I. INTRODUCTION
The European Union's new regional policy legislation was adopted by the EU Council at the last moment, on 17 December, roughly ten days ahead of the launch of the EU's financial programming for 2014-2020. The European regional development tool has been transformed. In the past, Cohesion Policy had the job of dealing with gaps in development, but its facelift has added the job of boosting growth and employment. A difficult task for the newly entitled “Structural and Investment Funds,” whose budget has suffered its very first reduction. The member states now have €325 billion to share out over the next seven years at EU co-financing rates ranging from 50% to 85% for investment in development projects.
In initiating changes to the regulations on the European Regional Development Fund, the Cohesion Fund, the European Social Fund, the European Rural Development Fund and the European Fisheries Fund, the European Commission wanted to focus on high-performance outcomes and make the system simpler and clearer. The European Parliament was involved in the decision-making process for the first time, along with the Council of Ministers, which led to serious battles over the question of subjecting cohesion policy to economic governance requirements in the form of macroeconomic conditionality.
The next few pages review key aspects of the modernisation process after two years of negotiation. The new policy will now be translated into action by Europe's regions.
II. MAKING THE MOST OF THE STRUCTURAL FUNDS
In order to provide clarity and simplification, legislators have drawn up a cluster of common measures for the European Regional Development Fund, Cohesion Fund and European Social Fund (these three Cohesion Policy funds are discussed below) and also for the European Rural Development Fund and European Fisheries Fund.
Cluster of measures. The rules on how the funds are to be managed are no longer dotted about in various pieces of legislation; a new regulation now provides greater coherence among the funds and allows them to be combined. The regulation codifies the management of the funds by the member states and how the countries and Commission will work together in new “Partnership Agreements.” A non-legally binding common strategic framework and a code of conduct for the partnerships have been added to the common measures to provide guidance for the member states as far as possible when drawing up their development strategy and applying for EU financing. The modernisation of the Cohesion Policy aims to make the most of European investment in terms of impact on the ground, and cash will not be forthcoming without a proper strategy.
Performance. An entire section of the regulation reviews how to use the funding to ensure the best bang for the EU buck. The targets to be pursued by EU-financed programmes have been halved to eleven. The common measures now target EU cash on thematic objectives like social inclusion, research, the low-carbon economy, sustainable transport and apprenticeships. The regulation stipulates, however, with a view to optimising results, that member states and regions must provide quantifiable data to demonstrate whether the targets have been met. Indicators must be drawn up to measure tangible progress. Progress will be examined in 2019, when extra money might be forthcoming for the best performing programmes. The reform process introduced a new incentive, the “performance reserve,” 6% of the fund that will be allocated by the European Commission in the light of the assessment of programmes that have met their targets.
Strings are attached. In order to ensure that the strategy has fertile ground to grow in, the common regulation stipulates that various criteria must be met before European subsidies are forthcoming. Countries will have to demonstrate to the Commission that they have met these “ex ante” conditions, and the Commission will decide whether enough has been done to allow the cash to flow (or refuse funding until the desired action is taken).
The conditionality covers good economic governance in the member states. Macroeconomic requirements can now be used to justify the freezing of EU financing. In the past, this only applied to the Cohesion Fund.
National breakdown for ERDF, ESF and the Cohesion Fund (at 2011 prices), not including the Youth Guarantee: Poland: €72.8 billion, Italy: €29.3 billion, Spain: €25.1 billion, Romania: €21.8 billion, Czech Republic: €20.6 billion, Hungary: €20.5 billion, Portugal: €19.6 billion, Germany: €17.2 billion, Greece: €14.4 billion, France: €14.3 billion, Slovakia: €13 billion, United Kingdom: €10.4 billion, Croatia: €8 billion, Bulgaria: €7.2 billion, Lithuania: €6.4 billion, Latvia: €4.2 billion, Estonia: €3.4 billion, Slovenia: €2.9 billion, Belgium: €2 billion, Sweden: €1.8 billion, Finland €1.3 billion, Netherlands: €1.3 billion, Austria: €1.1 billion, Ireland: €1 billion, Cyprus: €703 million, Malta: €684 million, Denmark: €494 million, Luxembourg: €57 million. (Source: European Commission)
III.COHESION FUND: TRANSPORT INFRASTRUCTURE SHAKE-UP
The arrival of a new financial instrument for European transport, energy and digital infrastructure has altered the state of play for the Cohesion Fund. Some €10 billion will be transferred from the Cohesion Fund to the brand new “Connecting Europe Facility,” earmarked exclusively for infrastructure projects connecting up eastern and western transport networks. Environmental concerns have not been neglected, with a reshuffling of priorities for investment in energy efficiency.
Some fifteen or so member states are eligible for finance from the Cohesion Fund and will share €66 billion on filling development gaps to catch up with the old member states. The countries eligible for Cohesion Fund cash are Bulgaria, the Czech Republic, the Baltic States, Croatia, Greece, Hungary, Cyprus, Malta, Poland, Romania, Slovenia, Slovakia and Portugal.
European value-added for transport. There has been a real change in terms of EU investment in transport infrastructure for these countries, which will now be allocated a total of €10 billion, but only under certain conditions, which can be summed up as providing “European value-added.” The €10 billion in question has been transferred into a new fund, the Connecting Europe Facility (CEF), which will have a total of €30 billion, €23 billion of it exclusively for transport (including the money from the Cohesion Fund). The European Commission created the CEF to develop the cross-border elements of transport networks (which are often neglected by national investment, forming a patchwork of transport routes across Europe). Until 2016, the €10 billion will be divided out among countries, and any cash not used as at 1 January 2016 will return to the cohesion country section of the CEF pot, so it would be possible for cash initially earmarked for Poland, say, to end up financing a Bulgarian rail route. The money will be available solely for international rail routes, rather than secondary branches. All financed projects will have to cover part of the trans-European transport network map, which focuses on more environmentally friendly forms of transport like rail, maritime or inland waterways. A co-financing rate of 85% will apply to transport projects in the Cohesion Fund section of the CEF, like the other Cohesion Fund initiatives, but cohesion fund countries can provide cash themselves for other mobility projects not connected with the CEF.
Energy efficiency at home. The Cohesion Fund will also prioritise projects that can deal with environmental problems. The revised regulation foresees cohesion countries investing in energy efficiency and renewable energy at home, rather than solely for public buildings and infrastructure, as in the past. The Cohesion Fund will now cover low-energy urban heating systems and high performance co-generation schemes. This may mark a change for the countries in question by allowing them to cut fuel bills, reduce their carbon footprint (as required for the EUROPE 2020 Strategy) and reduce their energy dependence on non-EU states.
National breakdown (at 2011 prices): Poland: €24.3 billion, Romania: 7.2 billion, Czech Republic; €6.6 billion, Hungary: €6.3 billion, Slovakia: €4.4 billion, Greece €3.4 billion, Portugal: €3 billion, Croatia: €2.6 billion, Bulgaria: €2.3 billion, Latvia: €2.1 billion, Lithuania: €1.4 billion, Estonia: €1.1 billion, Slovenia: €939 million, Cyprus: €286 million and Malta: €228 million. (Source: European Commission)
IV. ERDF: FUNDING TO FOCUS ON RESEARCH, ENERGY, ITC AND SMALL BUSINESS
Reform of the European Regional Development Fund (ERDF), which is used to correct imbalances between the regions of Europe, includes a mix of investment in innovation, energy efficiency, information technology and communication (ITC) and entrepreneurship. Here it is important to avoid too thin a scattering of the ERDF funding of nearly €100 billion on the regions. For the first time, aid has been earmarked for urban areas.
Mix and match. The ERDF will focus to varying degrees on four of the eleven thematic objectives promoted under the Cohesion Policy, depending on the level of development in the direct beneficiary regions, with a view to ensuring that public investment matches needs on the ground. Innovation, research, digital strategy, support for small and medium-sized enterprises (SMEs) and the low-carbon economy will receive half of the investment in the less developed regions (those with GDP of below 75% of the EU average). This will give greater room for manoeuvre to the regions which receive the most EU finance for catching up with other regions so they can pick priorities that match their own needs. In fact, in former industrial areas, for example, aid for high-speed internet access is not necessarily so very urgent. There will also be flexibility for transition regions (GDP between 75% and 90% of the EU average) which will have to use 60% of ERDF investment on the above-mentioned priorities. Virtually all ERDF funding for the most developed regions (GDP of over 90% of the EU average) will have to invest 80% of their EU funding in the four priority areas. The wealthiest regions will be allowed to pay greater attention to the promotion of renewable energy, for example.
Cities get a look-in. The EFDF will be expanding it financing in the upcoming programming period, with urban areas now getting some of the budget earmarked for the regions. Some 5% of EU aid will be paid to cities to promote sustainable integrated development in urban areas. An exchange platform will be set up for European towns and cities.
V. EUROPEAN SOCIAL FUND: LESS THAN A QUARTER OF THE COHESION PACKAGE/BUDGET
The philosophy of the Cohesion Policy's social pillar, focussed primarily on the European Social Fund (ESF), has been retained in the reform process, with the stress on combating youth unemployment.
Investing in people to the tune of €74 billion. The ESF will have around a fifth of the cohesion policy funding, or an estimated €74 billion.* The European Parliament would have preferred it to have a greater share of the €325 billion, but in the end it was decided that the ESF shall have 21.3% of the total budget. The ESF will invest in people, and its financing will continue to focus on job mobility, education, lifelong training, social inclusion and tackling poverty. The revised regulation states that member states must inject 20% of the ESF into tackling poverty so that disadvantaged individuals can have the same opportunities as others and be integrated into society. Promoting sexual equality must be included in all the financed programmes.
Youth Employment Initiative. Some €3 billion will be taken from the ESF budget to tackle youth unemployment in the worst-hit countries. The Youth Employment Initiative was set up with this in mind and will have €6 billion for 2014 and 2015, half from the ESF and half from another part of the EU budget. The cash will go to member states' regions where more than 25% of young people are not in education, employment or training. National governments will use the fresh money in their action plans to get 15-24 year-olds onto the labour market, and will have the option of extending this to young people up to the age of 30.
The ESF regulation has been redesigned to simplify procedures, better targeting working closely with local authorities to get the best bang for the EU buck. The reforms leave room for social innovation to develop novel solutions for meeting the needs of jobs, education and society in general.
National breakdown (in 2011 prices) for the ERDF and ESF, without the Youth Guarantee: * At this point in time, the national breakdown for the ERDF or the ESF has not been decided, and it will only be decided when the partnership agreements are decided upon with the Commission by the summer of next year. Member states are required to spend at least 21.3% of their total allocation on the ESF, and are free to spend more if they wish.
Poland: €48.5 billion, Italy: €29.3 billion, Spain: €25.1 billion, Germany: €17.2 billion, Portugal: €16.5 billion, Romania: €14.5 billion, France €14.2 billion, Hungary: €14.1 billion, Czech Republic: €14 billion, Greece: €11 billion, United Kingdom: €10.4 billion, Slovakia: €8.7 billion, Croatia: €5.3 billion, Bulgaria: €4.8 billion, Lithuania: €4.2 billion, Latvia: €2.8 billion, Estonia: €2.2 billion, Belgium: €2 billion, Slovenia: €1.9 billion, Sweden: €1.8 billion, Finland: €1.3 billion, Netherlands: €1.2 billion, Austria: €1.1 billion, Ireland: €1 billion, Denmark: €494 million, Malta: €456 million, Cyprus: €417 million, Luxembourg: €57 million. (Source: European Commission)
VI. INVESTMENT HAND-IN-HAND WITH GOOD ECONOMIC GOVERNANCE
For the first time, disbursement of the European Structural Funds will be conditional upon respect of good economic governance rules. This is already the case for Cohesion Fund beneficiary countries, and finance for Hungary was held back in 2011 when it was found guilty of breaking public deficit rules. No country will now be able to avoid having to comply with the macroeconomic strings attached to the aid.
As part of the reform process, the highly criticised term “macroeconomic conditionality” has been renamed “measures connecting the Structural Funds and investment with suitable economic governance in the EU.” This means that the Cohesion Policy is now formally recognised as an investment tool, but in return, it is now covered by the macro-economic requirements laid down the European Semester process.
In the event of macro-economic imbalance or excessive budget deficit in any country in the European Union, the European Commission has the power in severe cases to withhold Structural Funds to get the country to comply with the Commission's economic recommendations. All Structural Fund monies can be frozen, along with up to half of other European funding (but only where immediate compliance is not expected by the member state in question).
Case-by-case. This mechanism is often described as a last resort and a number of safeguards have been introduced to ensure it does not dangerously affect a member state. Firstly, application of the mechanism must take account of social and economic data like unemployment levels, poverty and economic recession and the length of time remaining under the programming period (to ensure that there is still enough time to complete projects once the suspension of funding is lifted). Secondly, the Commission's draft suspension decision will be formally discussed with the European Parliament. The Commission will be required to provide explanations to the European Parliament, which will be consulted throughout the suspension decision process and ahead of approval by the European Council. These guarantees were introduced on the insistence of the European Parliament, which under encouragement from the regions for a long time rejected the idea of any kind of macroeconomic conditionality of this type, seeing it as a double whammy for local authorities, punishing them for bad management at national government level. The MEPs reluctantly supported the mechanism when the safeguards were added, reassured by the attention paid to proportionality and the fact that application has been rendered virtually impossible in practice.
VII. TRANSITION REGIONS - A NEW CATEGORY FOR SMOOTHER ADJUSTMENT
The reshuffling of the classification of the regions is clearly beneficial. First of all by making the nomenclature more understandable and fairer. The introduction of a new category, transition regions, provides a buffer for regions of Europe that have become slightly richer, preventing them from having to leave the convergence system (as would have happened under the old rules) or from falling to the bottom of the league table of the richest nations under the impact of the crisis.
Simpler categories. The new breakdown classifies regions with per-capita GDP of less than 75% of the EU average as “less developed” regions. There are 71 of them, mostly in eastern and southern Europe. It is estimated that the Structural Funds provide around €270 per inhabitant (€239 billion in total). The “most developed” regions are those with per-capita GDP of above 90% of the EU average. There are 54 of them (in central and northern Europe), and their inhabitants only receive €24 from the Structural Funds (€52 billion in total).
Transition regions. In between the other two regions, an intermediate category will be added, “transition regions,” 53 areas with per-capita GDP of between 75% and 90% of average EU GDP. These regions are not rich, but nor are they poor, and they will receive some €67 per inhabitant in EU investment (€33 billion in total). Situated mainly in the west of the continent (although there are regions in the east with similar characteristics), they are scattered throughout France, Spain, Portugal, Italy, Greece, Belgium, Germany, Austria, Denmark, Ireland and the United Kingdom. The legislators have reduced the amount of money that transition regions must supply themselves compared with the wealthier regions, giving them a co-financing rate of 60% (rather than 50%) for the Structural Funds in general (but 85% for Cohesion Fund money). The less developed regions have a co-financing rate of 80%, rising to 85% for cohesion countries. Transition regions have been granted greater flexibility in the concentration of funding under the ERDF for enterprise, ITC, energy efficiency and research (see separate article).
VIII. PARTNERSHIP AGREEMENT FOR THE BENEFIT OF THE COMMISSION AND THE REGIONS
The member states will now have to sign a legal contract with the European Commission if they want to receive the subsidies earmarked for them under Cohesion Policy. The reform stipulates that a Partnership Agreement will give the European Commission great powers over EU investment, which has tended to fall short in the past when it comes to tangible outcomes. Regional authorities are responding proactively to ensure their voices are heard.
Commission takes control. Before any operational programme is launched or money released, the member states must provide the European Commission with their strategies for making the most of the EU funding, listing their objectives, indicators to measure the success or otherwise of a programme, and prior conditions in the field. Close sources explain that most of the member states have already provided the Commission with an initial draft, but with varying degrees of detail. The fastest to react were Poland and the United Kingdom and the slowest Spain, Italy and France (due to their decentralised systems). If the Commission is not happy with the strategies, it will enter talks with the country in question to arrange adjustments before the partnership agreements are signed (probably before the 2014 summer break). The Commission will gain more control over the management of the Structural Fund, monitoring use of the EU money more closely to ensure the best use is made of it.
Multi-level governance. Multi-level governance has been fully recognised in this connection. The common measures require member states to organise partnerships with local and regional authorities to draw up both the partnership agreement and the operational programmes. The local and regional authorities are no longer considered on a par with economic and social partners and this marks a big step forwards for the regions, whose unique characteristics should now be better incorporated. According to a European association which represents the interests of local groups, only one third of European capitals have had real dialogues with the regions.
IX.SIMPLIFYING A RUSTY CONCEPT?
Often described as a simplification drive, the reform process is finding it difficult to shake up the old bureaucratic structures. Although the European Commission unveiled emblematic changes, with a common regulation, more understandable categories of regions and e-cohesion, the draft legislation was mangled during the negotiations with the European Parliament and the Council of Ministers, making things more complicated.
The drawing up of partnership agreements, with indicators, thematic objectives and prior conditions, however laudable it might be in terms of performance, adds quite a thick layer of bureaucracy for regions and national authorities alike. The reform drive may in fact have failed when it comes to simplification. It is difficult to find in the revised regulations sections that will actually make life easier for the end beneficiaries. At best, the Commission is sending the ball back to the member states. Under the partnerships with the member states, European capitals will be required to provide a summary of tangible action to be introduced to this effect…
In addition to the very detailed European requirements, each member state also has its own rules, which hang like a fog of extra administrative hurdles for end beneficiaries. The word simplification may soon acquire a bitter taste, as end beneficiaries drop the old procedures and adjust to the new rules. A complex set-up that will not solve the visibility deficit for the EU's investment tool among the general public.
X. A NOTCH-TIGHTENING BUDGET AS COHESION JOINS THE AUSTERITY DRIVE
Under the pressure of austerity, the Cohesion Policy's budget for 2014-2020 has been cut for the first time. Dark times are on the horizon for some regions of Europe as the Structural Funds now finance only half of public investment in a good fifteen member states. EU cohesion cash will fall from €355 billion in 2007-2013 to €325 billion in 2014-2020 (at 2011 prices). Although the European solidarity mechanism has been reduced, it still gobbles up a good third of the EU budget, the second highest allocation after the Common Agricultural Fund.
Statistical impact. No government will proclaim that it has lost out in the sharing out of the new budget, but some countries and regions will be wincing, despite the various hand-outs and correction mechanisms carefully drawn up during the budget and legislative negotiations on reform of the Cohesion Policy. The “mechanical” impact of using 2007-2010 figures as the reference point in the calculations, in other words before the economic crisis kicked in, has led to significant cuts in the subsidies for some countries, Greece and Spain, for example. The Baltic States and Hungary will suffer from the capping of EU funding at 2.5% of GDP because their GDP plummeted during the crisis. Extra funding has been conceded for these and other countries to compensate for the drastic cuts in funding. The revision clause for the European budget for 2016 will use updated statistics and may change the situation for regions that are no longer eligible for convergence funding, but are suffering all the same from austerity. The introduction of the transition category will help soften the exit from the convergence programme for a number of regions. Transition regions are mostly located in central Europe, in old member states like France, Belgium, the United Kingdom, Ireland, Italy, Spain, Portugal, Greece, Denmark and Austria. The great beneficiary here is clearly Poland, whose aid amount is now no less than €72 billion, more than double the €29 billion for Italy, next in the list of the big recipients.
XI. THE PRESIDENT OF THE COMMITTEE OF THE REGIONS, RAMON VALCARCEL, ASSESSES THE REFORM PROCESS
The Committee of the Regions, the European advisory body that is closest to the local communities, has been at the forefront of moves to monitor and assess the reform process. The CoR president, Ramón Luis Valcárcel, discussed with EUROPE the other side of the coin for end beneficiaries.
Agence Europe: Is the reform of cohesion synonymous with effective simplification for the beneficiaries after all the changes introduced by the European Parliament and Council?
Ramón Luis Valcárcel: This reform has many positive aspects and will increase the effectiveness of the EU's regional policy but simplification is not among its strong points. Probably the introduction of e-procedures could simplify some processes but in general, despite all efforts undertaken, there are regulatory novelties, such as ex ante conditionalities or macroeconomic conditionality, that risk making the fund's programming and management more complex and uncertain. Let's look at ex ante conditionalities: the Commission guidance note is around 450 pages long… and of course, without these conditionalities being completed, the execution of funds cannot even start. The only way to make sure that we deliver investment for growth and jobs on time is to achieve the highest degree of cooperation among regions, member states and the Commission. Together we shall try to prevent mistakes and to boost projects planning and implementation.
AE: The principle of multi-governance has now been properly introduced into the various regulations in the Cohesion package. Do you trust the member states to respect the spirit of this? Does this appear to be the case in the preparation of the Partnership Agreement?
RLV: The reform sees a substantial strengthening of the principles of partnership and multi-level governance. This latter has been enshrined for the first time in the Common Provisions Regulation next to the partnership principle (Article 5). In addition, a European Code of Conduct on Partnership will be elaborated as a delegated act to guide member states in the implementation of these principles. Nonetheless, the Code will come too late for the current elaboration process, since the preparation of the partnership agreements and the operational programmes was already undertaken in parallel to the negotiations on the Cohesion Policy package, on the basis of an informal dialogue between member states and the European Commission. This effort was crucial to ensure a timely start of the new programmes in 2014. Nonetheless, even in the absence of the code, several member states have made serious efforts to better take on board regional and local authorities' views. Transparency has increased and overall coordination has stepped up. Of course, the proof will be in the eating of the pudding. Notwithstanding, within the CoR we are convinced that both multilevel governance and strengthened partnership will result in better results on the ground.
AE: For the first time, the budget of the cohesion policy has been cut. Will the focus on performance be enough to compensate for that loss and still ensure a tangible impact for European investment?
RLV: These financial perspectives were mostly shaped during the worse phase of the crisis. The consequence is that, for the first time in the EU history, we will see a decrease in the next seven years' expenditure ceilings, compared with the previous period. However, regional policy still accounts for one third of the overall budget and has been consolidated as the EU's main tool to invest in growth, innovation, cohesion. In this framework, the effort made to concentrate funds on relevant objectives could improve effectiveness. Regions and cities also share the need to better assess the impact of operational programmes, with clear and meaningful indicators. As regards the introduction of the performance reserve, we fear that it will instead encourage managing authorities to set less ambitious targets. The main consequence of this reserve is that almost 7% of funds will be available only after 2020.
AE: Are you still considering referring macro-conditionality to the European Court of Justice, despite the safeguard introduced by the European Parliament?
RLV: It is a question of justice. Why are regions to be punished for macro- economic imbalances originating from flawed decisions taken at the national level? We would certainly support any regional authority bringing a case before the Court. From an institutional viewpoint we deplore that, notwithstanding the overall good cooperation we have had with the Commission throughout the first co-decision process on this important dossier, no genuine responsiveness was given to the seven CoR opinions in which our Plenary had firmly rejected this provision.