EU Structural and Cohesion Funds in brief

1. The role of EU Funds in helping to reduce territorial and economic disparities among EU member states International Conference on the EU’s Structural and Cohesion Funds, Budapest, 4th October 2012

2. EU Structural and Cohesion Funds in brief • Two structural funds – the European Fund for Regional Development (ERDF) and the European Social Fund (ESF), plus the Cohesion fund which is limited to member states with a national income below 90% of the EU average. • Primary aim is to help poorer regions in the EU catch up with richer ones, but they also have side objectives such as ‘social cohesion’ and promotion of the low carbon economy. • Despite being geared towards narrowing regional disparities, all regions in all EU member states – even the richest – are eligible for at least some degree of funding. • Funded directly from the EU budget they are the second largest item of expenditure after the CAP – around 35% of the overall budget. €348.4bn has been allocated over the current seven year MFF.

3. Net SCF receipts (€bn) per member state, 2007-13 Source: EU Commission, Open Europe Calculations

4. General arguments in favour of SCF • Can boost jobs, growth and convergence, • Provide funding for regions which for various reasons may otherwise be unavailable from national governments, • EU more trustworthy and/or competent than national governments, • Political cover for single market, • EU ‘visibility’ and ‘European Solidarity’.

5. Have the Funds been effective? No conclusive evidence that the SCF have had an overall positive economic impact on the EU economy, or even on individual measures such as growth, jobs and regional convergence. A huge body of literature has looked at the impact of the funds and produced mixed results – and at times radically different conclusions. Limitations: • Virtually impossible to construct a meaningful counterfactual i.e. to establish whether any growth and convergence attributed to the SCF would not have taken place in their absence. • Macroeconomic models used to measure the impact of the SCF – including those used by the Commission – suffer from numerous shortcomings and rest on unrealistic assumptions such as perfectly efficient markets and optimal project selection.

6. The opportunity cost - i.e. where SCF spending leads to other, potentially more productive economic opportunities being wasted - is extremely difficult to quantify. A leaked 2009 Commission report admitted that: “the considerable administrative and opportunity costs of a setup which channels funding from well-off Member States to well-off regions, without generating appropriate levels of added value compared with national funding are generally ignored.” • It is extremely difficult to isolate the SCF from other economic and political factors, such as monetary and fiscal policies, FDI flows, or labour market reforms. In turn, it is difficult to establish a definite causal relationship between funding and growth and/or convergence. As the influential Sapir report for the European Commission noted: “there is simply not enough relevant regional GDP data for statistical procedures to distinguish the effects of cohesion policies.”

7. The SCF were effective in Ireland... • Between 1987 and 2000, Irish GNP expanded by 140% with the country experiencing a radical increase in SCF from 1989 onwards. In the decade between 1989 and 1999, Ireland’s GDP went from 72% to 111% of the EU average. • General consensus is that SCF played a role but were not dominant factor – access to single market equally important. • SCF flows – at one point accounting for 4% of Irish GDP – were large enough to have had an overall impact. • Irish Government used SCF to complement a range of national pro-growth policies such as opening up the economy, labour market reform, lowering the corporate tax rate, investing in human capital, research and infrastructure. • Ireland small enough to qualify as single region – could pursue a uniform development policy.

8. ...but record elsewhere is much more mixed “Its record so far has been patchy: regional disparities are not falling, or at best are declining very slowly.” - 2007 OECD report “there is not yet evidence that these policies has delivered the promised regional cohesion.” - Bouve (2005) “Regional aid does not guarantee a real convergence of living standards in the recipient region. This is obvious from the experience of the Italian Mezzogiorno.” - Barry (2003) “Some econometric analyses suggest the funds have a negligible, or even negative impact on convergence, while others imply a significant positive impact.” - Ederveen, Gorter, de Mooij and Nahuis (2002) “While income disparities among Member States have declined substantially since the early 1980s, they have increased across regions.” - 2008/9 EU Commission budget review

9. Other problems with the SCF • Ineffective tool for redistribution – acts as a ‘recycling exercise’ in wealthier member states, • Poor targeting – less well-off regions and pockets of depravation in wealthier areas can lose out, • Conflicting aims – e.g. jobs vs. efficiency, • No link between performance and funding, • Additional layer of bureaucracy, • Absorption problems.

10. An inefficient redistribution exercise Structural fund flows within and between EU15 countries • Sources: Santos (2008) dataset, Open Europe Calculations

11. Poor targeting – less well-off areas can lose out Source: EU Commission, Eurostat, Open Europe Calculations

12. Absorption problems – EU15 compared with EU12

13. SCF and the economic crisis Some evidence that issues with the SCF contributed to the crisis: • Co-financing – While a good idea in theory, in practice this is led to unsustainable spending on the part of national and local authorities in an effort to capitalise on all the available funding – i.e. ‘spend it or lose it’. Many of the projects did not actually correspond to a fundamental economic need. Madeira is a good example – it received billions yet its public debt per capita is double that of mainland Portugal. Worryingly, this is also evident in CEE countries. • Pro-cyclical – The SCF can be sucked into areas of the economy where unsustainable growth is taking place, with few ways of making adjustments. During the last decade, Spain needed ways of cooling its overheated economy, particularly its property bubble, but SCF cash was substantially geared towards infrastructure, which was already subject to abundant private credit and over-investment.

14. Can the SCF help to dig the EU out of the crisis? Due to liquidity problems and/or austerity programmes, several EU countries are now struggling to afford matching funds, meaning that a huge amount of money risks being never being paid out, just when it is needed the most. Co-financing problems in Greece and Italy Source: EU Commission, Open Europe calculations

15. What do crisis countries need instead of the SCF? • Due to all the issues highlighted, replacing the SCF in Italy, Spain and Greece with something more purpose-built could prove to be a huge benefit as they fight to bounce back from the eurozone crisis. • Above all, these countries need assistance with labour market reform including educating or retraining the workforce, and general labour mobility. This could be provided by a radically re-vamped and better targeted ESF or the Globalisation Adjustment Fund. • If assistance is going to be provided for infrastructure, it should be targeted at the high-tech sector (broadband, energy grid) to develop and diversify the economy, and not conventional construction projects. • Any new funding instruments should make greater use of conditionality and transparency.

16. Limiting SCF to less wealthy member states “When the economic and social, as well as democratic, arguments on structural funds now and for the future so clearly favour subsidiarity in action, there is no better place to start than by bringing regional policy back to Britain.” - Gordon Brown, UK Chancellor, 2003 “My view is that we can do a lot to help countries like Poland by not spending structural funds in other parts of the EU where they are not needed that much.” - Nick Clegg, Deputy Prime Minister, 2011 “We support the principle of repatriating regional policy funding, provided funding could be protected and ring-fenced over the long-term to ensure that the poorest English regions continued to receive the same level of support they would have received under the current system.”  - UK Parliament CLG select committee report, 2012 “The European added value of current Cohesion support in well-off regions can be questioned.” - EU Commission, 2009 leaked policy paper

17. Savings from 90% eligibility threshold (€bn)