Second Report on Economic and Social Cohesion: conclusions and recommendations

1) OBJECTIVE

To analyse the socio-economic progress made by the EU's less developed regions and the factors likely to stimulate further such advances in a European Union of 27 members, and to open the debate on the future shape of EU cohesion policy.

2) ACT

"Unity, solidarity and diversity for Europe, its people and its territory" - the Second Report on Economic and Social Cohesion, 31 January 2001 [COM(2001) 24 final - Not published in the Official Journal].

3) SUMMARY

1. Every three years, the Commission submits a "report on the progress made towards achieving economic and social cohesion and on the manner in which the various means have contributed to it" (Article 159 of the Treaty). This report is, where relevant, "accompanied by appropriate proposals".

2. Following the first Cohesion Report at the end of 1996, the Second Report was presented to delegates at the Cohesion Forum on 21 and 22 May 2001 in Brussels. It brings the statistical data for the regions and the Member States up to date to provide a snapshot of economic and social development within the EU.

3. Since data is now available for the applicant countries in most of the relevant fields as well, the report also provides the very first glimpse of the likely economic and social situation in the Member States and regions of a 27-member EU. Without anticipating when and how the new members will join, the report also presents a series of conclusions and recommendations designed to spark a public debate on what form cohesion policy should take in the enlarged EU. It is these conclusions that are described in this factsheet.

4. The analysis of the socio-economic situation in the EU's Member States and regions shows the notable successes chalked up by EU cohesion policy, especially in the poorest regions. In reforming its regional policy by 2006, the EU will have to bear in mind a number of issues:

• the considerable widening of socio-economic and spatial disparities that will be caused by enlargement;
• globalisation in trade, the EU economy's shift towards more knowledge-based activities and demographic trends;
• the need to improve the performance of EU regional programmes and raise public awareness of them, while also ensuring that other EU policies also help its less developed regions make up their socio-economic deficit.

5. The following sections contain a number of questions and options intended to prepare the ground for a full and frank debate on the future shape of cohesion policy in the enlarged EU. They are intended to ensure that this debate revolves more around the substance of policy than questions of financing.

PROMOTING THE FACTORS CRUCIAL FOR CONVERGENCE

6. Under its cohesion policy, the EU finances measures identified as likely to reduce socio-economic and spatial disparities in the EU. Since a system based on tax transfers alone would not be sufficient for this task, EU action must be concentrated on those factors of competitiveness likely to close some of the wide gaps between different parts of the EU.

7. Productivity - determined by factors including quality of human resources, levels of physical infrastructure and capacity for innovation - is a key driver in the process of growth and convergence. For example, economic development is dependent on the existence of reasonable levels of physical infrastructure (transport, business services, etc.). In the EU, the foundations of long-term growth will be laid through investment in skills and modern communications technology, enhanced by business' capacity for innovation. It is the task of EU cohesion policy to create a climate in which local economies in less developed regions can fully grasp the opportunities available in the single market. All such efforts should, moreover, be guided by the principle of sustainably managing natural resources.

PRIORITIES FOR ECONOMIC AND SOCIAL DEVELOPMENT

8. Currently action under the cohesion policy is targeted on several economic and spatial problems that fall within the numerous fields under the EU remit:

• least developed regions - still the top priority for EU cohesion policy, given the persistence of regional disparities in income and development (set to be further widened by enlargement).
• urban development - this issue lies at the heart of economic, social and spatial change. Towns and cities embody strategic potential for balanced and sustainable development. The main challenges they face are manifold internal disparities, the pressure they exert on the environment and their role as engines of growth for the surrounding area.
• diversification of rural economies - this, together with the nature of the town-country relationship, will condition how the rural areas adapt to a changing world. With agriculture no longer a major employer, the task is to revive the countryside and stop the drift of people to towns by promoting a pattern of development likely to foster new competitive activities, especially in the service sector.
• cross-border, transnational and interregional cooperation - to promote integration and reduce the economic fragmentation caused by national borders. Enlargement will increase the need for cross-border activities to further cooperation between old and new Member States.
• post-industrial economic restructuring - this will continue to be a priority for cohesion policy in future. EU support is needed to counter job losses in sectors such as textiles, automobiles and heavy industry and stimulate the development of new activities.
• areas with major geographical or natural handicaps - principally the outermost regions, islands and mountainous areas - these areas face considerable barriers to integrating with the EU economy on account of the extra costs imposed by their situation. They are also dogged by depopulation induced by lack of economic opportunities, and need structural assistance to promote development.

9. The cohesion policy priorities relating to employment must both tackle current problems and anticipate future needs. These priorities are:

• more and better jobs - current low rates of job creation within the EU can be improved by taking a more strategic approach to creating employment and anticipating trends in industrial change;
• nurturing the new economy and the knowledge economy - to counter the possible emergence of a digital divide with its in-built risks of social exclusion, it is essential to improve systems of education, training and lifelong learning and broaden access to information technology;
• encouraging social integration and combating poverty and social exclusion, which are still at unacceptable levels in the European Union;
• promoting equal opportunities and fighting all forms of discrimination, which lead to a waste of talent.

10. In future, cohesion policy must take a broader and longer-term view. Building on the achievements of the European Spatial Development Perspective (ESDP), the Commission intends to promote balanced development throughout the EU and is planning to put forward a spatial development strategy that could form the basis of future policy in this field.

OVERHAULING THE DELIVERY SYSTEM FOR COHESION POLICY

11. The Agenda 2000 reform of the Structural Funds improved the management systems for cohesion policy. Now, though, more fresh thinking is needed on the ways the policy is implemented: enlargement is just round the corner, priorities have been revised and programmes need to be more effective. At this stage, all we can do is look at the core issues and propose a set of solutions. In 2004, the third Cohesion Report will clarify future delivery methods for the policy.

12. The sections below address the following: (a) targeting/concentrating limited resources in the enlarged EU (b) the particular challenge of enlargement in the current programming period and (c) cohesion policy after 2006 in the enlarged EU.

A - Targeting limited resources in the enlarged EU

13. The next generation of cohesion policy will apply not just to parts of the new members but also to those regions in existing members where serious economic and spatial disparities persist. The basic principle must be the same as in the past, i.e. to concentrate limited resources on a reduced number of areas where action at EU level can help or on priority geographical areas, with the goal of building a critical mass of financing so that meaningful progress can be made. The programmes need to be refocused.

14. Top priority for funding is still given to underdeveloped regions, and the best way to concentrate resources in such areas is via the direct zoning method, on account of the objectivity and transparency it offers. This method combines the criteria of GDP per capita (measured in purchasing power standards, or PPS) with the level at which the assistance is delivered (measured in statistical territorial units - the NUTS system).

15. Currently, eligibility for assistance is determined by per-capita GDP levels (areas with less than 75 % of the EU average qualify). In future, two considerations will have to be borne in mind:

• by simple mechanical effect, applying this criterion after enlargement would cut by more than half (in terms of population) the regions eligible for Objective-1 assistance in the pre-enlargement members. This raises the question of how to treat the regions in these countries, whose situation will notionally improve relative to the newcomers although their problems remain.
• post enlargement, the disparities between the underdeveloped regions themselves will be more marked than at present, with some having per-capita income a quarter of the EU-27 average.

16. We therefore need a radical rethink of the advantages and disadvantages of the methods used to determine eligibility for structural assistance in the current programming period. For example:

• direct regional targeting is used for Objectives 1 and 2, with the Commission drawing up in advance a restricted list of eligible areas. This system enables assistance to be concentrated objectively and transparently on the really deprived regions but it lacks the flexibility to respond changing socio-economic conditions in these regions;
• indirect regional targeting is used for the Urban and Leader + Community Initiatives. The Member State governments determine the eligible areas using criteria set in advance by the Commission. This system is more flexible than the one above and could resolve some of the problems associated with the Commission's role in the designation of eligible areas. With this method, the criteria are designed to concentrate funding at levels that can make a real impact;
• horizontal targeting is used for Objective 3 programmes. Funding for investment in human capital is programmed at national level.

17. In the light of the above, assistance for underdeveloped regions could be delivered according to one of the four following methods:

• applying the current criterion (per-capita GDP below 75 % of EU average), regardless of the number of new Member States. This approach would automatically exclude many regions in the old members from funding, leaving them dependent for future assistance on other EU programmes (i.e. not those aimed specifically at underdeveloped areas), eligibility for which is subject to different priorities and criteria;
• applying the existing 75 % criterion as above, but including a transitional or "phasing-out" stage for EU-15 regions that are no longer eligible. This would be all the more generous, since the per-capita GDP of these regions would be close to the eligibility limit;
• raising the eligibility threshold above 75 %, to mitigate or eliminate altogether the automatic disqualification from eligibility of certain EU-15 regions, without maintaining eligibility for regions that would no longer have been underdeveloped in the old 15-member EU;
• having two separate eligibility criteria: one for EU-15 regions and another for those in the applicant countries. This would have the de facto effect of creating two distinct categories of aid recipient. The concentration of EU funding would depend on levels of prosperity in each region.

18. One way of accommodating the increase in income disparities among the EU's least developed regions in the wake of enlargement would be to set a specific part-financing rate that takes account both of prosperity and fiscal capacity in the poorest Member States.

19. Other issues are also worthy of consideration:

• should employment rate be added to the criteria already in use (population, regional and national GDP, unemployment)?
• if structurally insufficient, could levels of actual convergence achieved by the eligible regions be included in the criteria for allocating funds?
• should the link between financing levels and programme results be increased by placing more funds in the performance reserve?

20. The EU's poorer regions are not the only areas with development problems. Cohesion policy will also have to provide support for other parts of the EU that are facing an ongoing process of fundamental structural change. With resources limited, efforts will have to be concentrated to build up a critical mass of funding to produce genuine results.

21. For these regions, the indirect zoning method would have the advantage of encouraging such concentration, as witness the experience of the Urban and Leader + Community Initiatives. The Commission would simply to set a minimum level of concentration for EU and national government subsidies -programming in the various priority fields would then be carried out from a budget allocated to each Member State on the basis of the relevant socio-economic indicators.

22. Given the promising results they achieved with specific structural programmes between 1995 and 1999, and their strategic importance for enlargement, the EU's border regions could be included in the mainstream Structural Fund programmes.

B - The particular challenge of enlargement in the current programming period

23. In preparing for accession, the applicant countries have already started familiarising themselves with the management procedures for the Structural Funds, in particular through the Phare programme. An significant proportion of the budget for this programme is used for medium-term Objective 1-style measures which are preparing the way for day when EU assistance will be programmed under the Structural Funds.

24. The concept of regional development is a novelty for the authorities in the applicant countries. Decentralised management of aid programmes is also new, and raises the question of how well equipped the administrations in these countries are to handle and manage EU financing. This heightens the importance of the institution-building process in the prospective members, which aims among other things to:

• create a national-level policy by establishing a qualified administrative framework with the relevant administrative procedures;
• promote decentralisation by consolidating democratic institutions, developing partnerships and boosting economic effectiveness;
• determine a development strategy that will promote balanced growth.

25. It is now highly likely that some of the applicants will join before 2006. This scenario was not factored into the EU's forward budget planning schedule under Agenda 2000 for 2000-2006, confirmed at the 1999 Berlin European Council. Since structural funding will have to be made available to the new members as soon as they join, one solution could be to introduce a transitional or phasing-in stage, with transfers increasing progressively over time.

26. In this scenario, how would funding be divided between the Cohesion Fund and the Structural Funds? The former would replace ISPA and the latter Phare and Sapard. Given the requirements of the applicant countries in terms of transport and environmental infrastructure, a reasonable budget for the Cohesion Fund in the enlarged EU would seem to be around one third of all future EU cohesion funding. What is more, unlike the Structural Funds, the Cohesion Fund involves management at project level, which may be more suitable for civil services still lacking experience of programming and managing EU funding. And it also allows for high levels of part-financing without the need to comply with the additionality principle.

C - Cohesion policy after 2006 in the enlarged EU

27. The structural reforms introduced under Agenda 2000 led to a number of improvements such as extending decentralisation, a greater emphasis on partnership and evaluation and tighter management and financial-control practice based on a clearer division of responsibilities between Member State and Commission. While an in -depth study of how these changes have impacted on EU cohesion policy will have to wait until the next Cohesion Report is produced, some facts are already clear:

• the decentralisation of decision-making processes is progressing well as far as national and EU policies are concerned. The role played by regional and local authorities and local interests should be enhanced by the greater emphasis on working in partnership and especially by the increase in local-level programming where suitable.
• programming could be split into a two-level process, with the Commission devising overall strategy and identifying priorities for EU-level action and the actual programming carried out at the appropriate level (transnational, regional, local, urban, etc.).
• the application of the additionality principle, which requires that EU funding supplement rather than replace financing by national governments, could be reviewed. While its value in making EU cohesion programmes more effective is no longer in doubt, the problem is that it is applied not to individual programmes but rather all programmes under a single Objective in a given Member State, causing a lack of transparency. Compliance with additionality rules can be verified at programme level rather than nationally, especially in the less developed regions.
• the link between programme budgets and performance evaluation should be strengthened.

28. To increase consistency, the Cohesion Fund and the Structural Funds could be brought together into a single system. For example, the Cohesion Fund would be the sole channel for investment support for environmental and transport infrastructures, regardless of geographical area.

29. What is the financial outlook for cohesion policy in 2006 and beyond? The Second Cohesion Report highlights the more acute need for development assistance in the post-enlargement EU. While resources will be concentrated on the new members, the persistent problems of the existing members cannot be ignored.

30. Under Agenda 2000, the original Commission proposal for 2000-06 was for financing to maintain the levels reached in 1999, i.e. a cohesion policy budget equal to 0.46 % of EU GDP. At the Berlin European Council, the budget for structural measures was set at 213 billion over seven years (2000-2006). To this must be added pre-accession assistance worth 3 billion annually, the amounts set aside for countries joining before 2006 and the planned budgets for the new Member States. Altogether this equates to 0.45 % of projected GDP in the enlarged EU of 21 Member States in 2006.

31. The rules on financing for the 2000-2006 period state that in a given year no Member State may receive transfers under the Structural and Cohesion Funds worth more than 4 % of its national GDP. This cap will have serious implications for the poorest of the new members, called on to make efforts to meet the need for more balanced development and at the same time bear in mind their capacity to absorb funds.

32. Pre-accession assistance, adapted where necessary, should be continued for the countries applying to join on 1 January 2007.

33. For more information on the Second Cohesion Report, see the following:

• the full report on the Commission's INFOREGIO website (January 2001);
• the transcripts of the debates held at the Cohesion Forum;
• the SCADplus factsheet on the situation and trends in economic and social cohesion during the1995-1999 period;
• SCADplus factsheet on the 10 questions for the debate on tomorrow's regional policy.

Last updated: 20.04.2004