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EU Regional Policy (EUC Report)

My Lords, I am pleased to have this opportunity to debate the report on the future of EU regional policy, produced in July by Sub-Committee A of the European Union Committee. Thanks are due to my committee, to my special adviser, Dr John McCombie, of Downing College, Cambridge, to my clerk, Simon Blackburn, who has now moved on to greater things than me, and the committee specialist, Petros Fassoulas. I welcome my noble friend the Minister who may possibly not have thought that his maiden speech would be made on EU regional funding. I am sure that we will all welcome it cordially, even if he makes it in Welsh. We produced this report in July and the Government responded in October, which is about the average speed. It was the product of our consideration of the EU budget for 2009. In fact, the delay in getting to this debate has worked to advantage. In the current financial and economic crisis, there is huge pressure on EU regional policy and sometimes it seems to me that not a week passes without us being required to scrutinise and pronounce on an EU proposal to extend, increase, widen and generally tweak some part of regional policy. European regional policy is important to us all. In 2008, 36 per cent of the EU budget was spent on regional policy. The policy has its basis in Article 158 of the European treaty which states that the Community will aim to reduce, "““disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas””." So economic cohesion—that is what it is—the idea that no part of the Community should drag very far behind the other, has been a policy consideration for the European Community for half a century. It has become increasingly important; it has risen from 17 per cent of the European Union budget in 1988 to 36 per cent today. If the Lisbon treaty is ratified, Article 3 will state that the Union, "““shall work for the sustainable development of Europe based on balanced economic growth and … shall promote economic, social and territorial cohesion, and solidarity among Member States””." The aims are quite clear, but the administrative structures are extremely complex. There are three funds: the European regional development fund, which provides direct finance for companies, infrastructure and financial instruments; the European social fund, which finances projects to improve skills and access to employment; and the cohesion fund, which finances transport, energy and environment infrastructure projects. Three objectives underlie those policies, which do not match perfectly the way the funds are divided. The first and most important policy is convergence, which takes 81.5 per cent of our spending on regional policy. It aims to speed convergence between regions and is aimed at the poorest regions. The second is regional competitiveness and employment, which takes 16 per cent of the spending, and strengthens competitiveness and the attractiveness of regions not eligible for convergence funds. The third is the European territorial co-operation, which strengthens cross-border co-operation through joint projects, such as railways. The question of who is eligible for these funds is not wholly straightforward. It is based on a measurement of gross domestic product per head, which has the advantage of being easily understood and widely used in international comparisons of standards of living. There is a very wide range between member states, a range which has widened with the most recent introductions, the poorest regions being found in Romania and Bulgaria, as I think we would expect. For example, the Nord Est region in Romania has an index of 24, as against Hamburg which is 202 or inner London which, when the report was written, was 303, although it may not be quite as high at the moment. To be eligible for assistance from any of the regional funds, a region has to be below 75 per cent of the average index figure, or below 90 per cent for some. Other considerations also apply, such as relative prosperity, the number of employed and the number of jobs. When you add to these complications the fact that any money distributed is sensibly limited by a formula that takes into account the particular country’s or region’s ability to absorb the funds, you get the unsurprising result that there is no particularly clear relationship between the value of funds received per head and GDP per head. The result is that regions in some of the wealthier member states receive more funding per inhabitant than eligible regions in the poorer member states. To give an idea of how the indicative financial allocations for 2007 to 2013 work, Poland, as a very large, very poor country, will get around €60 billion, 19.4 per cent of the total funds for those years, and the UK will get 3.1 per cent of the funds, being much richer. When thinking about all of this, we found ourselves able to agree not only with the previous report of the committee but also with the Government’s thinking. We were strongly in agreement with the aims of regional policy; we agreed that it was important to reduce disparities between regions by encouraging economic and knowledge transfer from richer to poorer regions. As economic development is not even, we supported intervention in the market to counter underemployment and the use of resources in the poorer regions. We were also glad to be able to agree that, along with these ideas, the funds had helped to reduce regional disparities across Europe. We were given the examples that of the four countries originally eligible for cohesion funds, Spain, Greece and Ireland had all seen above-average increases in GDP as a result, and with 15 out of 50 regions in the EU having a GDP below 75 per cent of the EU average, by 2004 12 of these regions had moved above 75 per cent. So it actually works. The committee also agreed, perhaps more controversially, that there was no need for an increase in the total size of the EU budget and any extra money for regional policy should be reallocated from other budget headings. We had our eyes very clearly on the budget heading covering the common agricultural policy. Perhaps one of the most important conclusions is that we should change the way these funds are targeted. At present, about 20 per cent of the total regional policy budget is available to all regions, wherever they are. We concluded that funding should be concentrated in the poorest regions and reflect the principle of subsidiarity. This would result in a substantial loss of funding to richer member states, specifically to the United Kingdom. But the principle of subsidiarity—that action should be taken at European Union level only where it adds value to the reaction—can be used to justify richer member states taking responsibility for their own regional funding. Arguments against this conclusion, mostly deployed by the Commission, focused around the idea that regional policy should enhance member states’ co-operation and knowledge-sharing and that it was not acceptable to divide member states into donor and recipient countries. We saw the force of this argument but in the end we discarded it and we were very glad that the Government were able to endorse our conclusion, despite the fact that, on present distribution, an annual loss of £1.6 billion to the UK could be involved. However, in their response the Government said that this view depended rather on a rebalancing of the European budget generally, specifically rebalancing the funds allocated to the common agricultural policy. We were none the less glad that the Government were able to support our conclusion. There are various other aspects of the report. I am sure everybody is familiar with the fact that, in many cases, member states cannot use their full funding. For this reason, all member states have an absorption cap based on their gross national income which limits the funds available to them by on average around 50 per cent. For example, the region of Lubelskie in Poland, from where we took evidence, was able to use only 80 per cent of its funds between 2004 and 2006. This led many witnesses to argue that increasing regional funding made available to member states, as we recommend, will not necessarily raise their economic performance. We found that much of this problem was caused by inexperienced fund management structures in new member states and that, to help remedy this, the older member states were advising newer member states on fund management, which the committee supports in its report. For instance, the Office for National Statistics has advised eastern European countries on the collection of statistics. This has particular relevance in the current economic downturn, as many are citing regional funding as a way to inject cash into the economy. However, as many member states are currently unable to spend their current allocation, it may be seen as counterproductive. Pumping money into a system that is unable to spend its current allocation will not achieve a proportional benefit in the economy. We hoped that member states would be able to catch up and train their people fairly quickly. We also welcomed the integration of the funds with the Lisbon strategy for growth and jobs. Under the financial perspective 2007-2013, regional policy spending is linked with the Lisbon agenda, which means that money needs to be spent on competitiveness and employment objective spending. This enables member states to develop a more forward-thinking spending plan, linking spending on infrastructure with the development of employment, rather than just building roads. The committee welcomes the approach of the Commission that one policy does not fit all. As such, it agrees that regions should continue to draw up their own regional spending plans, rather than policies being decided on a centralised basis. We also agreed with the Government that spending should not be used other than to reduce regional disparities; for instance, it would be unwise to divert any spending to major issues such as climate change, which should be addressed on its own. This will help prevent projects funded by the funds conflicting with other European Union policies. Since we wrote the report, there have been several other developments. In September 2007, the European Commission published the Fourth Report on Economic and Social Cohesion, which presented the basic data and key assumptions with a view to debating the future after 2013. As listed in the report, the EU will face new threats and important challenges such as population ageing, rising energy prices and immigration pressure. A concrete presentation of cohesion policy after 2014 is not expected until the fifth report on economic and social cohesion is published around 2010, but the committee will probably take a look at it at that stage. The debate on the future reform of cohesion policy appears to revolve on two different views: on the one hand, that cohesion policy needs to keep its traditional role of reducing disparities and ensuring convergence for regions; on the other hand, that the priorities of cohesion policy should closely be linked to the Lisbon agenda and that improving competitiveness and innovation must be the main objective for future cohesion policy. The most important debate is coming up in the budget review 2009, which provides the opportunity to recommend an overhaul of the budget and the possibility of reforming the CAP and reducing the funds that richer members receive. We look forward to that debate.