravenes the rational purpose of regional assistance to help poorer regions catch up with the more developed ones.” Ujupan also aptly discusses the need to gain some measure of the relative importance of solidarity and equity, two of the primary goals of Regional Policy. The case for reducing or eliminating funding to wealthier states has a very straightforward logical explanation, although certain wealthy member states still have poorer regions within them that are perfectly viable recipients of funds under some of the objectives. Moreover, as pointed out by the EPRC report, “legitimacy could be lost if the focus was on poorer Member States alone,” even though “the case for supporting lesser developed regions in richer Member States is weak.”

The shift in favor of research and development proposed by the EPRC is one of the best proposals for reform available, although they fail to go into much detail as to how to go about making such a shift. Increased research and development funding, however, would help to provide a solid basis for long-term growth in the poorer countries that so desperately need it. The ERDF is in charge of this category of expenditures, which falls under the ‘Convergence’ objective of Cohesion Policy. Absent any major policy shifts with regards to research and development, the ERDF should at least look into increasing its expenditures in that area.

The Barca Report, an independent report specifically commissioned by former commissioner Danuta Hübner, further suggests that all reforms be made with three criteria in mind; issues must have EU-wide relevance; projects must be approached in a “place-based nature” to avoid inefficiency and social exclusion problems; and projects must demonstrate more verifiability. The Barca Report also refers to evident weaknesses that indicate the need for reform, which include “a deficit in strategic planning and in developing the policy concept,” “methodological and operational problems that have prevented… a satisfactory analysis of ‘what works’ in terms of policy impact,” and “A remarkable lack of political and policy debate on results in terms of the well being of people… most of the attention [is] being focused on financial absorption and irregularities.” The Barca Report gives a clear-cut critical analysis of the problems confronting Regional Policy today, as well as a variety of possible approaches and perspectives that prove very helpful in the reform process.

Reform is a slow process, but a variety of sources have laid forth a very reasonable and realistic path for it to take. While the three funds have constructed a very elaborate dispensation process for regional aid funding, it is apparent that their process needs significant streamlining and needs to adopt more flexible standards of application. Streamlining the process would allow more transparency and accountability, which would, in turn, create a greater capacity for effective analysis that would spur more effective reforms. While Regional Policy may not currently perform as an optimal tool of modernization for the less-developed states in the EU, it remains too valuable a tool to discount. As such, it ought to be evident that extensive reform of the funding distribution process is by far the most viable option.

Sources:

“Roundtable on Regional Policy.” OECD Observer. Web. 01 Apr. 2010.
“Regional Policy Inforegio – Key Objectives.” EUROPA – European Commission – Homepage.
“Regional Policy Inforegio – European Regional Development Fund (ERDF).” EUROPA – European Commission – Homepage.
“Challenges, Consultations and Concepts: Preparing for the Cohesion Policy Debate.” European Policies Research Centre, Feb. 2010.
“Regional Policy Inforegio.” EUROPA – European Commission – Homepage.
“Reform Perspectives for Cohesion Policy in the Budget Review Process.” AllAcademic Research.
“Barca Report.” EUROPA – European Commission – Homepage.
“Regional Policy Inforegio – European Social Fund (ESF).” EUROPA – European Commission – Homepage.
“Regional Policy Inforegio – Cohesion Fund.” EUROPA – European Commission – Homepage.

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