1. 1 REGIONAL POLICY Valanta Milliou cmilliou@aueb.gr http://www.aueb.gr/users/milliou/teaching.html

2. 2 1. Introduction 2. Justification 3. Practice 4. Regional Policy and EU Enlargement 5. Recent Developments

3. 3 1. Introduction

4. 4 Regional Policy One of the EU priorities is the existence of equal incomes and economic growth in its member-states and its regions. This is clearly stated in the preamble of the founding treaty of the EEC (Treaty of Rome, 1957): ‘need to strengthen the unity of their economies and to ensure their harmonious development by reducing the differences existing among the various regions and the backwardness of the less- favored regions.’ → Attempt to fulfill the above through the Regional Policy (RP).

5. 5 Regional Policy (cont.) More than 1/3 of the EU budget is allocated to the Regional Policy. Regional Policy:  Aims to reduce gaps in development among the regions  Works to improve disparities among the wellbeing of citizens  Helps lagging regions to… - catch up - restructure declining industrial regions - diversify the economies of rural areas with declining agriculture - revitalize declining neighborhoods in the cities.

6. 6 Regional Policy (cont.)  Seeks to generate new resources by investment  It sets job creation and the reduction of long-run unemployment as its primary concern. In other words, the Regional Policy seeks to strengthen the economic, social and territorial ‘cohesion’ of the EU.

7. 7 Inequalities in EU Europe is highly centralised in terms of economic activity:  The ‘core’ regions (W. Germany, Benelux, N.E. France, S.E. England) have 14% of the land, 33% of the population & 50% of EU GDP.  The ‘periphery’ regions have 65% of the land, 40% of the population & just 20% of EU GDP.

8. 8 Why should we be interested in the distribution of economic activities? Their distribution affects importantly the wellbeing of the EU citizens. E.g.:  The unemployment rate in the ‘periphery’ regions is much higher than the one in the ‘core’ regions. Youth unemployment rate: 134.2% in ‘periphery’ regions, 60.5% in ‘core’ regions (2001, EU27=100)  The income of the citizens in the ‘periphery’ regions is much lower than in the ‘core’ regions. More specifically: Inequalities in EU (cont.)

9. 9 2003: Average per capita national GDP (corrected for prices) relative to the average per capita GDP of ΕU25=100 Very uneven income distribution geographically. : Luxembourg 215%, Ireland 132%, Bulgaria 26%

10. 10 Inequalities in EU (cont.) 50 - 75 75 - 90 90 - 100 100 - 125  125 EUR27 = 100 <50 Income distribution even more uneven at regional level:  1/4 of ΕU27 population in 64 regions have per capita GDP below the 75% of the EU average.  13% of EU15 population have per capita GDP below the 75% of the EU average. (less even within the nations)

11. 11 Inequalities in EU (cont.) Strong regional contrasts in: -Portugal (Lisbon and the North vs. the South and Centre) -France (Paris vs. the rest) -Spain (Northeast and Madrid vs. South and West) -UK (South vs. North) -Germany (South vs. North) -Sweden (South vs. North) -Belgium (North vs. South) No regional contrasts in: - The Netherlands

12. 12 Inequalities in EU (cont.) French example: -Ile de France (Paris) has almost 1/3 of all economic activity (GDP). - Per capita incomes (not shown) are 158% of EU15 average. - Mediterranee has 10% of GDP, 12% of population. GDP/pop only 86% of EU15 average. Outre-Mer are former French colonies (poor islands in Caribbean, etc.).

13. 13 2. Justification

14. 14 Theoretical Justifications Theoretical explanations can be divided into two large groups: – Agglomeration theories and models – Dispersion theories and models

15. 15 Agglomeration Theories  Endogenous growth theory: Concentration of economic activity as a result of: - Increasing returns to scale to investment in human capital and R&D - Concentration of these factors in core areas to the detriment of the periphery - Especially as a result of economic integration A regional policy is needed in order to counterbalance this tendency

16. 16 Agglomeration Theories (cont.)  New economic geography: Concentration of economic activity as a result of: - Trade as a substitute for factor mobility - Once we allow for factor mobility, clustering is likely to occur as a result of the prevalence of agglomeration forces: - Technological externalities - Specialised labour skills and labour turnover - Firm level scale economies - Transport costs: As they fall, greater competition & dispersion forces less strong A regional policy is needed in order to counterbalance this tendency.

17. 17 Dispersion Theories  Classical Ricardian trade theory: – Factor endowment is less important – Integration leads to a rearrangement of economic activity – Investment and innovation will flow to low cost areas – Labour will flow to high cost areas – Disparities will even out and policies are not needed

18. 18 Dispersion Theories (cont.)  Neoclassical growth theories: – Investment as the only endogenous factor (technology is exogenous) – Decreasing returns to scale will lead to convergence – Even without economic integration – No need for regional policies → Economic theory is inconclusive about the territorial impact of economic integration

19. 19 Other Justifications -Equity and fairness -Efficiency (location patterns inefficient) e.g. unemployed resources, congestion - Coordination (i.e. need supranational coordination to be effective)

20. 20 3. Practice

21. 21 Short History Review 1957: The preamble of the Treaty of Rome refers to the need ‘to strengthen the unity of their economies and to ensure their harmonious development by reducing the differences existing among the various regions and the backwardness of the less-favored regions.’ 1958: European Social Fund (ESF) and the European Agricultural Guidance and Guarantee Fund (EAGGF) are established. 1965: First Commission Communication on Regional Policy: conclusions of the three groups of experts. 1968: Creation of the Directorate-General for Regional Policy.

22. 22 Short History Review (cont.) 1975: Creation of the European Regional Development Fund (ERDF). 1986: The Single European Act lays the basis for a genuine cohesion policy designed to offset the burden of the single market for the southern countries and other less-favoured regions. 1989: The European Council in 1988 overhauls the operation of the Solidarity Funds (now referred to as the Structural Funds) and allocates ECU 68 billion to them.

23. 23 Short History Review (cont.) 1992: The Treaty of the European Union designates cohesion as one of the main objectives of the Union, alongside economic and monetary union and the single market. It also establishes the creation of the Cohesion Fund to support projects in the fields of the environment and transport i the least prosperous Member States. 1994–99: The Edinburgh European Council (1993) allocates almost 200 billion ECU, one third of the Community budget, to cohesion policy. Alongside the Structural Funds, a new Financial Instrument for Fisheries Guidance (FIFG) is created.

24. 24 Short History Review (cont.) 1999: The Berlin European Council reforms the Structural Funds and adjusts the operation of the Cohesion Fund. These funds will receive over 30 billion euros per year between 2000 and 2006. 2004: On 18 February, the European Commission presents its proposals for the reform of cohesion policy for the period 2007–13: ‘A new partnership for cohesion: convergence, competitiveness, cooperation.’

25. 25 The Funds There are 5 main funds that financially support the Regional Policy of the EU. Four Structural Funds: - European Regional Development Fund (ERDF) - European Social Fund (ESF) - European Agricultural Guidance and Guarantee Fund (EAGGF - Guidance Section) - Financial Instrument for Fisheries Guidance (FIFG) And - Cohesion Fund

26. 26 The Funds (cont.) The European Regional Development Fund (ERDF): Promotes economic and social cohesion within the EU. Finances investment leading to the creation of new jobs, infrastructure improvements, local development initiatives and the activities of small and medium-sized businesses

27. 27 The Funds (cont.) The European Social Fund (ESF): Focuses on employment policy. Aims to prevent unemployment and to develop human resources. Promotes integration of the labour market.

28. 28 The Funds (cont.) The European Agricultural Guidance and Guarantee Fund (EAGGF - Guidance Section): Helps in both the development and the structural adjustment of rural areas whose development is lagging behind. Improves the efficiency of their structures for producing, processing and marketing agricultural and forest products.

29. 29 The Funds (cont.) The Financial Instrument for Fisheries Guidance (FIFG): Focuses on the structural reform of the fisheries industry to achieve a sustainable balance between fishery resources and their exploitation.

30. 30 The Funds (cont.) The Cohesion Fund: Established to provide financial contribution to projects in the fields of environment and trans-European networks. Four beneficiaries: Countries whose GNP per capita is below 90% of the EU average –Ireland –Greece –Portugal –Spain

31. 31 Priority Objectives Objective 1: Promotes the development and structural adjustment of regions whose development is lagging behind, i.e. whose average per capita GDP is less than 75% of the EU average. Covers the most remote regions (the French overseas departments, the Azores, Madeira and the Canary Islands) as well as the areas with low population density created by the Act of Accession of Austria, Finland and Sweden. Two thirds of Structural Fund operations concentrate on Objective 1. Almost 20% of the EU's total population is affected by measures taken under this Objective.

32. 32 Priority Objectives (cont.) Objective 2: Contributes to the economic and social conversion of regions in structural difficulties other than those eligible for the Objective 1. Covers areas undergoing economic change, declining rural areas, depressed areas dependent on fisheries and urban areas in difficulty. About 11.5% of the Structural funds operations concentrate on Objective 2. No more than 18% of the Union's population is covered by this Objective.

33. 33 Priority Objectives (cont.) Objective 3: Gathers together all the measures for human resource development (e.g. training) outside the regions eligible for Objective 1. The people that are eligible for financial support can be either in rich or poor regions. About 12.3% of the structural funds operations concentrate on Objective 3.

34. 34 The Community Initiatives Besides the 3 objectives, the regional policy of the EU includes a number of community initiatives. For the period 2000-06, these initiatives were: - Interreg III, which aims to stimulate cross-border, transnational and inter-regional cooperation; - Leader+, which promotes rural development; - Equal, which provides for the development of new ways of combating all forms of discrimination and inequality in access to the labour market; - Urban II, which encourages the economic and social regeneration of declining towns, cities and suburbs.

35. 35 Community Support Frameworks They lay down the general strategy for ERDF assistance in a certain number of regions within a Member-state. The Community Support Frameworks are documents approved by the Commission following appraisal of the plans presented by the interested member state. They contain descriptions of the strategy and priorities of the action, its specific objectives, the participation of the Funds and other financial resources.

36. 36 4. Regional Policy and EU Enlargement

37. 37 Number of Member-States The number of EU member-states has changed over the years. 1957: 6 Benelux, Germany, France, Italy 1973: 9 + Denmark, Irland, UK 1981: 10 + Greece 1986: 12 + Spain, Portugal 1995: 15 + Sweden, Finland, Austria 2004: 25 + Cyprus, Chech Republic, Estonia, Hungary Leetonia, Malta, Lithuania, Poland, Slovakia, Slovenia 2007: 27 + Bulgaria, Roumania ???? : ? + Ukrania,...

38. 38 2004 Enlargement The regional problems of the EU got worse with the accession of 10 new members. The new member states (except Cyprus and Slovenia) are poorer than the member-states of EU15.

39. 39 2004 Enlargement (cont.) Difficulties that arise: –The cost could increase significantly. –Some poor regions of the EU15 now appear relatively rich: → The entry pushes the per capita GDP above the average of EU25.

40. 40 2004 Enlargement (cont.) Most of the new member-states have a per capita GDP lower than the 75% of EU25. Some regions which with the enlargement exceeded the 75% of EU25 and were in danger of loosing the status of being regions of Objective 1 (“statistical effect”): Since the 2000-06 programme was “locked” their funding was not affected.

41. 41 5. Recent Developments

42. 42 2007-13 Programme 2004: On 18 February, the European Commission presents its proposals for the reform of cohesion policy for the period 2007–13: ‘A new partnership for cohesion: convergence, competitiveness, cooperation.’ 308 billions euros for the regional policy of the new period. 51.3% will go to the new memeber-states.

43. 43 Objectives Convergence: support employment growth and job creation in the Member States and least developed regions This objective will involve primarily the regions in which GDP per inhabitant is less than 75 % of the Community average (84 regions). To counter the ‘statistical effect’ of the enlargement, temporary support is proposed for the regions in which GDP per capita would have been less than 75 % of the Community average calculated for the EU15 (16 regions). 81.5 % of the budget for regional policy. Member-states whose GDP is less than 90 % of the EU average will be eligible for the Cohesion Fund, which will continue to finance programmes in the areas of transportation and the environment.

44. 44 Objectives (cont.) Regional competitiveness and employment: anticipate and encourage the change The regional policy outside the most disadvantaged member-states and regions will have two fundamental objectives: 1.It will use the regional programmes to assist regions and regional authorities to anticipate and promote economic change in industrial, urban and rural areas and to strengthen their competitiveness and attractiveness. 2. It will use national programmes to assist people in preparing and adapting to economic development in keeping with the priorities established in the European strategy for employment by supporting policies targeting full employment, the quality and productivity of work and social integration. 168 regions and 16% of the budget for regional policy.

45. 45 Objectives (cont.) European territorial cooperation: ensure harmonious and balanced development throughout the entire Union On the basis of the experience acquired in the Interreg initiative, the report calls for the pursuit of a policy promoting harmonious and balanced integration through the territory of the EU by supporting cooperation at cross-border and transnational level. Cross-border cooperation would involve in principle all regions adjacent to internal or external land or maritime borders. This involves essentially the search for common solutions to common problems by means of cooperation among the responsible authorities of neighbouring bodies involved in such areas as the development of urban, rural and coastal areas, strengthening economic relations and networking small and medium-sized enterprises. 2.5% of the budget for regional policy.