Opinion of the Economic and Social Committee on 'The future of cohesion and the long-term implications for the Structural Funds'

(96/C 153/03)

On 30 March 1995, the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an Opinion on 'The future of cohesion and the long-term implications for the Structural Funds'.

The Section for Regional Development and Town and Country Planning, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 20 February 1996. The Rapporteur was Mr van Dijk.

At its 333rd Plenary Session (meeting of 28 February 1996), the Economic and Social Committee adopted by a majority vote with 7 abstentions the following Opinion.

1. Introduction

1.1. This Opinion will consider the future of (economic and social) cohesion and the long-term implications for the Structural Funds. In a number of its previous Opinions (), the ESC has repeatedly stressed the importance of both the principle of cohesion as a statement of political solidarity between the regions of the EU, and the operation of the Structural Funds as a key common policy in effecting a reduction in the degree of economic disparity within the EU. It reasserts both positions on this occasion.

In so doing, the Economic and Social Committee endorses the principle contained in Article 2 of the founding Treaty of Rome which called upon the European Community to:

'... promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relations between the States belonging to it.'

It is within the context of this guiding principle that the current discussion on cohesion must be continued.

1.2. During a period when the process of a further deepening and widening of the EU is being contemplated, the ESC considers it relevant to review the implications for cohesion, and for the main policy instruments promoting cohesion. This is because, since the reforms of 1988 the EU structural policies have evolved into an effective vehicle for promoting economic and social cohesion across the EU. In the absence of the role played by the Structural Funds, economic growth in the Union's economically weakest regions would have been significantly lower than that recorded since the mid-1980s. Although more difficult to quantify, informed opinion also suggests that the economic prospects in the Objective 2 and 5b regions have been considerably enhanced by the operation of the Structural Funds.

1.2.1. The principle of strengthening the degree of economic and social cohesion between the regions of the European Union (EU) was given its clearest, and most forceful, expression in Single European Act (SEA). According to Article 130a of the TEU (Treaty on European Union), economic and social cohesion would be strengthened by:

'... reducing disparities between the levels of development of the various regions and the backwardness of the least-favoured regions, including rural areas.'

Moreover, Article 130b of the TEU called upon Member States to:

'... conduct their economic policies, and coordinate them, in such a way as ... to attain the objectives set out in Article 130a',

and stipulated that,

'the implementation of common policies and of the internal market shall take into account the objectives set out in Article 130a ...'.

It is important to stress, therefore, that the TEU requires that the impact upon economic and social cohesion is taken into consideration in the design and implementation both of common (EU), and national, economic policies.

1.2.2. The Committee considers that it is desirable to re-state the provisions of Article 130b during the period running-up to the 1996 Inter-Governmental Conference (IGC), and in the light of the implications for national economic policies in some Member States contingent upon the convergence requirements for European monetary union (EMU) being achieved. It is essential that national and EU policies do not jeopardize the considerable achievements that have been made since 1988 in strengthening economic and social cohesion in order to further competing objectives.

1.2.3. Securing progress towards greater economic and social cohesion within the Union remains a key challenge for EU policymakers. A recent European Parliament research report () defined cohesion as a situation in which (economic and social) differences between regions and groups in the Community are politically and economically acceptable. It is worth stressing that a Union in which wide divergences in economic and social well-being persist is, therefore, unlikely to be a politically stable Union. There is an ever-present risk as further steps are made to achieve an economic and monetary union that the industrially dynamic regions of the EU will benefit more than will the disadvantaged regions. This risk, which is one from which all EU Member States ultimately would suffer, can be neutralized only with the continued development of appropriate common cohesion measures.

1.2.4. The Structural Funds and Cohesion Fund are the mechanisms instrument through which the EU seeks to advance the objective of economic and social cohesion. In 1988, and as required by the SEA, the Structural Funds were reformed with a view to improving their effectiveness in promoting cohesion. It is worth recalling that a central reason underlying this reform to strengthen the EU cohesion measures was a concern that the completion of the Single European Market (SEM), whilst benefitting the industrially dynamic areas, could exacerbate the economic difficulties confronting the Union's economically weaker regions. As the process of economic integration deepens, this concern remains and must be responded to.

1.2.5. The reformed package of cohesion measures introduced in 1988 was based upon four principles - concentration of resources on the regions in greatest need; partnership in the design and implementation of regional policy; programming of Structural Fund assistance; and additionality in the provision of matching domestic financial support from beneficiary Member States. The 1988 reforms saw a doubling, in real terms, of the financial resources assigned to the Structural Funds up to 1993.

1.2.6. It is difficult to predict the conditions that will prevail after the IGC in 1996 and the approach to cohesion that will be favoured by the Member States. However, the Committee considers it essential that any revision of structural policy should not weaken the four principles approved in 1988 and ratified at the Lisbon and Edinburgh European Councils. These four principles of concentration, partnership, programming and additionality lie at the heart of the Structural Funds and determine, in large measure, the success of the programmes financed by them. These principles have been commented upon in several previous Opinions of the Committee (). The ESC considers that they must be maintained and their implementation in Member States improved.

1.2.7. The following particular observations can be made:

(i) with respect to programming, the ESC considers that greater flexibility in allocating funds will be necessary in the future as the pace of change intensifies;

(ii) concentration of resources remains vital and must be continued if the Structural Funds are to contribute fully to narrowing regional inequalities;

(iii) additionality must continue to be observed on the part of Member States if the Funds are to have their fullest impact. However, there is a risk that the effectiveness of the Structural Funds will be reduced if an individual Member State is required to reduce domestic public expenditure in order to fulfil the Maastricht convergence criteria. It is important that the objective of economic and social cohesion is not compromised by the need to conform to the Maastricht convergence criteria;

(iv) this Committee has, over the years and in several recent Opinions (), drawn attention to the constructive role played by the economic and social partners in all aspects of Structural Fund operations. Consequently, the ESC particularly welcomed Article 4 of the new framework regulation which makes mandatory the involvement of the economic and social partners in developing and implementing regional economic plans. Unfortunately, this requirement is not always fully respected in all Member States. The ESC takes this opportunity of restating the importance it attaches to the principle of partnership, and would call for a greater degree of transparency in procedures as a means of ensuring that partnership is observed in practice. The ESC calls upon the Commission to produce a detailed report on the implementation of partnership in Member States reviewing the extent to which the requirements under Article 4 are being met;

(v) the Structural Funds have a central role in promoting employment in the EU, and employment creation must remain a central measure of the success of actions taken within their ambit. Consequently, actions that improve the opportunity for self-sustained economic growth and employment creation in the disadvantaged regions should be prioritised by Member States. This may necessitate some Member States reappraising the allocation of Structural Fund support between infrastructural investments and those impacting more directly upon employment;

(vi) the principle of economic and social cohesion is central to the institutional unity and political solidarity of the European Union. Consequently, it is likely that any weakening in the resolve to promote cohesion on the part of the richer Member States would possibly have a counterpart in growing political hostility towards the Union within the weaker Member States. In the context of an enlarged European Union, and with partial movement towards monetary union expected by the end of the decade, there is a risk that the institutional cohesion of the EU will be fragmented: that is, the emergence of a 'variable geometry' Union. The defining feature of variable geometry is that individual Member States are able to participate in certain, though not all, of the functions of that Union. The 'opt-out' clauses that exempt the UK from the Social Protocol and both the UK and Denmark from monetary union are examples of variable geometry integration. The risk with an EU of variable geometry is that membership of respective elements of the Union could become permanent. At the very least the pressure on the stronger Member States to assist the weaker countries 'catch-up', pressure that would be (and is) present in the case of 'multi-speed' integration, would be considerably less.

1.2.8. The structural programmes were again reviewed in 1993, as provided for in the regulation and in the context of the need to negotiate a new budgetary framework for the EU - negotiations which led to the Delors II package being agreed at the Edinburgh summit. In that review, the central principles of the structural programmes were reasserted and the eligibility criteria left unaltered. Consequently per capita GDP remains the principal indicator of regional economic development with regions recording per capita GDP of 75 % or below the EU average being eligible for assistance under Objective 1. Countries recording an average per capita GNP of 90 % EU average or below are also eligible for assistance from the Cohesion Fund. Objective 2 of the Structural Funds is aimed at assisting regions suffering industrial decline. Eligibility under this objective has principally been determined by reference to the recorded rate of unemployment.

1.2.9. Finally, assistance under Objective 5b of the Structural Funds continues to be targeted at rural areas outside Objective 1 areas where there was a high share of agricultural in total employment and where per capita GDP was low. Objective 5b assistance is also available on the basis of geographical peripherality.

It should be noted that Objective 6 support was set up for the new Member States, Finland and Sweden. How this works in practice is not yet clearly defined as the programmes are only now beginning.

The 1993 review was conducted after agreement had been reached on the Delors II budget package which provided a financial envelope for the Structural Funds up to 1999. By that time, the Structural Funds will account for 35 % of total EU budgetary expenditure, and will represent only some 0,45 % of total EU GNP.

1.2.10. Prior to 1999, the EU Member States will have considered the future of the Union's cohesion policies. Their deliberations on this will take place against a background that is likely to differ in key respects from that which prevailed at the end of the 1980s. First, a monetary union between those Member States eligible for membership of the single currency area will be imminent. The economic situation in the remaining Member States will have a crucial bearing on the cohesion negotiations. Second, the question of the EU's enlargement to include the Central and East European Countries (CEEC) will have become clearer and, possibly, a timetable agreed upon. The financial implications of extending the cohesion funds to these countries are acknowledged to be considerable. Third, the Commission will have available the results of almost a decade of operation of the Structural Funds which will, undoubtedly, influence the future shape of the cohesion policies.

2. Cohesion - the broader issue

2.1. The concept of economic and social cohesion is not explicitly defined in the Treaty. In general terms economic cohesion is taken to refer to a narrowing in regional economic disparities within the EU. The variables most commonly used for measuring regional economic disparities are (a) Gross Domestic Product (GDP) per capita and (b) the rate of unemployment. The impact of the Structural Funds is assessed primarily by reference to the extent to which there has been regional convergence in these economic indicators.

2.1.1. However, cohesion can - and arguably should - be given a wider definition, one that involves a greater emphasis being placed on regional divergence in social indicators of well-being such as health, environmental quality, scholastic achievement, educational opportunities, rates of crime, migration, etc. Undoubtedly these social aspects are related to the economic development process, although in neither a direct nor simple manner. Nonetheless, these social indicators do enter the economic development equation: regions with relatively high social standards and high amenity are likely to be more attractive locations for investors, particularly those engaged in high-technology related activities.

2.1.2. Because of the inter-relationship between economic and social indicators of well-being, it is frequently the case that the highest incidence of social deprivation is to be found in those regions suffering from economic decline or economic backwardness.

Social problems need not only be associated with a low level of economic activity. To the extent that an economic development policy aims at attracting investment by lowering the costs that employers incur with respect to the general conditions of employment for employees, 'social dumping' too can lead to a widening of the cohesion gap. Consequently, EU Social Policy acquires a pivotal role in shaping the prospects for cohesion over the longer term.

2.1.3. A closely related issue in the Cohesion debate is the strategy adopted by the European Union in face of the presently high level of unemployment in all Member States. The average rate of unemployment in the EU is 11,1 %, significantly higher than rates in the EU's main competitor countries. This average masks considerable differences between Member States. Arguably the most worrying aspect is that long term unemployment (i.e. unemployment for longer than 12 months) accounts for over 45 % of EU unemployment. Analysis has demonstrated that the probability of gaining employment falls the longer the duration of the unemployment period. Skills become outdated and individuals find it increasingly difficult to re-enter the effective labour market. It is also worth stressing that unemployment is a particularly acute problem for young people and for women.

2.1.4. The average unemployment rate in the EU is 11,1 % (1994) but important differences between Member States can be observed. For example, in Spain youth unemployment rate is 45 % and women unemployment rate is 31,4 %, whereas in Luxembourg youth unemployment accounts only for 6,5 % and women unemployment for 4 % ().

2.1.5. It is vital that economic and social cohesion is not ignored in present discussion on policies aimed at tackling the problem of unemployment, and policies should not be introduced that, on balance, widen rather than narrow the cohesion gap. On the surface, the question seems to be one involving a conflict between economic efficiency and social justice. However, it is important to appreciate that no country in the EU will ever be able to compete in global markets on the basis of low-cost labour. There will always be countries which can deliver a more poorly paid work force. Consequently, the conflict between efficiency and equity may well be more apparent than real.

2.1.6. Considered in this broader sense, which incorporates social as well as economic indicators of well-being, cohesion acquires an important political dimension within the developing structure of the European Union. Indeed, the drive to secure greater economic and social cohesion may well be a central element in the process of achieving 'an ever closer Union'. Popular support for furthering economic and political integration in the EU is, as has been seen in the past, closely linked to the material well-being of EU citizens. Any tendency to lessen the commitment to cohesion could, therefore, result in a weakening of popular support for European integration, particularly in the poorer countries.

3. Results to date

3.1. The Structural Funds are the main common instrument aimed at further cohesion within the EU. During the period since the 1988 reforms, and as demonstrated by recent Commission reports, the Structural Funds have made an important contribution to reducing the level of economic disparity between the poorest and richest regions within the EU.

3.2. Progress towards greater cohesion has been most marked in those regions eligible for assistance under Objective 1 of the Structural Funds (especially Ireland, Spain and Portugal: the Structural Funds have been less successful in Greece). Not only are these the most disadvantaged regions within the EU, therefore those where the greatest progress is to be expected, but the principle of concentration means that these regions also attract the greatest share (approximately 60-70 %) of the available resources . This represents a significant injection of funds in relation to the size of the economies concerned.

3.3. The Commission's Fifth Periodic Report () recorded that the annual economic growth rate in Ireland, Spain and Portugal averaged ¾ % to 1¾ % above the EU growth rate from the mid-1980s, and that this was partly the result of Structural Fund assistance. Despite this, however, 1993 per capita GDP at purchasing power parity was some 22-24 % below the EU average in Spain and Ireland and 40 % below in Portugal.

Consequently, the results to date have been modest. There are three principal reasons why the structural programmes may not have contributed as much to cohesion as some expected:

(1) There is no provision for the Structural Funds to respond in any meaningful way to unexpected economic disturbances that adversely affect particular regions, or sectors or to a general fall in the level of economic activity during a recession. In face of a sectoral shock which significantly lowers the regional level of economic activity and employment, there is no provision in EU policy for compensatory financial flows to be made that otherwise could stabilize the level of demand and protect employment. Experience has shown that regions once 'hit' in such a way find it increasingly difficult to restore their previous level of economic activity. The impact of such shocks is likely to overwhelm any long-term support being given through EU structural programmes.

(2) EU structural policies must operate in the context of national economic policies, and economic policies being conducted in other Member States. Change in national economic policies or spending programmes is likely to outweigh the impact of structural policy. Consequently, the impact of the structural measures on cohesion has to be viewed in the context of the development of economic policy more generally. Although Article 130b calls for national and EU policies to be assessed in the light of their impact on cohesion, it remains to be seen who can question, and in what circumstances, the validity of a policy for not contributing to cohesion.

(3) The impact of the structural policies will operate, and is likely only to be detectable over the longer term. The explicit aim of the policy is to improve the economic opportunities facing the less favoured regions of the EU by enhancing economic infrastructure, human resources and investment opportunities. Whilst the level of unemployment is used as an indicator to decide regions eligible for Structural Fund support, it is unrealistic to use changes in the level of unemployment in the short run as a measure of the success of structural actions. If a shift towards targeting unemployment is desired, then almost certainly this would require a reconfiguration of the application of the Structural Funds.

3.4. The Fifth Periodic Report both reviews the recent experience of the Structural Funds and considers the elements for developing a coherent regional development strategy in the future. Emphasis is given, correctly in the Opinion of the ESC (), to infrastructure and the development of human resources, inward investment, and the role of research and technological development. Together these indeed do constitute a recipe for the successful development of regional economies and, consequently, for narrowing the cohesion gap.

3.5. Further work on the anticipated effects of the Structural Funds with regard to Objective 1 regions has recently been submitted to the Commission. A Report presented to DG XVI () by Professor J. Beutel examines the probable impact of the Structural Funds on Objective 1 regions over the period to 1999.

3.5.1. The Beutel study provides reasonable estimates of the probable impact of the current round of structural actions in the Objective 1 regions. It employs an input-output methodology to generate these estimates, and couches the results in terms of the regional employment and income effects. The methodology used enables the impact of Structural Fund actions on the regional economies to be isolated from other influences on regional income and employment. The global estimates regarding the impact on cohesion are favourable. The combination of a doubling, in real terms, of the resources available to Objective 1 along with a concentration of activity on a comparatively small number of regions, is expected to contribute significantly to enhancing economic prospects in the Objective 1 regions.

3.5.2. Beutel properly distinguishes between the 'demand' and 'supply' effects associated with structural actions. The demand effect relates to the immediate economic consequences that follow the injection of Structural Fund, and related, support to the region. As these funds are spent, employment will be generated in those sectors benefiting from direct expenditure under the structural programme - e.g. the construction and services sectors. However, the most important effect will be over the longer term on the supply-side of the regional economy. This will evolve as the structural programmes are completed and the competitiveness of the region increases as a consequence. These supply effects are related to the improved infrastructure, a better qualified labour force, and the development of new productive capacity. It is on these longer term effects that the future prosperity of the regional economy will depend, and which will provide the opportunity for closing the cohesion gap.

3.5.3. The Beutel study clearly demonstrates the significant part that the Structural Funds will play in enabling the Objective 1 regions to close the cohesion gap. In the absence of support, these regions will not be able to generate a rate of economic growth higher than the Community average for the period 1994-1999, as has to happen if they are to continue the process of catching-up with the more prosperous regions. This provides a useful illustration of the crucial role played by the Structural Funds in securing a greater measure of cohesion.

3.6. In addition, the Cohesion Fund was established to facilitate convergence . However, the recent entry into force of this instrument means that no final determination of its economic and social impact can be made at this time ().

3.7. The Structural Funds have come under some criticism recently from the Court of Auditors (). However, the main thrust of this criticism was levelled at procedures and unfulfilled commitments that are, in the management of the Structural Funds, properly the responsibility of the individual Member States and not the Commission itself. The calls made by the Court of Auditors for greater efforts to be devoted to the monitoring and evaluation of measures, along with its insistence that the 'fundamental principles' of the funds are observed (concentration, partnership, programming, evaluation and additionality), are fully accepted by the Commission. Indeed, many of the complaints that the Commission has, over time, levelled against Member States in the operation of the Structural Funds have been precisely in those aspects.

The ESC is concerned that the agreements taking the Structural Funds through to 1999 (in the case of Objective 1) and 1996 (Objective 2) further erode the Commission's capacity to intervene discreetly to ensure that the management of the Structural Funds is proceeding as required by the Regulation. This is mainly because the Commission is not authorized to interfere in the spending of Member States' money, if this is not in conformity with the provisions of the Regulation.

4. Prospects for the next review

4.1. As already noted, the context within which the next review of the operation of the Structural Funds will take place will differ in crucial respects from that prevailing at the time of the last review. However, it is important to recognise that despite the differences in context prevailing at that time, those regions within the EU presently in need of support under the Structural Funds may well remain in need of support if further progress towards achieving economic and social cohesion is to be made. Indeed, considerable care must be taken to ensure that any policy change does not reverse the gains made in those areas thus far.

4.2. There are four elements likely to influence the next review: the prospective enlargement to include the Central and East European countries; economic and monetary union; the view adopted in individual Member States regarding the benefits of the structural operations; and the commitment to institutional and political unity within the EU.

4.2.1. Enlargement

4.2.1.1. If, as widely expected, the EU will have entered into negotiations with a number of the countries of East and Central Europe by 1997/1998, this undoubtedly will play an important part in shaping the debate concerning the future of the structural operations. Even if we assume that the economies of the CEEC continue to develop at the present pace, it is expected that per capita incomes in those countries by the end of the decade will remain substantially below the EU average. Accession to the EU will therefore carry with it consequences for the Structural Funds. There are two issues.

4.2.1.2. First, as membership widens to include poorer countries, the EU average level of income is bound to fall simply as a matter of arithmetic. Consequently, some regions that presently qualify for Objective 1 support will find themselves ineligible and will be 'graduated-out' of Objective 1 status. This could well undermine progress towards greater cohesion already made in those regions, particularly for those who remain close to the 75 % eligibility threshold. At the same time, some countries, presently recipients of cohesion support from the EU budget, may find themselves becoming net contributors to that budget thus adding a further problem to an already difficult fiscal situation. Increasing the burden of fiscal policy in this manner could further worsen the prospects for closing the cohesion gap.

4.2.1.3. Second, the demands on the Structural Funds will increase significantly as EU membership extends to include the CEEC. By all statistical indicators, a large number of regions in those economies can be expected under the present criteria to be eligible to claim structural assistance. For such claims to be met will require either an increase in the resources available to the structural operations, or a reduction in the rate of support.

4.2.1.4. Alternately, enlargement might require a greater differentiation in the eligibility criteria for Structural Fund assistance. On the one hand, this approach would provide an opportunity to devise programmes of assistance specifically oriented towards the extraordinary needs of the CEECs during a transition phase leading up to and extending beyond formal EU membership. Consequently, enlargement need not draw excessively on the resources presently directed at achieving cohesion within the EU of fifteen Member States. On the other hand, devising specific instruments for the transition economies would ensure that the principle of concentration in the application of current structural policy instruments would not be weakened.

4.2.1.5. Consequently, in the face of a further EU enlargement, in all likelihood Member States should need to increase the financial commitment they are prepared to make to the structural operations if the current rate of progress towards cohesion is to be maintained. Otherwise, the cohesion gap can be expected to widen and this is likely to weaken the political solidarity of the EU with all that this entails for the future of integration.

4.2.1.6. This conclusion can be modified to the extent that alternative and more efficient mechanisms are developed for delivering assistance under the Structural Funds; measures that speed up the cohesion process. Moreover, if reforms in other policy areas - such as labour markets - effect a change in the conditions in the less favoured regions then there may be some room to reallocate existing resources without widening the cohesion gap as it presently stands.

4.2.2. Economic and monetary union

4.2.2.1. By the end of the decade the European Union will have secured progress to full economic and monetary union. Presently, the debate is dominated by consideration relating to monetary union.

4.2.2.2. It is probable that the continued development of the economic union following the completion of the single European market in December, 1992, will impact upon economic and social cohesion within the EU. In part we anticipate economic union promoting cohesion. To the extent that the economic growth rate for the EU as a whole is higher than otherwise would have occurred, we can expect all regions to experience some gains in absolute terms.

4.2.2.3. At the same time, however, there are reasons for being circumspect regarding the longer term consequences of economic union. In particular, there is some degree of concern that the economy of the EU will develop dualistic, or 'core-periphery', tendencies associated with some Member State economies at the present time. This tendency towards multi-polar development, with some regions enjoying a disproportionate share of the gains from integration and others a disproportionate loss, was highlighted in a recent Opinion of the Economic and Social Committee on Spatial Planning and Inter-Regional Cooperation in the Mediterranean Area (). The completion of the internal market programme along with an increasing globalization of production, is expected to result in the rationalisation of production, with industrial activity being concentrated in fewer, although larger, operations. This may have an adverse effect upon the less advantaged regions, especially those which are also peripheral geographically to the centres of EU population.

4.2.2.4. To the extent that this tendency does occur, the goal of securing economic and social cohesion will become ever more difficult and the demands on the Structural Funds will become even greater. Consequently, issues relating to spatial planning should be addressed at the outset rather than allowed to create additional problems for the weaker regions. In part this points again to the importance of monitoring closely the degree of convergence in real economic variables between different EU regions and Member States over time. Particular attention should, of course, focus on employment and output.

4.2.2.5. The prospective move to monetary union raises a number of important considerations relating to economic and social cohesion. At the present time it is expected that only a minority of EU Member States will be both eligible and willing to progress to stage 3 of monetary union. Those unable to do so will be given a derogation from membership of the single currency until such time as they satisfy the Maastricht convergence criteria.

4.2.2.6. Monetary union raises a number of general problems for weaker countries and which will impact upon the cohesion issues:

(i) fiscal convergence:

to become eligible for membership of the single currency area a country must observe two convergence criteria related to fiscal policy, although some discretion is given in deciding upon these - an annual budget deficit no higher than 3 % of GDP, and a ratio of outstanding public debt to GDP of no higher than 60 % (). In many of the weaker Member States current ratios are much higher than this and it will require a combination of high rates of economic growth and substantial fiscal prudence if the convergence criteria are to be met over the medium term. Achieving the Maastricht convergence criteria will not be a painless exercise and can be expected to lead to relatively unpopular economic policies being implemented in the relevant Member States. At the same time, to the extent that public expenditure is reduced in those countries, there might well be an adverse impact upon national support for regional economic development policies. Unless EU funds are available to substitute for national programmes (i.e. the rate of support from the structural operations is raised) it is difficult to see how a widening in the cohesion gap can be avoided;

(ii) asymmetric growth:

if the gains to monetary union are as significant as some analysts forecast, this will be manifest in a higher rate of economic growth for participants in the single currency area relative to those outside. In turn, this will make it ever more difficult for non-members to meet the convergence criteria, particularly those expressed in relation to the performance of the best-practice economies. Given that most cohesion countries are not expected to be among the first members of the monetary union, any differential in the rate of economic growth attributable to participation in the single currency will lead to widening in the cohesion gap, albeit that economic growth may be continuing in the weaker regions;

(iii) exchange rate changes:

countries that are not eligible for membership of the single currency area in the first phase will be in a position to use the levers of domestic monetary policy (including the exchange rate) to achieve national economic objectives. However, the extent to which this is possible in practice may be somewhat limited. In practical terms, the failure of a country to meet the convergence criteria could be taken as a signal on the part of the international capital markets that lending to that country carries with it an additional risk. Consequently a premium on interest earned may be demanded and the countries concerned find that the monetary union of which they are not a part has imposed upon them a higher structure of nominal interest rates. Moreover, although the exchange rate remains as an instrument to boost domestic economic activity, at least in the short term, in practice other EU Member States may find this unacceptable as it alters their relative competitive position;

(iv) external economic shocks:

whether within or outside a monetary union, all countries face the prospect of either a sectoral or general economic disturbance of an external origin - e.g. a fall in demand for exports due to a recession in a foreign market. Membership of, or a commitment to, a monetary union will narrow the range of responses that a country can take. Clearly, the exchange rate could no longer be used if a country had joined the monetary union. However, even a commitment to future membership of the monetary union may persuade a country not to adjust its exchange rate, given that exchange rate stability is a criterion determining eligibility of the monetary union. Consequently, a country affected by such a shock may find unemployment increasing and income falling, and the cohesion gap widening, as a result. The extent to which national fiscal policy could be used to lessen the adverse impact of the external shock will depend upon the prevailing fiscal situation relative to the stipulated convergence criteria. There is, therefore, a risk that membership of, or a commitment to, a monetary union will exacerbate the effects of an external economic shock.

4.2.2.7. There are three mechanisms which would, in theory, reduce the likelihood that monetary union, and efforts to meet the eligibility criteria, might be responsible for widening the cohesion gap.

4.2.2.8. The first is the development of an enhanced and more flexible fiscal policy capacity at the level of the EU itself: that is, a move towards European fiscal union to match European monetary union. Were this to happen, then economic assistance would flow to disadvantaged regions in response to external disturbances, or to regions not benefitting from a higher level of prosperity. Indeed, it is almost always the case in the industrialized world that a monetary union exists alongside a fiscal union that expressly provides for such re-distributive financial flows.

4.2.2.9. Secondly, conceptually some of the problems raised here might be resolved if the EU were to demonstrate a greater degree of regional wage flexibility. However, this is unlikely to occur. Instead, experience tends to show money wages converging rather than diverging in monetary unions. In any event, increasing the degree of income disparity within the EU runs expressly counter to the declared objectives of economic and social cohesion.

4.2.2.10. Finally, a greater degree of labour mobility could induce the unemployed in one region to move to regions where the potential for employment is greater. Once again, this is unlikely to offer a practical solution to the problem. It is likely that any significant movement of labour of this type would introduce a new set of problems of congestion and social difficulties within the regions attracting the migrant labour.

4.2.2.11. Consequently, the Economic and Social Committee is concerned that under certain conditions the movement to monetary union under the present institutional and policy provisions could result in a widening of the cohesion gap.

4.2.2.12. In the absence of one of these three developments, there is a real risk that monetary union could lead to a widening of the cohesion gap.

4.2.3. Member State views

4.2.3.1. The further development of the structural programmes will depend partly on the extent of political support for these programmes in individual Member States. In accordance with the principle of partnership, the design and the implementation of the structural operations requires the involvement of public and private sector economic agents at both local and national level, including the economic and social partners, working in conjunction with the Commission. In general the structural programmes are welcomed by local economic actors, and support from this quarter will be crucial in the negotiations surrounding their future.

4.2.3.2. Beyond encouraging general support for the cohesion policies, local economic agents are well placed to comment upon the further development of these policies. In particular, local knowledge concerning the available capital, research and technological development capacity, infrastructural deficiencies, educational requirements, the nature of environmental problems and their resolution, all will help ensure that cohesion policies are designed in a manner that best suits local requirements.

4.2.3.3. It is, of course, not possible to predict the position that individual Member States will adopt at the time of the next review of the Structural Funds. Certainly the period between the negotiation of the first Delors package in 1988 and the second Delors package in 1992 witnessed a shift in some Member States' views on the issue, with more opposing a significant increase in financial commitments to the structural operations than had been the case in 1988. In part, this change in attitude can be explained by the deterioration in the general economic climate that was beginning to appear by late 1992. In part too, however, it may reflect a hardening in the attitude towards support for cohesion policies by those Member States which are net contributors to the EU budget.

5. Recommendations

5.1. As we have discussed in this Opinion, the EU objective of attaining a greater measure of economic and social cohesion between the regions of the Union is likely to face considerable challenges in the future. However, these challenges should not be viewed as insurmountable obstacles to cohesion, although they may require a greater effort to be made on the part of Union policies if the cohesion gap is to be closed.

5.2. The arguments supporting the further development of EU cohesion measures remain valid:

- a failure to close the cohesion gap might well result in a significant movement of labour in search of better living standards in the more prosperous parts of the EU, leading to severe economic and social problems in those areas. Cohesion measures thus promotes the integration of the EU;

- financial transfers which support cohesion can lead to greater economic efficiency as they can eliminate, or correct, market failures such as information deficiencies and local labour shortages in specific skills;

- cohesion measures can promote economic and social stability by lessening the impact that external shocks will have on local income and employment;

- cohesion measures will help consolidate the single market by ensuring that those who gain least from its completion are compensated by those who gain most. In the absence of such compensation the weaker regions might come to question the economic and social benefits from integration.

5.3. In the light of these considerations, the Economic and Social Committee would offer a number of recommendations for the future development of the cohesion measures:

(i) there should be no diminution in the commitment of the Member States to the objective of attaining a greater measure of economic and social cohesion between the regions and the citizens of the EU;

(ii)

the principle of a continuous and balanced expansion of activity was established by the Treaty of Rome and the principle of cohesion entrenched by the SEA. These principles should be restated in the context of the forthcoming inter-governmental conference, as should the obligations upon both the Union and the individual Member States in the design of economic policy measures which are stipulated in Articles 130 (a) and (b);

(iii)

the four principles of concentration, partnership, programming and additionality must continue to be observed in the design and implementation of EU structural policies. The ESC echoes the concern expressed by the Court of Auditors to the effect that specific Member States are failing to conform to the Regulations governing the implementation of the Structural Funds, particularly with respect to partnership and additionality. The Economic and Social Committee joins with the Court of Auditors in calling upon both the Commission and the Member States to enforce rigorously the regulations governing the implementation of the Structural Funds;

(iv)

of these four principles, and in the light of ever more demands being made upon cohesion support, greater efforts may be required in the future to concentrate Structural Funds on or within those regions in greatest need. Greater concentration with respect to all the objectives is required, including those actions directed at spatial planning. The evidence available from the application of assistance since 1988 demonstrates quite clearly that Structural Fund assistance did lead to a significant improvement in the economic performance of most recipients of Objective 1 assistance. This establishes the gains that are likely to accrue from concentrating assistance;

(v) the ESC would call for a greater degree of coordination between national and EU policies that impact upon cohesion. This coordination is particularly important in policies which influence the economic growth potential of regions, e.g. training and education programmes, research and development support, environmental action programmes, infrastructural developments, inward investment support measures, rural development programmes;

(vi)

the development of non-traditional economic activities promoting local economic development is an essential avenue for economic development in the least prosperous areas within the EU, be these Objective 1, Objective 2 or Objective 5b regions. By devising support measures that assist regional economic diversification, public policy can raise the maximum growth potential in the economically weakest regions. In other words, a region which continues to be dominated by the agricultural sector has an inherently lower economic growth potential than one characterized by high technology industry. EU assistance should lay greater emphasis upon the development of non-traditional activities, and assisting the inputs required for these activities to prosper - including assistance to small and medium-sized enterprises;

(vii)

the ESC would request that the Commission produces a detailed appraisal of the effects of assistance under the new Objective 4 of the Structural Funds as soon as practicable. This policy instrument has the potential to smooth the transition of industry by helping adapt the workforce to new technologies and working practices. It is important to assess how that programme is operating in order to determine whether or not greater efforts in such initiatives should be made;

(viii)

it is important to note that regional economic inequalities can increase also in response to policies introduced in the more prosperous regions of the EU. The ESC reminds the Commission that EU competition policy prohibits Member States from unfairly assisting domestic industries through State aids and similar measures that distort competition. All such policies should be closely monitored to ensure that they are not distorting the economic prospects of enterprises and regions in other Member States;

(ix)

there is some evidence that the effectiveness of EU structural measures increased following the reforms of 1988. A key feature of these reforms was that they enhanced the role played by the Commission in assisting the development of regional economic development support. The ESC considers that the Commission continues to have a pivotal role to play in this respect as only the Commission is in a position to consider the consequences of policy actions on cohesion across the EU. Moreover, the Commission is best placed to assess those policies and actions that are making the greatest contribution to cohesion. The ESC considers it essential that the Commission continue to operate as coordinator and, where appropriate, as a policy initiator, in this policy area;

(x) in developing further the instruments for cohesion, there is a case for targeting some part of Structural Fund assistance on large conurbations within the objectives 1 and 2 regions. To some extent, greater prosperity in these regional centres will promote an increased level of activity throughout the region as a whole as the economic dynamic in the centre spreads out to the immediate locality. At the same time, however, care must be taken to ensure that such support does not create a new type of economic and social problem with potentially unemployed labour being attracted to conurbations thereby introducing new problems associated with overcrowding and social deprivation;

(xi)

under the prevailing regulations, the Central and Eastern European Countries will, upon membership of the Union, be eligible to receive assistance from the structural funds. Unless there is a significant increase in the resources available to the EU budget, these additional claims can only be met by switching funds away from regions currently in receipt of structural fund support, despite the fact that many of these regions are likely to remain disadvantaged for the foreseeable future. Moreover, it is questionable whether or not the structural funds are, as they stand, the appropriate instrument of assistance to meet the particular needs of the CEECs upon accession. Consequently, the ESC suggests that the Commission, in conjunction with Member States, examine the possibility of devising temporary (and degressive) transition instruments aimed specifically at promoting the economic and social development of the CEECs as they approach membership and beyond. Otherwise there is a risk both that economic and social cohesion between the present EU Member States will widen as the territorial focus of the structural funds shifts, and that real progress towards cohesion between the four probable new Member States and the current EU Member States is frustrated;

(xii)

given the concern that the procedures to achieve convergence could lead to a widening of the cohesion gap, the Economic and Social Committee supports the proposition that cohesion Member States ineligible to move to stage 3 of monetary union by 1 January 1999, ought to continue to receive assistance from a possibly adapted Cohesion Fund in order to help them fulfil the Maastricht convergence criteria;

(xiii)

countries in which support from the Cohesion Fund has been crucial in enabling them to fulfil the convergence criteria may continue to require financial support following the beginning of the third phase of EMU. This will require either an amendment to the existing regulation of the Cohesion Fund to facilitate their continued eligibility, or the introduction of an additional financial instrument targeted at their specific problems;

(xiv)

the Economic and Social Committee is concerned that the effectiveness of the Structural Funds can be impaired in some cases by virtue of the emphasis in national regional activity on infrastructural investment. As the ultimate objective of the funds is to help generate economic and social cohesion leading to lasting employment, the Economic and Social Committee stresses the importance of productive investment and of the training and education of the labour force as key priorities for expenditure under the Structural Funds;

(xv)

the purpose of this Opinion is to pinpoint the challenges facing the European Union's Structural Funds. One conclusion of the analysis is that greater use is going to be made of European regional policy instruments in a context of an enlarged Union and one in which Economic and Monetary Union has been achieved. In the light of the challenges this will create to cohesion within the EU, there is a strong case for increasing the financial resources available to the Structural Funds. Presently the Structural Funds account for less than one-half of one percent of EU Gross Domestic Product. This is a comparatively small amount in the context of these challenges and consequently can play only a limited role in promoting economic and social cohesion. External economic shocks that impact adversely on a particular region can jeopardize its economic development for many years. Under current arrangements the Structural Funds cannot assist such regions, other than through the very constrained resources available under Community Initiative programmes. Given the dynamic nature of the determinant of economic and social cohesion, the ESC considers that there are powerful arguments supporting an enhanced financial capacity for the Structural Funds and for greater flexibility and response in the configuration of Structural Fund assistance.

Done at Brussels, 28 February 1996.

The President

of the Economic and Social Committee

Carlos FERRER

() OJ No C 304, 10. 11. 1993; OJ No C 236, 11. 9. 1995.

() 'A new strategy for social and economic cohesion' - European Parliament, Ian Begg and David Mayes (1991).

() OJ No C 201, 26. 7. 1993; OJ No C 195, 18. 7. 1994; OJ No C 236, 11. 9. 1995.

() OJ No C 127, 7. 5. 1994; OJ No C 393, 31. 12 . 1994.

() Employment in Europe 1995, Commission (COM(95) 381 final).

() COM(94) 322 final.

() OJ No C 236, 11. 9. 1995.

() The Economic Impact of Community Support Frameworks for Objective 1 Regions, 1994-1999.

() See doc. CES 1449/95.

() OJ No C 303, 14. 11. 1995.

() Spatial planning and inter-regional cooperation in the Mediterranean area, Rapporteur Mr Cal (OJ No C 133, 31. 5. 1995).

() Article 104 Point 2 provides limited scope for a limited degree of flexibility around these reference values.