1. EU REGIONAL POLICY REF: EUREGIONALPOL 2010 /FEB 23feb10

2. (1) Introduction n Aim - to overcome regional disparities in the EU and support the integration process n Structural funds (SFs) provide financial assistance to do this –invest in backward regions –encourage future growth in these regions n Effective? Sufficient funds?

3. (2) Europes regions n Concern for Europes disadvantaged regions has always been part of EU priorities. –In Treaty of Rome preamble. n Pre-1986, most spending on regions was national –Rural electrification, phones, roads, etc. n 1973, Ireland (poor at the time joined); 1981, Greece joined but no major reorientation of EU spending priorities.

4. n 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. –QMV was 71% of vote, 31% to block See graph n Structural spending increasing % of EU budget since 1980s.

5. n QMV was 71% of vote Important figure for blocking

6. Europes Economic Geography: Facts n Europe highly centralised in terms of economic activity. –CORE 1/7 th land, but 1/3 rd of pop. & ½ GDP. n Periphery has lower standard of living etc.

7. (3) Why is an EU regional policy required? n To overcome regional disparities in the EU and support the integration process n Do your own research / see presentations for recent data on –Income inequality –Unemployment inequality –Core v periphery issue See European Commission Economic and Cohesion Reports, Eurostat, UK House of Lords European Committee (module web)

8. Geographic income inequality n Within nation economic activity is very unevenly distributed

9. Why an EU policy in addition to national policy? n Controversial –interventionist n Arguments for an EU policy –Overcome market failure in EU,eg labour immobility –Counterbalance; EU policies may worsen regional imbalances, eg CAP, EMU, SEM –EU co-ordinate national policy

10. (4) Main types of funds n Structural funds (SFs) –ERDF –ESF –EAGGF (guidance) –FIFG –Cohesion fund n Others incl. –Pre accession aid

11. (5) Regional Policy Objectives & Reforms n Minor reforms pre- single market n 1989 Reforms –Linked to SEM –Principles incl: Made collaborative /EU co-ordinator Multi-annual programme additionality

12. n Agenda 2000 –2000-2006 n Aim to increase efficiency n New streamlined objective regions –6 to 3 objectives See below

13. RP Objectives 1989-99 n Objective1 regions –structural adjustment n Obj.2 regions –industrial decline n Obj 3 regions n Obj 4 regions n Obj 5 regions n Obj 6 regions 2000-06 concentration increased n Objective 1 –structural adjustment –< 75% EU GDP –70% SF here! –ERDF n Objective 2 –Regions in decline & rural areas n Objective 3 –human resource development –ESF

14. n Simplification and decentralisation n Clearer division of responsibilities n Subsidiarity emphasised n But, budget fixed at 0.46% of EU GDP

15. 2007-13 n New allocations following enlargement n Some EU15 regions now less funding (now >75%) – phase out funding n 3 objectives streamlined to 2 objectives

16. n Convergence objective 82% of expenditure –structural adjustment If < 75% EU GDP –Cohesion funds n Regional competitiveness & employment 16% of expenditure –Regions in decline & rural areas –human resource development n funds from…..

17. Issues incl. n Dependency n Additionality n Subsidiarity n Enlargement n Absorption by CEECs n Each stage of integration - different effects on regional disparities

18. (6) RP: Effective? Sufficient? n Some EU convergence across EU –Convergence v divergence (see El Agraa) –Some evidence indicates divergence –At best, narrow convergence –Convergence may be explained by Theory of Comparative Advantage n Still core-periphery disparities

19. Geographic Specialisation n Krugman index of specialisation shows most EU nations becoming more specialised. –EU economies seem to be specialising more in their comparative advantages. Source: Midelfart-Knarvik and Overman (2002)

20. Krugman index comment

21. n EU states: more specialised on a sector basis –explained by Theory of Comparative Advantage –Eg Portugal cloth, Germany pharmaceuticals…..;

22. Comparative Advantage and Specialisation Source: Midelfart-Knarvik and Overman (2002)

23. comment

24. n Federal systems (Canada & US) have lower regional disparity than EU –US - 1/2 that of EU –Convergence slow (2% pa) n Underfunding despite increased finance in 1990s –SF 0.46% of EU GDP –need ability to transfer funds between regions

25. n Aims –Realistic? Attainable? –Elimination of disparities or equality of opportunity? n Inefficiency due to problems with planning, implementation and operation (EU 1999)

26. n BUT, within EU states - greater disparities –clustering of economic activity (agglomeration, see later for economic geography theory)

27. (7) Theory n 2 major approaches linking economic integration to change in the geographic location of economic activity. n Comparative advantage suggests nations specialise in sectors in which they have a comparative advantage. –Some convergence between states n New Economic Geography & endogenous growth suggest integration tends to concentrate economic activity spatially. –Greater disparities within states

28. Agglomeration Theory n Economic geography can –help explain empirical indications –assess the effectiveness of structural policies n Agglomeration forces exist when spatial concentration of industry creates forces that encourage further concentration –positive externalities –dynamic –attract complementary factors

29. In the figure below n Curve A; agglomeration index (the ratio of the number of firms in the rich region to the total no. of firms) –Agglomeration rises, income disparities widen As firms locate in core/rich areas n Generally more profitable to produce in rich area (larger market) to benefit from economies of scale n If transaction costs between regions fall, firms will increasingly locate in the region & serve all regions

30. n Curve R; regional income inequality index (ratio of income in the rich region to the total no. of firms) n As agglomeration rises income disparities narrow –Aggm. Reduces innovation costs Raises innovation & NEW ENTRY Greater competition for firms in rich region, lower profits & reduces disparity between regions

31. n Curve S; agglomeration rises, so does innovation & growth –Agglomeration (spatial clustering) reduces cost of innovation & raises growth rates –Also, high innovation rate encourages market entry/competition, reducing profits of incumbent (concentrated in rich region), & hence reduces regional income disparities See Martin (1999) for analysis

32. Agglomeration Income inequalities Innovation rate & LR growth rate Industrial agglomeration R A S

33. Income inequalities Innovation rate & LR growth rate Industrial agglomeration R A S Equilibrium degree of agglomeration, Innovation/LR growth rate

34. Different impact of regional policy n RP may fail –EU RP often targets infrastructure to support SEM –Often unwanted & desired effects (trade- off) –Thus, need to chose policy carefully n

35. n Eg 1. SFs reduce transactions costs within poor regions (eg…………………) n Curve A shifts left A to A1 –For a given level of inequality, aggn falls –Firms attracted to poor region n Result: trade-off – aggn – inequlity!!! – Growth/innovation!!!

36. Income inequalities Innovation rate & LR growth rate Industrial agglomeration R A S x x x

37. Income inequalities Innovation rate & LR growth rate Industrial agglomeration R A S A1 x x x

38. Income inequalities Innovation rate & LR growth rate Industrial agglomeration R A S A1 x y x y xy

39. n Eg 2. No trade-off is possible –Raise innovation/growth –Reduce aggm –Reduce inequality n If SFs reduce costs of innovation –Incl. R&D, education, telecommunications (faster broadband) –less regional!! n See Martin (1999) for analysis

40. (8) Conclusion n Despite some narrowing of disparities, they still exist –Disparities within countries widening n RP linked to integration policies n Regional policy –effective? –sufficient?

41. Further reading n Baldwin & Wyplosz, J Pelkmans, S Senior-Nello (all on general reading list) n Martin (1999), Are European regional policies delivering?, EIB Papers, vol 4,2 n Amiti M, New trade theories and industrial location in the EU, Oxford Review of Econ Poliy n Krugman & Venibles (1990), Integration and the competitiveness of peripheral industry, in Bliss & Braga de Macedo (eds), Unity with diverisity in the European Economy, Cambridge Uini Press n Midelfart-Knarvik & Overman (2002), Delocation &European integration. Is structural spending justified?, Economic Policy