The EU Regional Policy

Introduction

The EU regional policy is a critical instrument of financial solidarity and an extremely powerful force for economic cohesion and integrity. Through establishment of solidarity, tangible benefits are brought to citizens in regions that are not well-off. Cohesion underlies the crucial principle that everyone in the EU community should benefit from narrowing of income and wealth gaps between various regions.

Large differences in levels of prosperity exist both within and between EU countries. In terms of GDP per capita, the most prosperous regions are all urban – Brussels, London and Hamburg. Luxembourg, the wealthiest country, is seven times richer than Bulgaria and Roman, the newest and poorest EU members.

Membership to the EU comes with many dynamic and beneficial effects, especially when it is coupled with a properly planned and executed regional policy. For example, Ireland’s GDP was only 64% that of the EU average when it joined the EU in 1973. Today, the country has one of the highest GDP (the standard measure of well-being) in the EU. One of the key priorities of regional policy is to improve the living standards in all the countries which have joined the union since 2004 in order for them to attain the EU average within the shortest possible time.

The regional inequalities that exist in the EU are as a result of long-standing economic, social and cultural handicaps. These disadvantages are as a result of social deprivation, inadequate infrastructures and high level of joblessness. In some EU member states, the handicap is partly a legacy of their previously centrally-planned economic systems.

The EU regional policy mainly involves investing in people. The EU has been using the entry of new countries as an opportunity to reorganize and restructure systems of regional spending. Between 2007 and 2013, 36% of the EU budget goes into regional spending. In terms of cash, this represents an expenditure of 350 billion Euros. This effort is always focused on three main objectives: competitiveness, convergence and cooperation, which constitute what is now referred to as Cohesion Policy.

The aims of the EU regional policy

The EU, being much more than a common market, is based on policies and values that are agreed upon by its member states for its people’s benefit (Schout & Jordan 2007, 841). Attaining regional equity in distribution of income and wealth is one of the fundamental objectives laid down in the European Commission Treaty. This objective is being pursued through the achievement of economic and social cohesion, a measure that has been responsible for reduction of disparities between regions.

Forty three percent of EU’s economic output is generated in only 14% of its regions: Hamburg, London, Munich, Paris and Milan. These territories are home to about a third of the union’s population. The money that is set aside for the regional policy is always channeled through three the cohesion policy’s instruments: the Cohesion Fund, European Regional Development Fund, and the European Social Fund.

The EU cohesion policy’s added value is considerable. The cohesion policy is responsible for supporting the much-needed investments in human resources, infrastructure, human resources, diversification and modernization of regional economies. It also contributes to more jobs and growth in poor member states and regions. These states end up achieving above-average economic growth and employment performance. They also end up being better equipped in order to catch up faster with the average EU GDP level. It would be difficult for such a level to be achieved without the investments that are being pumped into the regional policy.

The Cohesion policy also facilitates the task of ‘levering in’ and safeguarding compliance with other policies of the EU- environment, state aid, the information society and support for innovation. Moreover, it improves and modernizes all public administrations while enhancing transparency. This fosters good governance within all member states and regions. In the past, the policy has been crucial for purposes of aiding poorer member states to develop beyond the EU’s average. In the years to come, the regional policy appears poised to continue generating more success stories from the economic development trends of new members of the union.

The regional policy is also an effective tool of turning emerging challenges into opportunities (Prange 2008, p. 46). The challenges of globalization, population ageing and climate change do not stop at institutional, national, and policy borders. Instead, they have direct impact on local and regional communities directly and to varying degrees. It is difficult for Europe’s competitiveness to be achieved through the policies of individual states and regions alone. Economic success is a crucial social process for which the element of close cooperation is necessary. The European Union’s regional policy is designed in a manner that ensures that people are involved in the process of designing and implementing various regional development strategies. This ensures that only viable local projects that are of significance to the region are funded the cohesion policy’s money for the benefit of Europe as a whole.

The priority focus for the regional policy is on East and Central European members plus all other regions of all the other EU states with special needs. Fifty one percent of the Union’s regional spending between 2007 and 2013 will be shared among the 12 member states that have joined the EU since 2004. The fact that this represents only a quarter of the total EU’s population underscores the commitment by the policy’s implementers to ensure that the gap between the rich and poor EU member states is bridged.

The bulk of regional spending is always reserved for regions whose GDP is below 75% of the EU’s average (Orbie 2008, p. 87). This is aimed at helping improve their infrastructures as well as develop their human and economic potential. This category of funding concerns 17 out of the 27 EU member countries. Meanwhile, all the 27 countries qualify for funding in support of innovation and research, job training, and sustainable development. Each of the 27 countries points out its less developed areas and directs the funds here. A small amount of the regional policy fund is used in inter-regional and cross-border cooperation projects.

Creation of growth and jobs

There are many ways in which the EU regional policy promotes growth and jobs. One of these ways is through making regions and countries more attractive and viable for investments. This is done by improving accessibility, preserving environmental potential and providing quality services. Growth and jobs are also promoted through encouraging the development of a knowledge economy, innovation, and entrepreneurship through development of effective information technologies. When better jobs are created, more people are attracted into employment. This also improves workers’ adaptability while at the same time increasing human capital investment.

Attracting investors

The cohesion policy of the EU has been helping to boost regional economies by supporting SMEs (small and medium-sized enterprises) and attracting outside investment (Puga 2008, p. 380). Through attraction of investors, the productive capacity of various regions is increased. Those regions that lag behind are given an opportunity to catch up with their well-off neighbors.

Every year, about 1.2 million enterprises are created within the EU. This represents a 10% increase in the total number of businesses in the union. However, it is disheartening that only a half of them survive for five years. Meanwhile, there are very big differences across different EU regions. For example, in Spain, Italy and United Kingdom, new SMEs are created twice as often as the EU average.

The EU foreign policy has been a major contributor to a holistic approach to investment, especially in ‘convergence’ member states, whereby it can account for as much as 20% of the total gross fixed capital of these states. In cohesion and structural funds, emphasis is always on supporting ways through which SMEs can be created and modernized. In this regard, attention is put on those SMEs with less than 250 employees and an annual turnover not exceeding 50 million Euros.

SMEs are considered the real giants of the EU economy, since they account for 99% of all the businesses that exist in the region. Two-thirds of all the existing private-sector jobs are provided by SMEs. In countries such as Italy and Poland, businesses with less than 10 employees have dominated the labor market.

However, SME’s face the difficulty of accessing capital, knowledge and experience (Becker 2008, p. 16). The EU regional policy is aimed at tackling these difficulties. This is achieved through a combination of different ‘soft’ measures such as provision of training services and ‘hard’ measures such as direct investment. Other ‘soft’ measures that are undertaken by the regional policy include provision of business support services, financial engineering, innovative environment and creation of clusters and networks.

EU member countries, especially those that joined the union in 2004, have been quite successful in attracting investors from foreign countries. However, considerable differences in national performances still exist. For example, in Bulgaria and the Czech Republic, Foreign Direct Investment (FDI) was 9% of the GDP. On the other hand, in Estonia, Latvia and Slovenia, it was 11%, 4% and 2% respectively.

Another concern is that FDI tends to be heavily concentrated in large capital cities and surrounding areas. This reinforces regional disparities rather than reducing them. The potential factors that investors consider in choosing to invest their money in a particular region include proximity to the country of the investment’s origin, a common language, labor costs, and corporate taxation. Although the regional policy cannot exert an influence in all these factors, it can make a remarkable difference in order to improve the attractiveness of a region. This attractiveness is being brought about by education of the workforce, increasing accessibility, information technologies. Additionally, there is more spending in research and innovation.

Towards the achievement of this end, the programmes of the cohesion policy will be implemented through a specially designed budget whose allocation of funding is divided into three areas: direct investment in firms, entrepreneurship and human capital. Twelve percent of the allocation is being implemented in direct investment in firms. Priority is given to those firms that have links with research and innovation, eco-friendly production and technology transfer.

In the area of entrepreneurship, 13% of the total allocation is dedicated to adaptation of information and communication technologies; workers, entrepreneurs and enterprises. In human capital development14% of the total budgetary allocation is sunk into efforts aimed at contributing to an increase in the qualification level of local and regional workforce.

Instruments of the EU regional policy

There are three main instruments of EU regional policy. These include the ERDF (The European Regional Development Fund), ESF (The European Social Fund) and the Cohesion Fund. The ERDF covers programs that involve innovation, general infrastructure and investments. ERDF money is provided to the poorest regions within the EU.

The ESF is meant for paying for vocational training projects and many other kinds of job creation and employment assistance programs. Just like in the case of the ERDF, all EU member states are eligible for ESF assistance. On the other hand, the Cohesion Fund is meant for transport and environmental infrastructure projects. It is also responsible for the development of renewable energy. Only countries with less than 90% of the union’s average qualify for this funding. This means that all the 12 newcomers plus Greece and Portugal, which benefited from the operations of the Cohesion Fund, are being left out of this source of funding.

The instruments are aimed at providing assistance that is complementary to national action, including policy interventions at local and regional levels. The European Commission together with the member states have to ensure that assistance from these Funds is always consistent with the policies, activities and priorities of respective communities. In order for the instruments to work, the activities need to be complementary to other community-based financial instruments.

The strategic approach regulation stipulates the manner in which a regional policy should be adopted in pursuit of regional development objectives. In this regard, each member state is always required to present a ‘national strategic reference framework’ for use in preparing the programming of all the funds. This ensures that all the assistance obtained through these funds is consistent with the union’s strategic guidelines.

Many additional measures have been put in place in order to ensure that the regional policy instruments are successful in addressing regional economic imbalances. For instance, the European Employment Strategy (EES) and Broad Economic Policy Guidelines are crucial reference points in the process of facilitating proper implementation of the strategic guidelines

The efficient functioning of the various EU regional policy instruments is clearly spelt out in various operational programs. Each EU member state is required to draft an operational program that covers the duration between 1 January 2007 and 31 December 2013. These operational programmes focus on just one of the three set objectives and receive funding from only one of the three EU regional policy instruments (Funds). The European Commission appraises every program in order to determine whether it contributes to the regional development agenda.

The objectives of Convergence and Regional Competitiveness and Employment are often emphasized whenever related operational programmes are being drawn. Some of the objectives include a financial plan, a justification for the priorities and a list of major related projects. Another key objective is information on priority areas as well as their specific objectives.

Compared to the 2000-2006 programme, the 2007-2013 programme has bee simplified at both the policy level and at the operational level. At the policy level, every member state is required to prepare a document that is based on the Community strategic guidelines that have been approved by the European Commission’s council. This purpose of this document is to serve as the framework for preparing other programs. At the operational level, the Commission is tasked with the approval of programs on the basis of the strategic reference framework that has been set out at the national level.

Other key areas of the EU regional policy’s instruments include financial management and technical assistance. In terms of financial management, the policy requires operational programmes for each Fund and objective to be made annually. Additionally, the first budget has to be made before the European Commission has adopted the decision to approve operational programs of member states. In terms of technical assistance, the Funds can be used to finance preparations, administrative, monitoring and technical support, audit, evaluation and inspections that are necessary for the implementation of the regional development objective.

Conclusion

The EU Regional Policy is an excellent avenue through which new EU member states can be integrated into the European market. The regional policy’s aim of attaining equity in distribution of income and wealth is being realized. Today, thanks to the instruments of the EU regional policy, the objectives of economic and social cohesion are being achieved.

The imbalances in development between capital cities and the surrounding areas on the one hand and the rural areas on the other are being addressed by the ‘2007-2013 programme’. New EU member countries that are poor such as Greece, Turkey and Bulgaria have been able to attract foreign direct investment. Additionally, SMEs have flourished, leading to creation of new jobs the attainment of the EU’s GDP average.