EU REGIONAL POLICY

REF: EUREGIONALPOL 2010 /FEB 23feb10

(1) Introduction Aim - to overcome regional

disparities in the EU and support the integration process

Structural funds (SFs) provide financial assistance to do this– invest in backward regions– encourage future growth in these regions

Effective? Sufficient funds?

(2) Europe’s regions Concern for Europe’s disadvantaged

regions has always been part of EU priorities.– In Treaty of Rome preamble.

Pre-1986, most spending on regions was national– Rural electrification, phones, roads, etc.

1973, Ireland (poor at the time joined); 1981, Greece joined but no major reorientation of EU spending priorities.

Entry of Spain & Portugal created voting-bloc in Council (with Ireland and Greece) that induced a major shift in EU spending priorities, away from CAP towards poor-regions. – QMV was 71% of vote, 31% to block

• See graph “Structural spending” increasing % of

EU budget since 1980s.

QMV was 71% of vote

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Structural Funds

Poor Vote-Share

CAP

Important figure for ‘blocking’

Europe’s Economic Geography: Facts Europe highly

centralised in terms of economic activity. – ‘CORE’

• 1/7th land, but 1/3rd of pop. & ½ GDP.

Periphery has lower standard of living etc.

Periphery

Centrality of EU25 Regions

Intermediate

Core

Periphery

Centrality of EU25 Regions

Intermediate

Core

(3) Why is an EU regional policy required?

To overcome regional disparities in the EU and support the integration process

Do your own research / see presentations for recent data on – Income inequality– Unemployment inequality– Core v periphery issue

• See European Commission Economic and Cohesion Reports, Eurostat, UK House of Lords European Committee (module web)

Geographic income inequality Within nation

economic activity is very unevenly distributed

Guyane (F)

Guadeloupe

(F)

Martinique

(F)

RÈunion

(F)

Canarias (E)

AÁores (P)

Madeira

(P)

Kypros

Index, EUR-26 = 100

< 30

30 - 50

50 - 75

75 - 100

100 - 125

>= 125

no data

Source: Eurostat

0 km100 500

REGIO.A1- GIS/HP/(statmap) - m98001_uk_C_A4P - 09 Jan 01

SIG16SIG16

© MEGRIN for the administrative boundaries

GDP per head by region (PPS), 1998

< 30

30 - 50

50 - 75

75 - 100

100 - 125

>= 125

Index, EU-25 = 100

< 30

30 - 50

50 - 75

75 - 100

100 - 125

>= 125

Index, EU-25 = 100

< 30

30 - 50

50 - 75

75 - 100

100 - 125

>= 125

Index, EU-25 = 100

Why an EU policy in addition to national policy?

Controversial– interventionist

Arguments for an EU policy– Overcome market failure in EU,eg labour

immobility– Counterbalance; EU policies may worsen

regional imbalances, eg CAP, EMU, SEM– EU co-ordinate national policy

(4) Main types of funds Structural funds (SFs)

– ERDF– ESF– EAGGF (guidance)– FIFG– Cohesion fund

Others incl.– Pre accession aid

(5) Regional Policy Objectives & Reforms

‘Minor’ reforms pre- single market 1989 Reforms

– Linked to SEM– Principles incl:

• Made collaborative /EU co-ordinator• Multi-annual programme• additionality

Agenda 2000– 2000-2006

Aim to increase efficiency New streamlined objective regions

– 6 to 3 objectives • See below

RP Objectives

1989-99 Objective1 regions

– structural adjustment

Obj.2 regions– industrial decline

Obj 3 regions Obj 4 regions Obj 5 regions Obj 6 regions

2000-06 concentration increased

Objective 1– structural adjustment– < 75% EU GDP– 70% SF here!– ERDF

Objective 2 – Regions in decline &

rural areas Objective 3

– human resource development

– ESF

Simplification and decentralisation Clearer division of responsibilities Subsidiarity emphasised But, budget fixed at 0.46% of EU GDP

2007-13

New allocations following enlargement Some EU15 regions now less funding

(now >75%) – phase out funding 3 objectives streamlined to 2 objectives

Issues incl.

Dependency Additionality Subsidiarity Enlargement Absorption by CEECs Each stage of integration - different

effects on regional disparities

(6) RP: Effective? Sufficient? Some EU convergence across EU

– Convergence v divergence (see El Agraa)– Some evidence indicates divergence– At best, narrow convergence– Convergence may be explained by Theory

of Comparative Advantage Still ‘core-periphery’ disparities

Geographic Specialisation Krugman index of

specialisation shows most EU nations becoming more specialised.– EU economies

seem to be specialising more in their comparative advantages.

Source: Midelfart-Knarvik and Overman (2002)

Krugman index comment

EU states: more specialised on a sector basis– explained by Theory of Comparative

Advantage – Eg Portugal cloth, Germany

pharmaceuticals…..;

Comparative Advantage and Specialisation

-52%

-50%

-42%

-35%

-30%

-16%

-9%

-4%

13%

15%

25%

44%

58%

83%

-80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Germany

DenmarkSwedenAustria

FinlandNetherlands

France

BelgiumUK

Ireland

GreeceItaly

Spain

Portugal

Low-education labour Medium-education labour High-education labour

Source: Midelfart-Knarvik and Overman (2002)

comment

Federal systems (Canada & US) have lower regional disparity than EU – US - 1/2 that of EU– Convergence slow (2% pa)

Underfunding despite increased finance in 1990s– SF 0.46% of EU GDP– need ability to transfer funds between

regions

Aims– Realistic? Attainable?– Elimination of disparities or equality of

opportunity? Inefficiency due to problems with planning,

implementation and operation (EU 1999)

BUT, within EU states - greater disparities– clustering of economic activity

(agglomeration, see later for economic geography theory)

(7) Theory 2 major approaches linking economic

integration to change in the geographic location of economic activity.

Comparative advantage suggests nations specialise in sectors in which they have a comparative advantage.– Some convergence between states

New Economic Geography & endogenous growth suggest integration tends to concentrate economic activity spatially.– Greater disparities within states

Agglomeration Theory Economic geography can

– help explain empirical indications– assess the effectiveness of structural

policies Agglomeration forces exist when spatial

concentration of industry creates forces that encourage further concentration– positive externalities– dynamic– attract complementary factors

In the figure below Curve A; agglomeration index (the ratio of

the number of firms in the rich region to the total no. of

firms) – Agglomeration rises, income disparities

widen• As firms locate in core/rich areas

Generally more profitable to produce in rich area (larger market) to benefit from economies of scale

If transaction costs between regions fall, firms will increasingly locate in the region & serve all regions

Curve R; regional income inequality index (ratio of income in the rich region to the total no. of firms)

As agglomeration rises income disparities narrow– Aggm. Reduces innovation costs

• Raises innovation & NEW ENTRY• Greater competition for firms in rich region,

lower profits & reduces disparity between regions

Curve S; agglomeration rises, so does innovation & growth– Agglomeration (spatial clustering) reduces

cost of innovation & raises growth rates– Also, high innovation rate encourages

market entry/competition, reducing profits of incumbent (concentrated in rich region), & hence reduces regional income disparities

See Martin (1999) for analysis

AgglomerationIncome inequalities

Innovation rate & LR growth rate

Industrialagglomeration

RA

S

Income inequalities

Innovation rate & LR growth rate

Industrialagglomeration

RA

S

Equilibrium degree of agglomeration,Innovation/LR growth rate

Different impact of regional policy

RP may fail– EU RP often targets infrastructure to

support SEM– Often unwanted & desired effects (trade-

off)– Thus, need to chose policy carefully

Eg 1. SFs reduce transactions costs within poor regions (eg…………………)

Curve A shifts left A to A1– For a given level of inequality , aggn falls– Firms attracted to poor region

Result: trade-off– aggn– inequlity!!!– Growth/innovation!!!

Income inequalities

Innovation rate & LR growth rate

Industrialagglomeration

RA

S

x

x

x

Income inequalities

Innovation rate & LR growth rate

Industrialagglomeration

RA

S

A1

x

x

x

Income inequalities

Innovation rate & LR growth rate

Industrialagglomeration

RA

S

A1

xy

x

y

xy

Eg 2. No trade-off is possible – Raise innovation/growth– Reduce aggm– Reduce inequality

If SFs reduce costs of innovation – Incl. R&D, education, telecommunications

(faster broadband)– ‘less regional’!! See Martin (1999) for analysis

(8) Conclusion Despite some narrowing of disparities,

they still exist– Disparities within countries widening

RP linked to integration policies Regional policy

– effective?– sufficient?

Further reading Baldwin & Wyplosz, J Pelkmans, S Senior-Nello (all

on general reading list) Martin (1999), ‘Are European regional policies

delivering?, EIB Papers, vol 4,2 Amiti M, “New trade theories and industrial location

in the EU, Oxford Review of Econ Poliy Krugman & Venibles (1990), Integration and the

competitiveness of peripheral industry, in Bliss & Braga de Macedo (eds), Unity with diverisity in the European Economy, Cambridge Uini Press

Midelfart-Knarvik & Overman (2002), Delocation &European integration. Is structural spending justified?, Economic Policy