Reducing regional disparities through investment

STATEMENT | EUROPEAN POLICY

Reducing regional disparities through investment Statement on the reform of EU cohesion policy 2021-2027

May 2019 BDI recommendations Oktober 2017 ▪ EU cohesion policy should remain adequately financed to 23. foster the regional convergence of economic performance. Marginal real spending cuts are nonetheless justified in view of the considerable progress achieved in economic development, particularly in the poorest regions. In general, all countries and regions should remain eligible to apply.

▪ Regional and cohesion policy funds need to be more strongly directed towards growth, infrastructure, investment and to improving workers’ qualifications.

▪ Cohesion policy should be more closely aligned with key reform points of the European Semester, both at the start of the programme and in the interim review 2023/24.

▪ The different funding instruments of regional policy, the European Fund for Strategic Investments (EFSI) and other expenditure programmes (research, climate protection, agriculture) must become more interconnected.

▪ Cohesion policy should be implemented in a way that better stimulates economic growth and innovation. The administrative aspects throughout the entire funding cycle from application, allocation and review should be greatly simplified. The introduction of a uniform set of rules and a one-time audit should facilitate and ensure this. The rule-of-law mechanism to monitor the use of the funds is a welcome development.

Reducing regional disparities through investment

Content Background.......................................................................................................................................... 3 EU budgetary process ........................................................................................................................... 3 Will Brexit increase or decrease the budget? ........................................................................................ 3 Cohesion policy ................................................................................................................................... 3 Co-financing rates, division of regions and key themes ........................................................................ 4 Thematic objectives of the ESI Funds ................................................................................................... 5 The allocation of cohesion policy funds ................................................................................................ 7 Less red tape for businesses ................................................................................................................ 9 Ex-ante conditionality criteria – basic preconditions ............................................................................. 9 European Semester ............................................................................................................................ 10 Planned sanctions in case of non-compliance with the recommendations of the European Semester ...... 10

Rule of law as a precondition for good EU financial management ..................................................... 10 How will a weakening in the rule of law be identified? ........................................................................ 10 InvestEU .............................................................................................................................................. 11 How InvestEU will work ....................................................................................................................... 11 Cohesion funds and InvestEU ............................................................................................................. 11 Synergies............................................................................................................................................. 11 Conclusion ........................................................................................................................................... 11 Sources ............................................................................................................................................... 13 Imprint.................................................................................................................................................. 13

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Reducing regional disparities through investment

Background EU budgetary process The budget of the European Union is determined in a “multiannual financial framework” (MFF) that is adopted for a period of several years in accordance with Article 312 of the Treaty on the Functioning of the European Union (TFEU). Unlike a national budget, the European budget must be balanced. The long-term nature of the budget has proven problematic during past crises, which has prompted proposals on how to achieve greater flexibility. The proposals of the European Commission for the next MFF, scheduled to start in 2021, foresee a slight rise in funds.

Comparison of current EU budget and the presented proposal, in billion euros* MFF 2014-2020

MFF 2021–2027 Proposal

Change in %

1,106.7

1,134.6

+ 2.5 %

Agriculture and environment

428.0

336.6

- 21.4 %

Cohesion

377.9

330.6

- 12.6 %

Total budget

Research (Horizon)

79.4*

97.6*

+ 22.9 %

*constant prices of 2018, except *: current prices in billion euros Sources: European Parliament, European Commission, own calculations

Will Brexit increase or decrease the budget?

The departure of the United Kingdom from the European Union will reduce the budgets of the EU to the sum of between eleven and 14 billion euros net per year. The European Commission is assuming a net impact of around eleven billion euros net per year. In addition, the migration crisis has triggered a need to finance border control measures and security at the EU level. The European Commission plans to finance these new tasks and the exit of the United Kingdom with higher contributions from the member states of the EU27 and cuts in the main funding programmes so far, namely agriculture and cohesion.

Cohesion policy The objective of cohesion policy is to strengthen economic, social and territorial solidarity within the European Union. A key focus of cohesion policy is to reduce regional disparities in economic development in the 276 regions of the EU (Busch 2017). The budget for cohesion policy is expended in three different funds. In addition to this, there are two more funds that have so far been classified as structural policy funds but are not included in regional and structural policy (Busch 2017): ▪ ▪ ▪ ▪ ▪

European Regional Development Fund (ERDF): for 2021-2027: 200.6 billion euros European Social Fund (ESF): for 2021-2027: 88.6 billion euros Cohesion Fund (CF): for 2021-2027: 41.3 billion euros European Maritime and Fisheries Fund (EMFF) European Agricultural Fund for Rural Development (EAFRD).

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Reducing regional disparities through investment

These five funds, together with the Youth Employment Initiative (YEI), make up the European Structural and Investment Funds (ESIF).

The EU Structural and Investment Funds account for a considerable proportion of public investment in some member countries:

Proportion* of European structural and investment funds in public investment 2015-2017 in percent 90 80 70 60 50 40 30 20 10 0

*figures are estimates Source: European Commission

Co-financing rates, division of regions and key themes The programmes and investments funded by EU cohesion policy are financed together with the respective member state or region. Regions are the official subdivisions of countries for statistical purposes, second hierarchy, termed NUTS-2. In Germany, these regions generally correspond to the administrative districts. 1 There are different categories and co-financing rates depending on the economic strength of the region, as measured by GDP. The European Commission has proposed the following rates for the financial framework 2021-2027: ▪ ▪ ▪

1

70 percent in less developed regions (2014-2020: 85 percent) 55 percent in transition regions (2014-2020: 75 percent) 40 percent in more developed regions (2014-2020: 50 percent)

For a current list of European regions according to NUTS-2 see Commission Regulation 2016/2066.

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Reducing regional disparities through investment

Regions are categorised in relation to the EU average GDP for the funding period 2021-2017: Less developed regions

Regions with GDP below 75 percent of the EU average

Transition regions

Regions with GDP between 75 and 100 percent of the EU average

More developed regions

Regions with GDP or more than 100 percent of the EU average

Source: European Commission (COM 375, 2018)

The German transition regions for the funding period 2014-2020 are: Luneburg, MecklenburgWestern Pomerania, Saxony-Anhalt, Brandenburg, Dresden, Chemnitz and Thuringia.

Plans are to adapt the definition of transition regions for the funding period 2021-2027. For the period 2014-2020, the threshold between a transition region and a more developed region was at 90 percent of the average per capita income in the EU. The European Commission proposes raising this threshold to 100 percent for the period 2021-2027. This change alone will make Trier a “new� transition region. A direct comparison between transition regions 2014-2020 and transition regions 2021-2027 is therefore not possible on account of the amendment of the definition.

Thematic objectives of the ESI Funds The regions have so far been free to select their thematic objectives provided they met several fairly loose requirements of the European Commission. The distribution of ERDF funds among the thematic objectives, for example, depended on the category of the respective region:

Requirements of the EU for thematic objectives of the regions Developed regions

80 percent of the funds focused on at least two of the eleven objectives; At least 20 percent of funds for a low carbon economy

Transition regions

60 percent of the funds focused on at least two of the eleven objectives; At least 15 percent of funds for a low carbon economy

Less developed regions

50 percent of the funds focused on at least two of the eleven objectives; At least twelve percent of funds for a low carbon economy

Sources: Federal Institute for Research on Building; Urban Affairs and Spatial Development

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Reducing regional disparities through investment

The financial framework 2014-2020 sets out eleven thematic objectives (known as “thematic concentration”) derived from the Europe 2020 Strategy for “smart, sustainable and inclusive growth”:

Requirements for 2014-2020 according to thematic concentration: Objective

billion euros

percent

1

Strengthening research, technological development and innovation

43.7

9.6

2

Enhancing access to, and use and quality of information and communication technologies (ICT)

14.2

3.1

3

Enhancing the competitiveness of small and medium-sized enterprises (SMEs)

63.4

14.0

4

Supporting the shift towards a low-carbon economy in all sectors

45.0

9.9

5

Promoting climate change adaptation, risk prevention and management

29.1

6.4

6

Preserving and protecting the environment and promoting resource efficiency

60.6

13.3

7

Promoting sustainable transport and removing bottlenecks in key network infrastructures

58.5

12.9

8

Promoting sustainable and quality employment and supporting labour mobility

40.7

9.0

9

Promoting social inclusion, combating poverty and any discrimination

44.5

9.8

10

Investing in education, training and vocational training for skills and lifelong learning

34.5

7.6

11

Enhancing institutional capacity of public authorities and stakeholders and efficient public administration

5.0

1.1

14.9

3.3

454.1

100

Other: technical aids; outermost regions; measures that will be discontinued Total Source: German Economic Institute (IW)

The proposal for the multiannual financial framework 2021-2027 reduces the number of thematic objectives from eleven to five: 1. A smarter Europe (innovation, SMEs, digital technologies, industrial modernisation) 2. A greener, carbon free Europe (reducing carbon emissions, renewables, climate change / Paris Agreement) 3. A more connected Europe (strategic transport, digital networks) 4. A more social Europe (employment, education, social inclusion) 5. A Europe closer to citizens (locally-led development initiatives and sustainable urban development).

The objectives will in future be determined on the national instead of the regional level. This will require closer coordination between the federal, state and regional levels.

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Reducing regional disparities through investment

The thematic objectives of the funding will be structured differently depending on a region’s classification: Less developed regions

Objective 1 at least 35 percent, objective 2 at least 30 percent

Transition regions

Objective 1 at least 45 percent, objective 2 at least 30 percent

More developed regions

Objective 1 at least 60 percent, sum of objectives 1 and 2 at least 85 percent

Source: European Commission (COM 372, 2018)

The allocation of cohesion policy funds The allocation of funds and possible changes to these procedures have been the subject of much public debate. In this context, it is important to remember that there are several differences between the system for the allocation of funds in the current funding period and the European Commission’s proposal for the next financial framework.

Funding allocation criteria in the financial framework 2014-2020: The allocation of funds between the member states is mainly calculated based on GDP per capita (inhabitant) per regional level, unemployment, population and population density (Busch 2017). A precondition for funding is a contractual agreement between the European Commission and the respective member state.

Proposed funding allocation criteria for the financial framework 2021-2027: Before the European Commission presented its proposal, the federal government of Germany and its federal states advocated further funding for all European regions. The European Commission has heeded this recommendation so that all 376 regions will continue to have access to cohesion funds.

Main trigger for changes: change in per capita GDP* 2007-2009 compared to 2014-2016 40 30 20 10 0 -10 -20 -30 EL CY ES IT FI NL PT SI HR SE FR BE DK AT CZ LU BG HU DE SK EE LV RO PL ML LT IE * in percentage points Source: Euroepan Commission

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Reducing regional disparities through investment

In the negotiations of the programmes, certain preconditions have to be met (ex-ante conditionality).

Plans are to connect them more closely to the recommendations on economic surveillance included in the European Semester.

Comparison of allocations for cohesion policy per member state, currently and for the next funding period: member state

allocation 2021-2027 (in billions, 2018 prices)

change to period 2014-2020 (%)

aid intensity (EUR per capita)

change to period 2014-2020 (%)

BG

8.9

8

178

15

RO

27.2

8

196

17

HR

8.8

-6

298

0

LV

4.3

-13

308

0

HU

17.9

-24

260

-22

EL

19.2

8

254

12

PL

64.4

-23

239

-24

LT

5.6

-24

278

-12

EE

2.9

-24

317

-22

PT

21.2

-7

292

-5

SK

11.8

-22

310

-22

CY

0.9

2

147

-5

SI

3.1

-9

213

-11

CZ

17.8

-24

242

-25

ES

34.0

5

105

3

MT

0.6

-24

197

-28

IT

38.6

6

91

5

FR

16.0

-5

34

-9

FI

1.6

5

42

2

BE

2.4

0

31

-5

SE

2.1

0

31

-6

DE

15.7

-21

27

-20

DK

0.6

0

14

-3

AT

1.3

0

21

-4

NL

1.4

0

12

-3

IE

1.1

-13

33

-17

LU

0.1

0

16

-14

EU27

331

-9.9

106

-11

Source: European Commission

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Reducing regional disparities through investment

Seventy-five percent of the cohesion and structural funds should continue to be allocated to underdeveloped regions. In terms of percentage, this is more than in previous budget plans.

The funds are to be allocated to the individual regions according to this formula: 80 percent based on GDP per capita and 20 percent based on indicators on youth unemployment, level of education of the population, climate change, admission and integration of immigrants.

The European Commissioner for Regional Policy, Corina Cretu, has indicated cuts in cohesion funds for some countries. The reasons given for these cuts are Brexit, the new priority of security and migration, and the strong catching-up progress that has been achieved in some regions. When these regions joined the EU, their GDP per capita was at 47 percent of the EU average, it has since risen to 75 percent of the EU average.

Less red tape for businesses Businesses complain about the excessive administrative effort involved in participating in projects financed by cohesion funds. In extreme cases, for example, seven review procedures may be carried out by different supervisory bodies for the same project participation. Many small and medium-sized enterprises in Germany decide against applying for cohesion funds and projects because of the considerable administrative burden involved, instead seeking out alternative sources of funding for their own projects.

The European Commission’s proposal includes several simplifications for businesses and administrations: ▪ ▪ ▪ ▪ ▪

Reduced bureaucratic burden through the introduction of the principle of a uniform review procedure and a uniform set of rules for all funding.

Greater flexibility: five percent of the funds can be moved from one regional priority to a different one as needed.

Member states can use cohesion and structural funds for the InvestEU scheme.

Ensuring synergies between the different pillars of the budget and the different funds.

The integration of Smart Specialisation Strategies is a new and useful approach for businesses in cluster regions.

Ex-ante conditionality criteria – basic preconditions Ex-ante conditionality criteria are the preconditions for funding in the current funding period. In the new funding period starting from 2021, these principles are called “basic preconditions” and are based on the approach of the ex-ante conditionality criteria. They are directed at public procurement, state subsidies and respecting fundamental rights. The Smart Specialisation Strategy (regions with similar strengths specialise in their competitive products and services) will also benefit from the basic preconditions.

Some economists (Ciffolilli, Condello, Naldini, Richter 2018) have proved a positive correlation between ex-ante conditionality and the improvement of the allocation and the investment climate as well as its good influence on structural reforms.

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Reducing regional disparities through investment

European Semester The European Semester provides the financial, budgetary and economic policy framework for coordination on the European level. With this tool, the European Commission evaluates the fiscal and budgetary policy plans of the governments of the member states and formulates “country-specific recommendations” for each member state. The European Semester includes preventive instruments and instruments to sanction governments in case of violations against the economic and budget policy regulations of the EU. The criteria that must be met are based on the “two-pack” and the “six-pack” rules from the Maastricht Treaty.

As the European Semester provides annual analyses and recommendations to remedy structural deficits (also often investment weaknesses) of the economies of the member states, it would useful to consider linking the European Semester to regional policy. The European Commission proposes linking them up at several points: at the start of the funding programme 2021-2027 and when the roadmap is laid down (i.e. the individual objectives are set). The interim review scheduled for 2024 should be based on the country-specific recommendations. Member states are requested to regularly report progress to the European Commission.

Planned sanctions in case of non-compliance with the recommendations of the European Semester In the event that a member states violates the regulations of European economic and budget governance (such as Excessive Deficit Procedure, Excessive Imbalance Procedure, and possibly ESM programmes), the European Commission is entitled to submit a proposal to the Council to freeze all or part of the structural funds for this country. The Council may reject this proposal with a reverse qualified majority voting procedure. Once the identified violations have been remedied, the member state can request the European Commission to recommend the Council to restore access to the structural funds.

Rule of law as a precondition for good EU financial management In line with the principle of ex-ante conditionality criteria or basic preconditions, the European Commission proposes a new mechanism: in the event of serious violations against the rule of law and correspondingly weak administrative institutions and quality of the administration and review, an instrument should be in place to freeze the access of the respective member state to EU funding programmes. This measure is designed to restrict and prevent the misuse of European funds.

More specifically, compliance with the principles of the rule of law should be ensured, including: legality, legal certainty, ban of arbitrary action on the part of executive powers, the division of powers and effective judicial protection through independent courts (the latter is set out in Article 47 of the Charter of Fundamental Rights of the European Union). The legal basis for this mechanism is Article 2, 19 and 317 TFEU. How will a weakening in the rule of law be identified?

The European Commission would have to conduct a qualitative assessment to identify a weakening of a state’s rule of law. For this purpose, information would be drawn from all kinds of sources and established institutions, such as ECJ rulings, reports from the European Court of Auditors, findings and recommendations from relevant international organisations and networks such as the Council of Europe and the European network of supreme courts.

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Reducing regional disparities through investment

InvestEU Plans are to pool various investment financing options in the new MFF under the umbrella of InvestEU, including the European Fund for Strategic Investments (EFSI), Connecting Europe Facility (CEF), some instruments of the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) and InnovFin. An advice platform will provide technical support and assistance in the preparation, development and implementation of projects. The associated portal, InvestEU, will help bring together investors and project developers. InvestEU is designed to mobilise additional investment to the sum of 650 billion euros. The focus of investment will be on sustainable infrastructure, research, innovation and digitalisation, SMEs, social investment and competence.

How InvestEU will work Guarantees from the EU budget (38 billion euros) will be used by financing partners such as the European Investment Bank (EIB) as collateral for investment projects. Private financing partners will then invest in the guaranteed projects. The model for this initiative is the EFSI, which was successfully implemented by the EIB. Cohesion funds and InvestEU Every member state can freely decide to spend a voluntary contribution of up to five percent of its cohesion policy funds on InvestEU. Synergies In the past, companies have frequently and extensively criticised the fragmented and complex nature of the European financing landscape. With its proposal for the new MFF, the European Commission has for the first time created the possibility of combining funds from different funding lines as follows: ▪ ▪ ▪ ▪

Horizon Europe (successor programme to Horizon 2020) and cohesion projects with a “Seal of Excellence”.

Combination of funds from ERDF and ESF+ for urban development projects.

Using Horizon Europe to fund research and innovation in the areas of agriculture, food and rural development (synergies with common agricultural policy).

InvestEU and cohesion policy funds.

Conclusion In view of the challenges arising from Brexit and the new European priorities of security, border protection and migration, the proposal of the European Commission for the Multiannual Financial Framework 2021-2027 is both solid and ambitious. Cohesion and structural policy must be directed more towards investment and innovation in order to foster convergence between the different regions.

Reducing the number of thematic objectives will help make the management of the funds and projects leaner and is therefore a significant improvement that will cut the administrative burden for funding recipients, which are often businesses. The European Commission aims to improve its support of industrial modernisation, innovation and SMEs. Regional and cohesion policy has suffered from the fact that it has been treated as a separate policy field by the EU in the past. This has presented a distorted picture. As the very core of cohesion policy is promoting and harmonising the different economic regions, regional policy can make a considerable

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Reducing regional disparities through investment

contribution to increasing investment in weak regions. Linking up cohesion policy with the European Semester and other investment funds that will be pooled under InvestEU as well as including indicators such as youth unemployment, level of education, climate change and admission of migrants is a step in the right direction and, if implemented correctly, will produce investment synergies.

Cutting the bureaucracy involved in applying for funding and the administration and review of the funding process is particularly important for a good investment climate on the regional level. Basic preconditions before and following the project financing should be a matter of course. In the last few years, there have been repeated calls to make things simpler for administrations, businesses and other organisations such as university and research institutes. It is a very welcome development that these administrative simplifications will now actually be implemented.

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Reducing regional disparities through investment

Sources Bundesinstitut für Bau-, Stadt- und Raumforschung (2014). EU-Strukturpolitik in Deutschland.

Busch, Berthold 2017. IW-Analysen 121. Kohäsionspolitik in der Europäischen Union. Cologne.

Ciffolilli, Andrea; Condello, Stefano; Naldini, Richter, Sandor (2018). Support of ESI Funds to the implementation of the Country Specific Recommendations and to structural reforms in Member States. June. Luxembourg.

European Commission 2016. Regulation 2016/2066. 21 November. Brussels -- 2017. Reflection paper on the future of EU finances. 28 June. Brussels.

-- 2018a. Single market, innovation and digital – legal texts and factsheets. 6 June. Brussels.

-- 2018b. EU Budget for the future. New legislative package for cohesion policy 2021-2027. Brussels.

Euroepan Parliament 2018. Multiannual Financial Framework 2021-2027: Commission Proposal Initial comparison with the current MFF. 4 May. Haas, Jörg; Rubio, Eulalia 2017. Brexit and the EU Budget: Threat or Opportunity? 16 January.

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Author Valerie Ross T: +49 30 2028 1623 v.ross@bdi.eu Editorial / Graphics Dr. Klaus Günter Deutsch T: +49 30 2028 1591 k.deutsch@bdi.eu Marta Gancarek T: +49 30 2028 1588 m.gancarek@bdi.eu

BDI publication number: D 1029

This translation is based on „Position Europapolitik“ as of April 2019.

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