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Regional Policy in the European Union

25 August 2006
by eub2 -- last modified 03 January 2007

Although the European Union is one of the richest parts of the world, there remain striking internal disparities of income and opportunity between its regions. The entry in May 2004 of 10 new member countries whose incomes are well below the EU average has widened these gaps. Regional policy transfers resources from affluent to poorer regions. It is both an instrument of financial solidarity and a powerful force for economic integration.


Solidarity and cohesion

The two words solidarity and cohesion sum up the values behind the regional policy of the EU:

  • solidarity because the policy aims to benefit citizens and regions that are economically and socially deprived compared to EU averages.
  • cohesion because there are positive benefits for all in narrowing the gaps of income and wealth between the poorer countries and regions and those which are better off.

Big differences in prosperity levels exist both between and within member states. Even before enlargement, the ten most dynamic regions of the EU had a level of prosperity, measured by GDP per capita, which was nearly three times higher than the ten least developed regions. The most prosperous regions are all urban - London, Hamburg and Brussels.

The dynamic effects of EU membership, coupled with a vigorous and targeted regional policy, can bring results. The gap between richest and poorest regions has narrowed over the years. The case of Ireland is particularly heartening. Its GDP, which was 64% of the EU average when it joined in 1973, is now one of the highest in the Union. 

One of the current priorities is to bring living standards in the new member states closer to the EU average as quickly as possible.

The causes of inequality

Inequalities have various causes. They may result from longstanding handicaps imposed by geographic remoteness or by more recent social and economic change, or a combination of both. The impact of these disadvantages is frequently evident in social deprivation, poor quality schools, higher unemployment and inadequate infrastructures.

The cost of success

The EU policy to reduce regional disparities is built on four structural funds:

  • the European Regional Development Fund;
  • the European Social Fund;
  • the section of the EU’s common agricultural fund devoted to rural development;
  • financial support for fishing communities as part of the common fisheries policy (CFP).

These funds will pay out about EUR 213 billion, or roughly one third of total EU spending, between 2000 and the end of 2006.

A further EUR 18 billion was allocated to the Cohesion Fund, set up in 1993 to finance transport and environment infrastructure in member states with a GDP less than 90% of the Union average at the time (Greece, Ireland, Spain and Portugal). This has since been expanded to cover the new member states as well. Because of its strong economic performance, Ireland dropped out as a beneficiary in 2004.

Where the money goes

Unlike the Cohesion Fund, poor or disadvantaged regions in all EU countries can benefit from the four structural funds according to certain criteria or objectives.

  • A total of 70% of funding goes to so-called Objective 1 regions where GDP is less than 75% of the EU average. About 22% of the Union population live in the 50 regions benefiting from these funds which go to improving basic infrastructure and encouraging business investment.
  • Another 11.5% of regional spending goes to Objective 2 regions (areas experiencing economic decline because of structural difficulties) to help with economic and social rehabilitation. Some 18% of the EU population live in such areas. An Objective 2 programme in Denmark, receiving EUR 162m from the structural funds, has succeeded in improving transport and telecommunications in small islands and coastal communities with limited access by land and little local fresh water.
  • Objective 3 focuses on job-creation initiatives and programmes in all regions not covered by Objective 1. 12.3% of funding goes towards the adaptation and modernisation of education and training systems and other initiatives to promote employment.
There are also four special initiatives, accounting between them for 5.35% of the structural funds. These cover cross-border cooperation, programmes for urban renewal and fair access to labour markets.

Looking after new members

With enlargement, the area and population of the Union has expanded by 20% while GDP has increased by less than 5%. The GDP of the newcomers varies from about 82% of Union average in Cyprus to 45-50% in Poland and the Baltic States (Estonia, Latvia and Lithuania). The Union created tailor-made financial programmes for the period 2000-2006 to help the newcomers adjust to membership and to start narrowing the income gap with the rest of the Union.

These programmes are worth about EUR 22 billion in all, with further funding now available for the post-entry period. The components are:

  • ISPA (the Instrument for Structural Policies for Pre-accession) finances environment and transport projects with a budget of EUR 7.28 billion;
  • Sapard (Special Accession Programme for Agriculture and Rural Development) concentrates on agricultural development with a EUR 3.64 billion budget.

They are additional to the older Phare programme whose budget for 2000-2006 is EUR 10.92 billion and whose priorities are to:

  • strengthen the administrative and institutional capacity of new members. This accounts for 30% of its budget. 
  • finance investment projects - which absorb the remaining 70%.

To supplement these programmes, the Union set aside a further EUR 23 billion from the structural and cohesion funds to be spent in the new member states in the period 2004-2006.

Beyond the short term

In July 2004, the European Commission published proposals for a new-look and more integrated regional policy for the period 2007-2013 after present programmes run out. Old and new member states will no longer be treated separately. Procedures will be simplified and funding concentrated on the most needy regions of the 25 member states. For the new period, the Commission proposed a regional policy budget (including the Cohesion Fund of EUR 336 billion. This represents 35.7% of overall EU spending during this period.

The Commission’s idea is to divide the spending into three categories. Of the total amount, 79% would go on reducing the gap between poor and richer regions while 17% would be spent on increasing the competitiveness of poor regions and creating local jobs there. The remaining 4% would focus on cross-border cooperation between frontier regions.

European Commission Regional Policy website - Inforegio

Regional policy loans & grants

EU legislation in force: Regional Policy

Recent case-law of the Court of Justice and the Court of First Instance: regional policy

Source: European Commission - updated March 2006