Third report on economic and social cohesion: the socio-economic situation of the Union and the impact of European and national policies

On the basis of the European debate launched in 2001, the third report on economic and social cohesion makes concrete proposals on the future of regional policy after 2006. It bases its analysis on an assessment of the impact of Community and national policies on cohesion. It provides updated information on the socio-economic situation of the European Union.

ACT

Commission communication - third report on economic and social cohesion [COM(2004) 107 final - Not published in the Official Journal].

SUMMARY

The policy on economic and social cohesion is producing positive effects in those areas of the European Union facing difficulties. However, large socio-economic disparities persist between Member States and between regions. These disparities in levels of wealth and degrees of dynamism arose from structural deficiencies in certain key areas for competitiveness such as investment in physical infrastructure, in innovation and in human resources. Member States and regions therefore need support from Community policies to overcome their handicaps, develop their strong points and evolve in an increasingly competitive environment.

The enlargement of the European Union to 25 Member States on May 1 represents a challenge without precedent for the European Union. In particular, it jeopardises the current balance of regional policy. The third report on economic and social cohesion sets out concrete proposals for regional policy after 2006. The Commission bases its proposals on the socio-economic situation of the Union and on an analysis of the impact of regional policy, other Community policies and national policies.

SOCIO-ECONOMIC SITUATION OF THE EUROPEAN UNION

Economic growth

Since 1994, disparities in income between Member States and between regions have been decreasing. Gross domestic product (GDP) and productivity have been increasing more quickly in the four countries eligible for the Cohesion Fund (Spain, Greece, Ireland and Portugal) than in the rest of the European Union. The increase has been particularly high in Spain and Ireland and more modest in Portugal and Greece. Nevertheless, major differences still exist between States. In Greece and Portugal, the per capita GDP is still around 70 % of the Community average. One thing however is certain: the contribution made by the Structural Funds to growth in the four cohesion countries (1.5 % in Spain, 2 % in Greece, almost 3 % in Ireland and more than 4.5 % in Portugal). Over the last decade, trade between these four countries and the rest of the Union more than doubled. On average, almost a quarter of structural expenditure returns to the rest of the Union in the form of imports, with Germany being the principal beneficiary.

Within Member States, the regions whose development is lagging behind, eligible for Objective 1, have enjoyed annual growth of 3 % compared with slightly more than 2 % for the Union as a whole. However, the catching-up process varies widely from one region to another. Outside the four cohesion countries, weak growth in the national economy is slowing down that of Objective 1 regions. While the growth in GDP in the new German Länder is equal to the Community average, that of the regions of the Italian Mezzogiorno is lower. This is also true for the old industrial regions. Although not Objective 1 regions, the regions of north-east England, the regions of northern Germany and the very sparsely populated regions of northern Sweden have seen their annual per capita GDP increase less than the Community average since 1994.

Employment and social cohesion

There are still wide regional disparities in employment levels. Employment has increased over the past ten years in the cohesion countries, significantly in Spain and Ireland, to a lesser extent in Portugal and in Greece. Only 43 % of those of working age were in work in the regions of southern Italy in 2002. In the ten new Member States, economic restructuring of agriculture and traditional industries is increasing unemployment and 56 % of those of working age are in work as against 64 % in the current Member States of the Union.

In 2000, approximately 55 million people were at risk of poverty, i.e. 15 % of the European population. Poverty particularly affects elderly people (more than 65 years old), single parents, the long-term unemployed, ethnic minorities and the disabled. The countries of southern Europe, the United Kingdom and Ireland are particularly badly affected and the numbers concerned in many of the new Member States are above the Community average.

Over the coming decades, the progressive ageing of the population will gradually reduce the working population, with a serious impact on growth potential. Between now and 2010, this will begin to affect Germany, the four southern Member States and the majority of the new Member States. By 2025, there will be on average less than three people of working age for each elderly person. Faced with the prospects for population structure, steady economic growth, high employment and a reduction in the number of people retiring are vital. Immigration should also provide an important source of additional labour.

Narrowing disparities in regional competitiveness factors

The challenge for cohesion policy is to invest in the competitiveness factors so that Member States and regions can overcome their structural problems. The principal competitiveness factors that have been identified are:

• physical infrastructure: transport and telecommunication networks.Since 1994, transport links both within the cohesion countries and between those countries and the rest of the Union have been improving. In 1991, the density of the motorway network in those countries was 20 % less than the Community average. With Structural Fund support, it has exceeded the average by 10 % since 2001, with Spain and Portugal being the principal beneficiaries. In Objective 1 regions as a whole, the motorway density is only 80 % of the Community average and much less than that (20 % less) in the new Member States. As for the railways, although the network throughout the Union has been modernised, there is still a major discrepancy between the dynamic regions and those whose development is lagging behind. In the new Member States, road construction is accelerating the transfer of passengers from rail to road. Considerable investment will be required to bring railways up to standard.In telecommunications, the number of fixed telephone lines in relation to population remains much lower in both the cohesion countries and the new Member States. This is tending to be offset by a rise in mobile phone use. Broadband access, essential for the use of high-speed Internet and the development of new information and communications technologies (NICT), shows wide disparities across the Union. These reflect relative levels of prosperity;
• human resources: the adaptability and skills of the workforce.As regards investments in human resources, large structural weaknesses remain both in the Union of Fifteen and in the new Member States. The proportion of people with education beyond basic schooling remains very low in Objective 1 regions, especially in Spain, Italy and Portugal, the exception being the new German Länder. This proportion is markedly above the European average in the new Member States. On the other hand, in these countries, the average number of young people who complete university studies is below the average in the Union of Fifteen. This is also the case in Objective 1 regions, despite the clear progress that has been made. The situation is similar as regards continuing training;
• innovative capacity.Innovation is one of the keys to regional competitiveness. However, innovative capacity varies greatly from one region to another in the same Member State, within the Union of Fifteen and within the Union of Twenty-five. Eight of the 213 European regions account for a quarter of total R&D expenditure;
• sustainable development.There is a substantial need for investment in the environment in the cohesion countries and the need is even greater in the accession countries. The main areas concerned are water treatment, waste management and the control of emissions.

THE IMPACT AND ADDED VALUE OF STRUCTURAL POLICIES

The budget for regional policy over the period 2000-06 is EUR 215 billion. The sums transferred to Objective 1 regions represent an important proportion of the wealth of the cohesion countries. They amount to 0.9 % of national GDP in Spain and more than 2.5 % in Greece and Portugal. This funding has a genuine leverage effect on public investments. The increase in investment achieved is estimated at 3 % in Spain, 4 % in the new German Länder, 7 % in the Italian Mezzogiorno and 8-9 % in Greece and Portugal. In most cases, there has also been a similar knock-on effect on private financing, as the figures for Austria, Germany, the Netherlands and Belgium testify. Private investment nevertheless remains weak in France, the United Kingdom and the cohesion countries. Structural Fund support is also supplemented by European Investment Bank (EIB) loans, particularly in the areas of transport and the environment. Since 2000, they have totalled EUR 20 billion a year. More than half has gone to Objective 1 regions and EUR 3 billion to the new Member States

Over the period 1994-99, 82 regions in the twelve Member States received aid under Objective 2. This Objective supports the conversion of regions with serious natural or structural handicaps. More than half of the expenditure was concentrated on the conversion of old industrial sites and on business services. To a lesser extent, funds went to developing human resources and providing aid for R&D. Community support permitted the creation of 700 000 jobs, the modernisation of 300 000 small and medium-sized enterprises (SMEs) and the conversion of 115 million square metres of industrial waste land. In ten years, unemployment fell slightly more in Objective 2 regions than in the rest of the European Union.

Several spheres of activity show the value added by regional policy

As regards agriculture and rural development, the Structural Funds have maintained economic activities in the countryside. They have encouraged the economic diversification of rural areas through agritourism and environmental protection activities. The fisheries sector is concentrated in a limited number of regions in the European Union and structural measures aim in particular to stimulate their economic conversion.

During the 1994-99 period, the European Social Fund (ESF) provided support for the development of human resources amounting to a third of overall Structural Fund investment. Assistance under Objective 3 was aimed at integrating young people, the long-term unemployed and other social categories at risk of exclusion into employment. It was also targeted on promoting equal opportunities between women and men. The most successful measures were those combining guidance, training and assistance with finding a job. In addition, the ESF provides finance for adapting employment, education and training systems. Since 2000, it has provided EUR 60 billion for the national plans implemented as part of the European Employment Strategy (EES).

Cooperation and networking - two success stories

The four Community Initiatives allow the adoption of innovative regional development strategies. The cooperation between regions and networking achieved through them represent an important value added of structural policy:

• over the period 2000-06, INTERREG III is providing EUR 5 billion to support cross-border and trans-national cooperation and the exchange of experience between European regions. Border regions will play an increased role in the enlarged Union;
• URBAN II is providing support for innovative projects in 70 towns and cities. The emphasis is on boosting the economy of urban areas in crisis;
• the aim of EQUAL is to combat all forms of discrimination and inequalities in the labour market. A heavy emphasis is placed on cooperation, the exchange of experience and best practice;
• LEADER+ provides assistance in rural areas. With an annual budget of EUR 300 million, the Initiative provides assistance to SMEs and supports the development of tourism.

New pilot innovative actions were launched in 2001. With a budget of around EUR 400 million, they are increasing regional competitiveness through innovation, disseminating technology and promoting sustainable development. Three quarters of all the regions have now applied for these programmes.

Structural Fund management is improving, but further progress can still be made

The management of regional policy is based on four general principles:

• programming involves planning expenditure over a number of years. It has brought more stability and consistency but, on the other hand, the time taken to adopt programming documents has increased;
• the partnership during the drawing up and the implementation of programmes has been strengthened.This mobilises a series of players: the regional and local authorities, the private sector, the social partners and civil society. An effective partnership improves the targeting and evaluation of projects and the dissemination of information;
• the concentration of funding means that financial support is directed towards those regions that need it most. It has been increased, although evaluations show that assistance is too thinly spread;
• additionality means that Community financing for a project is additional to other public and private financing.This rule is generally respected under Objective 1. It is more difficult to verify for Objectives 2 and 3.

Improving the efficiency of programmes remains a major challenge. On the ground, the local players have criticised the delay in adopting rules, which put pressure on the utilisation of financing. Thus, only a third of Objective 1 projects were completed in time and another third were completed over a year late. In addition, two thirds of projects exceeded their budget. By requiring the utilisation of funding within two years of programming, the "N+2" rule tightens discipline. What is more, a financial incentive has been introduced for the 2000-06 period in the form of a mid-term performance reserve. It rewards 90 % of the programmes on the basis of criteria such as the rate of financial absorption and sound management.

Monitoring is an essential part of the system for implementing the Structural Funds, but it has not been as effective as expected because of the difficulty in collecting information. Programme evaluation is carried out in three phases: before implementation, at mid-term and at the end of the period. A greater involvement of all those involved will permit a further improvement in the analyses made.

THE IMPACT OF OTHER COMMUNITY POLICIES

Unlike structural policy, the main aim of the following Community policies is not to combat regional disparities but they do have a strong regional impact:

• enterprise, innovation and education policies.Community enterprise, innovation and education policies are aimed at strengthening the competitiveness of EU producers. Regions are far from having equal innovation capacity, as the disparities in the take-up of Community financing for research testify. To remedy this problem, the Innovation Relay Centres and the Innovating Regions in Europe network aim to disseminate a culture of innovation. In addition, the sixth action programme for R&TD is in part aimed at improving links between research centres in the more dynamic parts of the EU and those in peripheral areas. In the field of education, the 'Education and Training 2010' programme aims to ensure a high level of life-long education and training;
• social and employment policy.In March 2001, the Lisbon European Council defined a comprehensive strategy aimed at ensuring long-term economic growth, full employment, social cohesion and sustainable development. The European Employment Strategy provides support to Member States to reform their labour markets. As regards social integration, exclusion must be combated at all levels. The Union's commitment to equality between men and women is part of a comprehensive approach. Measures aim, in particular, to attract women into employment, encourage them to stay in the labour market and make it easier to reconcile a working career with family responsibilities;
• transport, energy, telecommunications and the trans-European networks.Liberalising the markets for transport, telecommunications and energy has led to increased efficiency and lower prices. It has also, however, brought the risk that particular social groups or regions could be excluded. The European Union has therefore established public service obligations, or ' services of general economic interest '(SGEI), which guarantee access to essential services of reasonable quality and at affordable prices. At the same time, the trans-European networks (TENs) in transport, energy and telecommunications have increased the accessibility of the more remote regions. The networks planned to link the European Union of Fifteen to the new Member States will have the same effect;
• the environment, agriculture, rural development and fishing.The Sixth Environmental Action Programme aims to combat the negative effects of growth and the exhaustion of natural resources. For the 2000-06 period, aid for rural development is higher for Objective 1 regions (56 % of expenditure) than in the rest of the Union. This aid is supporting the emergence of a European agricultural sector based on quality, the enhancement of the countryside and the rural heritage and the economic diversification of rural areas. After 2007, expenditure under the common agricultural policy (CAP) will decrease, in particular with a fall in price support and an emphasis on rural development. In the fisheries sector, Community policy aims to conserve fish stocks and restructure the industry. The recent emergency measures will have serious economic and social consequences in some Spanish and Portuguese regions. Of the new Member States, Poland and the three Baltic States have a fisheries sector;
• competition policy.If granted in strict compliance with European competition law, state aid contributes to cohesion by influencing the geographical distribution of economic activity. Since 1997, total national expenditure on state aid has decreased sharply. In 2001, state aid in the form of assistance to Objective 1 and Objective 2 regions accounted for 9 % and 6 % respectively of total state aid. It nevertheless remains greater in the relatively prosperous Member States than in the cohesion countries. In the context of enlargement, it will play a major role. Future reforms of the rules will aim at less but better targeted assistance.

THE IMPACT OF NATIONAL POLICIES

Public expenditure by the Member States amounts on average to 47 % of the GDP of the European Union, while the budget allocated to cohesion policy is less than 0.4 %. The policies of the Member States provide, in particular, income support and basic services: education, medical care, social welfare. On the other hand, public investment in human and physical capital accounts for on average only slightly more than 2 % of Community GDP. Expenditure on business support services, higher education, innovation and R&D is even lower. In relation to the sums allocated to structural expenditure by Member States, therefore, the budget for cohesion policy does not seems so small, especially as spending is concentrated in the regions which are most in need of assistance.

In the Member States, public expenditure on income support is in general much higher in the less prosperous regions because of the lower level of income. Government revenue, on the other hand, is proportional to income, in the main because most taxes in the Member States are levied centrally either on income or expenditure. Then redistribution mechanisms reduce disparities in the revenue available to regions. The general trend is now towards devolving responsibility for public services to regional and local level without a similar trend in respect of raising the money to fund these services. The main exception is Italy, where responsibility for raising revenue is being increasingly devolved to the regions without an increase in regional transfers.

Foreign direct investment (FDI) can potentially play a key role in reducing regional economic disparities. It is not only a source of income but facilitates the transfer of technology. However, foreign investors are not necessarily attracted to places where the need is greatest. Berlin apart, only 2 % of FDI in Germany has been in the new Länder and only 4 % of FDI in Italy has benefited the regions of the Mezzogiorno. Foreign investment is mainly concentrated in dynamic urban areas. In the new Member States, most investors are attracted to the capital cities. In 2001, two thirds of FDI in Hungary was in Budapest. The same holds for Prague in the Czech Republic and Bratislava in Slovakia.

For further information, consult the INFOREGIO website of the Directorate-General for Regional Policy:

• the full text of the third report on economic and social cohesion;

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Second progress report on economic and social cohesion [COM(2003) 34 final - Not published in the Official Journal].

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First progress report on economic and social cohesion [COM(2002) 46 final - Not published in the Official Journal].

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"Unity, solidarity, diversity for Europe, its people and its territory" - Second report on economic and social cohesion [COM(2001) 24 final - Not published in the Official Journal].

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Last updated: 07.05.2007