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REGIONAL POLICY

REGIONAL POLICY. Valanta Milliou cmilliou@aueb.gr http://www.aueb.gr/users/milliou/teaching.html. 1 . Introduction 2. Justification 3 . Practice 4. Regional Policy and EU Enlargement 5. Recent Developments. 1 . Introduction. Regional Policy.

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REGIONAL POLICY

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

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

  3. 1. Introduction

  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): ‘needto strengthen the unity of theireconomies and to ensure their harmoniousdevelopment by reducing the differencesexisting among the various regions andthe backwardness of the less-favoredregions.’ → Attempt to fulfill the above through the Regional Policy (RP).

  5. Regional Policy(cont.) More than 1/3 ofthe 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. 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. 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. Inequalities in EU(cont.) 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:

  9. Inequalities in EU(cont.) 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. Inequalities in EU(cont.) <50 EUR27 = 100 Income distribution even more uneven at regional level: 50 - 75 75 - 90 90 - 100 100 - 125  125 • 1/4 of ΕU27 population in 64 regions have per capita GDP below the 75% of the EU average. • 13% of EU15population have per capita GDP below the 75% of the EU average. (less even within the nations)

  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. 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. 2. Justification

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

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

  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 occuras 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 & dispersionforces less strong A regional policy is needed in order tocounterbalance this tendency.

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

  20. 3. Practice

  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. 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 in1988 overhauls the operation of theSolidarity Funds (now referred to as theStructural Funds) and allocates ECU 68 billionto them.

  23. Short History Review (cont.) 1992:The Treaty of the European Uniondesignatescohesion as one of the main objectives of theUnion , alongside economic and monetary unionand the single market. It also establishes thecreation of the Cohesion Fundto supportprojects in the fields of the environment andtransport 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 FinancialInstrument for Fisheries Guidance (FIFG) iscreated.

  24. Short History Review (cont.) 1999:The Berlin European Council reforms theStructural Funds and adjusts the operation of theCohesion Fund. These funds will receive over30 billion euros per year between 2000 and2006. 2004: On 18 February, the EuropeanCommission presents its proposals for thereform of cohesion policy for the period 2007–13: ‘A new partnership for cohesion:convergence, competitiveness, cooperation.’

  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. The Funds (cont.) The European RegionalDevelopment Fund (ERDF): Promotes economic and social cohesionwithin the EU. Finances investment leading to thecreation of new jobs, infrastructureimprovements, local developmentinitiatives and the activities of small andmedium-sized businesses

  27. The Funds (cont.) The European Social Fund (ESF): Focuses onemployment policy. Aims to preventunemployment and to develop humanresources. Promotes integrationof the labour market.

  28. The Funds (cont.) The European AgriculturalGuidance and Guarantee Fund(EAGGF - Guidance Section): Helps in both thedevelopment and the structural adjustmentof rural areas whosedevelopment is laggingbehind. Improves the efficiencyof their structures forproducing, processingand marketingagricultural and forestproducts.

  29. The Funds (cont.) The Financial Instrument forFisheries Guidance (FIFG): Focuses on thestructural reform ofthe fisheries industryto achieve asustainable balancebetween fisheryresources and their exploitation.

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

  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. Priority Objectives (cont.) Objective 3: Gathers together all the measures forhuman resource development (e.g. training) outside theregions 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. 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 newways of combating all forms of discrimination andinequality in access to the labour market; - Urban II, which encourages the economic and socialregeneration of declining towns, cities and suburbs.

  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. 4. Regional Policy and EU Enlargement

  37. Number of Member-States The number of EU member-states has changed over the years. 1957: 6Benelux, 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. 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. 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. 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 2000-06programme was “locked” their funding was not affected.

  41. 5. Recent Developments

  42. 2007-13 Programme 2004: On 18 February, the EuropeanCommission presents its proposals for thereform 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. Objectives Convergence: support employment growthand job creation in the Member States andleast 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 oftransportation and the environment.

  44. Objectives (cont.) Regional competitiveness andemployment: anticipate and encouragethe change The regional policy outside the most disadvantaged member-states and regions will have two fundamentalobjectives: • It will use the regionalprogrammes to assist regions and regional authorities toanticipate and promote economic change in industrial,urban and rural areas and to strengthen theircompetitiveness and attractiveness. • It will use nationalprogrammes to assist people in preparing and adapting toeconomic development in keeping with the prioritiesestablished in the European strategy for employment bysupporting policies targeting full employment, the quality and productivity of work and social integration. 168 regions and 16% of the budget for regional policy.

  45. Objectives (cont.) European territorial cooperation: ensureharmonious and balanced developmentthroughout the entire Union On the basis of the experience acquired in the Interreginitiative, the report calls for the pursuit of a policypromoting harmonious and balanced integration throughthe territory of the EU by supporting cooperation atcross-border and transnational level. Cross-bordercooperation would involve in principle all regions adjacentto internal or external land or maritime borders. Thisinvolves essentially the search for common solutions tocommon problems by means of cooperation among theresponsible authorities of neighbouring bodies involved insuch areas as the development of urban, rural and coastalareas, strengthening economic relations and networkingsmall and medium-sizedenterprises. 2.5% of the budget for regional policy.

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