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The EU’s Structural and Cohesion Funds

“Cohesion is not simply a matter of throwing money at problems…It implies rather a willingness to act at Community level to redress the disparities between regions and between different social groups.”

Jacques Delors, January 1988

Introduction

The Structural Funds and the Cohesion Fund are the financial instruments of the EU’s regional policy.  Their purpose is to narrow the disparities in development between the regions of the EU.  Taken together they amount to 35 per cent of the EU’s planned expenditure between 2007 and 2013 and are the second largest item of EU expenditure after the CAP.

The future of these funds is now up for debate in the context of the forthcoming review of the EU’s spending, the 2014-2020 financial perspective.  This paper explains the purpose and operation of the existing structural funds, the changes that result from the Lisbon Treaty and it gives a flavour of the debate about the future of the funds.  It is usual to refer to “structural funds” to encapsulate both the structural funds and the cohesion fund.

Background

Whilst the Community was established as a customs union with free movement rights for goods, people, services and capital, the preamble to the 1957 Treaty of Rome gave as one of the reasons for establishing the Community that Members were:

            “Anxious to strengthen the unity of their economies and to ensure their harmonious development by reducing the difference existing between the various regions and the backwardness of the less favoured regions”.

But in fact regional economic disparities – with the exception of southern Italy – were not that great between the six founder Members.  It was the expansion of the Community to include countries like Greece, Ireland Portugal and Spain that created a more economically diverse community.

The establishment of the European Regional Development Fund (ERDF) in 1975 – in part a response to British concerns about the fairness of its budget contribution – for the first time gave the Community a significant mechanism for financing regional economic development.  Resources to support rural development were also provided through part of the Common Agricultural Policy.

Both the European Social Fund (which had been established in 1958) and the ERDF continue to this day (further details can be found below) but the rules for the distribution of funds have altered down the years.  In essence there have been three phases of EU structural and cohesion funding:

- 1958-1986 – policy developed using the ESF and (later) the ERDF to finance training and support to help the unemployed (ESF) and to enable small and medium sized business in disadvantaged areas to develop (ERDF);

- 1987-1999 – the passing of the Single European Act led to a new mechanism, targeted on five objectives, designed to ensure that the newly established Single Market did not lead already disadvantaged areas of the EU to fall further behind; resources were concentrated on those regions of the EU whose per capita income was 75 per cent or less of the EU average; the Cohesion Fund was created in 1994 to provide grants for environmental and transport infrastructure projects in Member States whose GDP was below 90 per cent of the EU average;

- 2000- to date – a more concentrated approach with a reduced number of objectives for the structural funds was adopted after 1999 with stricter enforcement of the criteria for eligibility.  This tightening up reflected concern about the growth of the structural funds budget and the need to adapt to the expansion of the EU to include (from 2004) a number of new Member States with economies well below the EU average.

The Structural Funds Today

During the period 2007-2013, the share of the EU budget allocated to all regional policies amounts to €348 billion, of which €278 billion is for the Structural Funds and €70 billion for the Cohesion Fund.

Three objectives are being applied to the financing of structural fund policy from 2007 to 2013:

- “convergence” – in other words, to accelerate the economic convergence of the regions of the EU where per capita GDP is below 75 per cent of the EU average with the rest of the EU (except in the case of Cohesion funding – see below); it works through the ERDF, the ESF and the Cohesion Fund and represents 81.5% of the resources allocated to the structural funds; known as “Objective One”;

- “regional competitiveness and employment” – to improve regional competitiveness and employment through the promotion of innovation, entrepreneurship, environmental protection and the development of labour markets; this objective includes regions which not covered by the convergence objective. Financed through the ERDF and the ESF, this objective makes up 16% of regional fund spending.  Previously known as “Objective 2”;

- “European territorial co-operation” – to strengthen co-operation at cross-border, transnational, as well as inter-regional levels, in the fields of urban, rural and coastal development, and foster the development of economic relations and networking between small and medium-sized enterprises (SMEs). The smallest of the objectives in terms of resources, it is financed by the ERDF and represents 2.5% of structural funds spending.  Known as “Objective 3” in the past.

All the structural funds work on the basis of co-financing - i.e. Member States paying a percentage of the cost – different ceilings apply to each of the objectives for the maximum share of the total spend that can come from the structural funds.  The highest percentage is normally 75 per cent for projects funded under either the convergence objective or the territorial co-operation objective but it can be 85 per cent for convergence projects funded through the Cohesion Fund.  The purpose of this co-funding or match funding system is to ensure that EU funds are additional to those provided from Member States’ national or regional budgets.

As explained above, the Cohesion Fund is intended for Member States whose per capita GDP is below 90% of the Community average – that means it covers the 12 new Member States since 1 May 2004 plus Greece and Portugal.  Spain is eligible for grants from this fund for a transitional period.  The fund finances environment and transport infrastructure projects under certain conditions, notably that if the public deficit of the Member State exceeds 3% of national GDP, no new finance will be approved until the deficit has been brought under control.

Structural Funding and the UK

The UK is receiving a total of €9.4 billion in Structural Funds for the period 2007-13.  This funding splits four ways:

- two UK areas are entitled to funding under the convergence criteria:
Cornwall and the Isles of Scilly and West Wales and the Valleys.
The budget for the convergence areas totals €2.6 billion; 

- Merseyside, South Yorkshire and the Highlands & Islands are receiving transitional funding as they were entitled to convergence funding (i.e. they had Objective 1 status) under the previous scheme;

- the largest share of the structural funds the UK receives is for regional competitiveness and employment - €6.2 billion; this can be spent in any part of the UK;

- the final tranche is of €0.6 billion, provided for cross-border and trans-national programmes (for example, in Ireland).

Future Policy

The debate has already begun about what arrangements there should be for structural funding beyond 2013.  The Commission produced a major paper on the subject in 2008 and there have been many other reports commenting on the question, including one by the House of Lords European Union Committee. [1]

To understand the current debate it is important to recognise past difficulties over settling structural funding questions:

- objections from wealthy Member States (especially Germany) about the scale of their contribution towards the structural funds;

- political difficulties in wealthier Member States who stand to lose entitlement to structural funds as a result of changes to the rules;

- and conversely, concern in newer Member States that they have been denied a fair share of structural funds;

- doubts about the value of regional funding, including concerns about fraud and misuse in some Member States – recently reinforced by in depth inquiries published by the Financial Times (2 December 2010).

All these difficulties remain – and it is not clear what impact changes made by the Lisbon Treaty will have.  The structural funds are now part of the co-decision procedure – in other words, the Parliament’s agreement is required along with that of the Council before any changes can be made to the rules and the same process applies to the budget.  In addition, the individual Member State programmes under the ESF and the ERDF will have to be approved by co-decision in future, rather than just in Council (as they have been until now).

The Lisbon Treaty included a protocol on “economic, social and territorial cohesion” in which Member States re-affirmed their commitment to reform of structural funds, stated that they would continue to apply the 90 per cent of per capita GDP rule to the Cohesion Fund and agreed that there should be “greater margin of flexibility in allocating financing from the Structural Funds to specific needs not covered under the present Structural Funds regulations”. 

It is too early to state with certainty what changes will be made to the structural funds from 2014 but it must be expected that a switch in resources from wealthier Member States in the west and the north of the EU to more recently joined (and poorer) Member States in the centre, east and south is likely.  There may be difficulties over the position of Spain, which will object strongly to its share of structural funds falling further (it is currently, for example, the third largest recipient of ESF resources) and equally strong objections from newer Member States that their share of the funds is too small. 

Future regional fund spending is likely to be tied more closely to wider EU economic objectives, as advanced in the EU 2020 Strategy (the successor to the Lisbon economic strategy) and the Gothenburg Strategy (on environmental sustainability).  Such an approach would mean a greater share of resources being targeted on research and innovation, on skills related to those sectors, on the development of entrepreneurial skills and on energy and environment projects related to climate change. 

The UK Government argues for the phasing out of structural fund support for wealthier Member States (a position largely supported by the Dutch and Swedish governments) and that the structural funds should be “renationalised” by wealthier Member States who would fund and administer their own regional aid policies whilst the structural funds would focus on poorer Member States.  This position is supported by the Scottish Executive but not by the Welsh Assembly.  Although many Member States think that the structural funds should continue to support all EU members, the structural funds make most sense when used for transnational programmes or for supporting poorer Members.

Early indications are that the renationalisation idea is opposed by both a majority of Member States and by many members of the European Parliament.  Newer Member States feel that if structural fund recipients were restricted to the less well-off countries, wealthier Member States would be less likely over time to support the retention of the funds.

December 2010

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[1] he Future of EU Regional Policy, HL 141, 2007-08.

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