Second Report on Economic and Social Cohesion - an assessment

1) OBJECTIVE

To analyse the progress made in terms of economic and social cohesion and the factors likely to stimulate such development in a European Union of 27 members and to open the debate on the future shape of European 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

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".

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 the state of economic and social development within the EU.

Since data in almost all the relevant fields is now available for the applicant countries as well, this report also provides the very first glimpse of the state of economic and social development in the Member States and regions of a 27-member EU. It consists of the following:

• an assessment of economic, social and spatial cohesion;
• an analysis of the contribution made by other EU and national policies to improving cohesion;
• conclusions and an assessment of the outlook for cohesion policy.

Without anticipating when and how the new members will join, this document also presents a series of conclusions and recommendations aimed at sparking a public debate on the future shape of cohesion policy in an enlarged EU. While enlargement has undoubtedly provided the main impetus for the imminent reforming of EU regional policy, radical developments in the economic, social and spatial spheres have also played their part. For example, the move towards a society based on knowledge and modern communications technology.

I - SITUATION AND TRENDS

Narrowing of income disparities in the EU-15

Per capita income disparities between Member States and (particularly) regions in the EU remain considerable. The 10 % of the population living in the most prosperous regions are 2.6 times better off than the 10 % from the poorest regions.

Despite this picture, the gap has been narrowing. In the three poorest Member States (Greece, Spain and Portugal), average per capita income rose from 68 % of the EU average in 1988 to 79 % in 1999. Disparities between regions have proved more resistant to improvement, partly because the gaps between regions within some Member States have widened.

Step change with enlargement

The enlargement of the EU is set to change the economic landscape significantly. First indications are that this will lead to a doubling of the income gap in the EU. The 27 Member States in the enlarged EU are likely to fall into three broad groups:

• the most well-off countries - 12 of the existing members - in which income levels are above the EU-27 average;
• a middle group composed of the three remaining current members (Greece, Spain and Portugal) together with Cyprus, Malta (subject to statistical confirmation), Slovenia and the Czech Republic, in which income levels approach 80 % of the average;
• a third group containing the 8 remaining applicant countries, in which per capita income is around 40 % of the average and which will account for some 16 % of the EU population.

Given the rate of improvement achieved so far under cohesion policy, wiping out regional imbalances in the current EU alone will take an entire generation - for the enlarged EU at least twice as long will be needed. In sectors such as transport infrastructure, for example, the investment needed to create trans-European networks in all the applicant countries will run to 90 billion over the next ten years, while the cost of complying with EU standards is likely to be somewhere between 50 billion and 100 billion.

Gains in job creation

Employment in the EU rose by more than 2 million during the 1990s. However, the picture varies significantly from country to country -only four Member States have an employment rate (the proportion of the working-age population in employment) over 70 %, while in Greece the figure is as low as 55 % and in Spain and Italy lower still.

Women account for an increasing share of the workforce, one in three of them in a part-time capacity. Most of the growth in employment was in highly-skilled service sector jobs in the most well-off regions. Skills mismatches have started to cause a shortage of labour in the IT sector.

Stubborn unemployment black spots

In 1999, the average jobless rate in the EU was 10.2 %, although this still varied greatly between individual countries. Greece, Spain, Italy, France and Finland, for example, had over 10 % of their labour force out of work, more than double the rate in Luxembourg, the Netherlands, Austria and Portugal. While the economic growth seen at the end of the 1990s had definitely helped bring down jobless totals across the EU, it had done little to close the gaps between regions.

In the applicant countries, average unemployment in 1999 stood at 9.3 %, close to EU levels. However, the far-reaching reforms being pushed through in these countries as they convert to market economies harbour significant risks of rising unemployment. As regards labour markets in the applicant countries, four basic differences can be discerned from those in the EU:

• the labour market continues to shed women, although female participation rates remain higher than in the EU;
• employment in the traditional industries remains high, even after the restructuring of this sector;
• agricultural employment, at 22 % of the total (albeit with marked variations between countries), is 5 times higher than the EU average;
• labour productivity continues to lag behind EU levels;
• the main growth area for employment is the service sector, especially in the national capitals.

In an enlarged EU, the labour market will be greatly influenced by demographic trends which could reverse ongoing trends in the current EU. The inevitable ageing of the labour force in the EU-15 will lead to a contraction in the working-age population in the existing Member States. And while the pattern in the applicant countries is broadly similar, the estimated increase in the number of people aged 20-35 over the next ten years could, overall, offset the declining numbers of workers in the EU-15.

Poverty and social cohesion - an enduring problem

In the EU in 1996, 1 in 6 people were living below the poverty line (i.e. defined as having an income that is less than 60 % of the average in one's country of residence). This picture was marked by sharp variations between countries - in the Netherlands and Denmark, for example, 11-12 % of the population were below this threshold, whereas the figure in Greece and Portugal was 20-25 %. The groups most at risk are people with low levels of education, pensioners, the unemployed, single-parent families and families with large numbers of children. Although data of this type is not available for the applicant countries, the evidence suggests that the places most affected by poverty are rural areas.

The spatial dimension

The biggest spatial imbalance in the EU today is of course that between the least developed regions and the rest. Spatial development is a reflection of more than just levels of income and employment, including as it does the notion of development potential. In this respect, the European Spatial Development Perspective (ESDP) serves as the blueprint for spatial planning in Europe, based on an analysis of these disparities and the nature of the main spatial imbalances. The solution it proposes envisages polycentric development in the EU and a new relationship between town and country.

Economic activity in the EU is mainly concentrated in a central triangle extending from North Yorkshire in the United Kingdom via Franche-Comté in France to Hamburg in Germany. Accounting for just one seventh of the EU's current land area, this area is home to a third of its population and produces almost half (47 %) its GDP.

This concentration of population in central areas is reflected in high levels of urbanisation and a clustering of activities, in particular the high-skill sectors (company headquarters, research institutes, universities, etc.), giving these areas productivity levels 2.4 times greater than in outlying areas. Despite this, the EU's urban centres are also the areas with the greatest economic and social disparities - in some neighbourhoods alarming levels of poverty exist alongside high rates of unemployment that lead to social exclusion.

Rural areas vary greatly from one Member State to another in size, geographical characteristics, population, development levels, etc. Disregarding Portugal, the share of the population living in rural areas is growing (albeit at different rates in each country) and employment growth in these areas from 1995 to 1999 (+1 %) outstripped the EU average (+0.8 %). This has proved that rural areas are not inherently inimical to job creation. Nevertheless, development in many rural areas is still greatly impeded by the natural disadvantages these areas present.

The EU's border regions, home to one in four of its citizens, are often dogged by problems of accessibility and lack the economic opportunities enjoyed by central areas, due to the presence of an international border. Although there is a great variety of such regions, they benefit from a number of EU-sponsored cross-border cooperation programmes. For those of them bordering the applicant countries, enlargement will speed up the realisation of the single market.

The other specific areas such as the islands, mountain areas and the outermost regions are confronted with range of geographical, economic and social problems that hamper their integration with the rest of the EU. These areas are already the recipients of generous amounts of regional aid - 95 % of both mountain areas and islands are eligible for Objectives 1 and 2 in 2000-2006 period.

II - CONTRIBUTION OF COMMUNITY POLICES TO ECONOMIC AND SOCIAL COHESION

Economic and monetary integration policies

Economic and monetary union

For high levels of growth to be sustained in the EU's less developed regions, structural policies need to go hand in hand with macro-economic policies that guarantee financial stability. One such policy is the single currency. During the 1990s inflation, one of the convergence criteria, fell markedly in the cohesion countries, in particular Ireland, to stabilise at around 2.5 %. The introduction of the euro makes disparities more apparent and capital more mobile. By cutting transaction costs and interest-rate differentials, it should reduce the price of capital and thereby increase its availability in the less developed regions.

The internal market

Trade is expanding considerably both within the internal market and with countries outside. Trade flows with the applicant countries grew substantially during the 1990s - the EU now takes 60 % of these countries' exports, although only 10 % of EU exports go the other way. Within the existing Member States, foreign direct investment attained significant levels in Ireland, Sweden and the Benelux countries. In the applicant countries it grew to some 20 % of total investment.

The increased competition generated by closer economic integration limits the protection that can be afforded to local industries. This gives an advantage to regions with resources in the form of technical skills and reduces the demand for unskilled workers. The best solution to this is to raise levels of education and reorient training towards growth sectors. At the same time, in the face of such intensified competition, to what extent has economic integration led to increased sectoral specialisation by certain countries in the search for economies of scale?

Competition policy

Subsidies provided by Member State governments accounted for 2.5 % of total public spending within the EU from 1996 until 1998, and thus had a significant effect on the regional distribution of economic activity. The volume of such aid varies greatly from country to country, with the better-off countries spending more than the cohesion countries.

In 1999, the Commission introduced a series of more transparent criteria and guidelines by which to evaluate areas eligible for regional aid. The share of the EU population covered by this aid fell, from 46.7 % to 42.7 %, and the aid was concentrated mainly on the most disadvantaged regions. Nevertheless, attempts to align more closely the regions eligible for structural assistance with those qualifying for state aid failed to bear fruit.

What is more, faster growth does not necessarily equate to greater regional integration or narrowing income inequality. Hence the need to flank the larger projects of economic and monetary union and the creation of the internal market with suitable supporting measures, so all Member States and regions can reap the full benefits of the opportunities offered by European integration.

Common Agricultural Policy (CAP)

The Agenda 2000 reform of the CAP was intended to make the EU's agricultural sector more competitive and establish a second key priority for EU agricultural policy: rural development. Market support and export refunds have been scaled back considerably and an increasing share of agricultural spending redirected towards direct aid and rural development measures. In absolute terms, based on agricultural area, three Member States (France, Germany and Spain) absorb over half of all expenditure under the EAGGF Guarantee Section. In terms of size and economic weight of agricultural holdings, there is a clear divide between the EU's northern and southern regions.

Horizontal policies

Employment and human resources development policy

Launched in 1997, the European Employment Strategy laid down guidelines to direct the national employment action plans in each Member State. The strategy consists of 4 key elements:

• employability of the labour force;
• development of entrepreneurship;
• business adaptability;
• equal opportunities.

Labour market performance still varies widely between regions, highlighting the need for specific regional and local strategies. Despite continuing high unemployment, labour shortages threaten a number of Member States. To remedy this, action must be taken to raise levels of education and training, giving priority to high-risk groups such as unskilled young people and the long-term unemployed. As regards equal opportunities, though the overall picture is one of progress, there remains plenty of scope for improvement.

Environmental policy

The goals of economic and social cohesion and environmental protection go hand in glove, since compliance with EU environmental standards is now an absolute condition for obtaining structural funding. Protecting the environment should not be regarded solely in terms of the short-term costs it imposes on the economy, since it will ultimately lead to improvements in quality of life and make regions more attractive. For its part, the Cohesion Fund provides incentives to its beneficiaries (Ireland, Spain, Portugal and Greece) to undertake major investment in environmental improvement. The applicant countries are faced with the same problems but on a larger scale, especially in the waste management sector. The EU is providing financial assistance through the ISPA programme.

Other EU policies

The European Research Area , established as part of the EU's research and development policy (RDT), focuses on the pursuit of excellence in science in a bid to improve the EU's position in relation to its competitors. The aims of this programme include promoting a more even distribution of knowledge through projects involving partners from Objective 1 regions and creating an environment conducive to innovation and research in economically backward regions. Another priority is increasing the mobility of researchers, although without leading to a brain drain in favour of the more dynamic central regions.

EU transport policy is intended to boost economic and social cohesion by providing all regions with access to suitable transport systems that serve real public needs. As highlighted by the ESDP, the trans-European transport networks are making a significant contribution to spatial development and narrowing the gap between regions -they improve access to isolated, remote and island regions, open up border areas and stimulate a more even spread of development along coastlines.

Energy is a factor of competitiveness and sustainable development. Despite the attention focussed on this area, however, the single market in energy is still in its embryonic stages. Notwithstanding this, a number of factors have been identified as instrumental in creating the proper basis for sustainable development: energy efficiency, improvements in the means for managing and controlling energy and legislation to promote the use of renewable sources.

Enterprise policy

The European Union has set itself the goal of becoming the most competitive and dynamic knowledge-based economy in the world. Community enterprise policy is working throughout the EU to bring about this scenario. Some of its measures are targeted specifically on the less developed regions: assistance in accessing risk and start-up capital, spreading the benefits of innovation, developing a sense of entrepreneurship, etc.

In 1997, the common fisheries policy accounted for no more than 0.2 % of EU GDP and employed just 0.4 % of the workforce. However, the concentration of this sector in coastal and remote areas invests it with a special importance for regional development: in 1997, 70 % of fishermen and 60 % of jobs in the fisheries sector were located in Objective 1 regions. To ensure that stocks are sustainably exploited , the scaling back of fishing effort must be offset with a package of accompanying measures to maintain employment, part-financed by the financial instrument for fisheries guidance (FIFG).

III - ECONOMIC AND SOCIAL COHESION POLICY - THE RESULTS

Impact of structural policy since 1989

In this period, EU spending on economic and social cohesion policy almost doubled, from 0.27 % of EU GDP in 1989 to 0.46 % in 1999. The principal recipients of these transfers were Spain, Portugal and Greece, the three main beneficiaries of the cohesion policy. Following the decisions taken by the Berlin European Council in 1999 to prepare the ground for enlargement, the cohesion policy budget for the EU15 will be pared back to its 1992 levels by 2006 (0.31 % of EU GDP). At the same time, funding for the applicant countries will be increased steadily every year from 2002 onwards.

In Objective 1 regions, the gap with average EU per capita income levels was reduced by approximately one sixth between 1988 and 1998. A handful of Member States and regions (Ireland, the new German Länder and Lisbon) posted even better results. In the 2000-06 programming period, structural assistance is to be targeted more than ever on the less developed regions: some 70 % of funding will be concentrated in the Objective 1 regions (covering just 41 % of the EU 15 population).

The employment situation is less clear. In Objective 1 regions, regional rates of employment and unemployment showed little sign of converging in 1995-99. The data available for Objective 2 and 5b regions points to more favourable employment development than the rest of the EU. As for Objective 3, the measures taken in these regions have helped many young people and members of the long-term and structural unemployed to find employment.

Prospects for the 2000-06 programming period

The new Structural Fund arrangements are another factor that make the structural programmes more effective. Strategic medium-term programming is now a feature of national and regional development policies. The consolidation of partnerships between local interests and the evaluation of public funding initiatives are two major tools now at the disposal of the Structural Funds. And the advantages gained from having an EU-level regional policy are further enhanced by the cross-border and transnational character of the Community Initiatives.

The new regulatory framework introduced for the 2000-06 period is an attempt by the Commission to improve the returns from EU programmes and raise their profile with the public by:

• better identifying the EU's priorities by adopting indicative guidelines for Structural Fund programmes;
• insisting that local partnerships include all the relevant parties at all levels of administration;
• launching a debate on future EU policies;
• better incorporating the ideas of the European Employment Strategy.

The indicative Commission guidelines have helped to redirect the focus of regional development strategies in the 2000-06 period. There is now more emphasis on the structural factors underlying competitiveness, which lay the basis for long-term growth: research, innovation, information technology, human capital, etc. Other new departures include seeking a better balance between different modes of transport, placing greater focus on environmental issues, cutting back direct aid, promoting equal opportunities and tackling urban issues.

The drive to improve the management of resources is a constant theme of the Structural Fund reforms: concentrating funding on specific problems, devolving responsibility for programme implementation to the Member States, establishing monitoring and control procedures, boosting the role of programme evaluation, etc. The 2003 mid-term evaluation will also be a convenient point at which to take stock of the progress made by the Structural Fund programmes in the new programming period and, in particular, to distribute the performance reserve accordingly.

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 conclusions and recommendations from the report on economic and social cohesion during the 1995-1999 period;
• SCADplus factsheet on the 10 questions for the debate on tomorrow's cohesion policy.

Last updated: 20.04.2004