What if the EU regional policy all about, and why were the Structural Funds set up?

In the European spirit and on the grounds of economic rationality, the European Economic Community effectively launched development programmes targeting the reduction of regional disparities in 1975, which the Community only theoretically stood for prior to this date. During the preceding decades, namely from 1955 to 1975, European countries were hoping that the underdeveloped regions would be able to catch up on their own accord, or possibly pursuant to the impact of general economic boom. However, life failed to justify this. Significant regional economic disparities lead to serious social tension, less permanent economic development, as well as the sub-optimum exploitation of the market. 

Europe continued to believe in the power of competition, however understood that it is necessary to even out the opportunities of regions, and make the most in all regions. This is why financial funds were set up, which targeted developing the infrastructure of regions lagging behind, the diversification of the local economy, developing labour skills, as well as the productivity of the various economic sectors. Read on to get to know more about the history of EU regional policy and the Structural Funds.    

What are the regions?

Regions are specific territorial units set up to facilitate administration. They are called NUTS (Nomenclature of Territorial Units for Statistics) regions, and are sub-divided into 5 categories:

Typology of Regions - Population
NUTS 0 Countries: 15 0.4 - 80 million inhabitants
NUTS 1 Supra-regions 77 0.4 - 17 million inhabitants
NUTS 2 Regional: 206 0.08 - 10 million inhabitants
NUTS 3 Sub-region: 1031 0.02 - 7 million inhabitants
NUTS 4 Local: 1074  
NUTS 5 Local: 98433  

The Structural Funds generally grants funding for the programmes of NUTS Level 2 and NUTS Level 3 regions. However, the EU has made an exception to this rule in the case of the recently acceding countries (including Hungary as well) by allowing them to define their respective programmes at NUTS level 0, i.e. at a national level up to 2006. 

How frequently are changes made to the programmes of the regions?

The budget of the Structural Funds is defined according to 6-year cycles; therefore, the programmes of the regions also run for 6-year periods. The last period was from 2000 to 2006, mid-way through which Hungary will join the EU. The current 15 EU member states are eligible to commit 190 900 million Euros during this cycle. 

What does Hungary have to do with the Structural Funds?

Hungary has been receiving a share of the funding the Structural Funds since 1989 within the framework of pre-accession programmes. The PHARE Programme that was launched in 1989 and SAPARD available since 2000 are examples for these. However, these programmes will be phased out from May 2004, namely, from when we officially join the EU, and we will also be able to directly receive a share of the various funds of the Structural Funds (although payments will still be authorised following 2004 as well). In order for us to be able to so, we need to define our development objectives within the framework of a National Development Plan, in addition to setting up the institutional system capable of managing, controlling and evaluating the implementation of the National Development Plan in the following in compliance with EU standards. Read on to find out more about how Hungary prepared for the receipt of the Structural Funds.    

What principles govern EU regional policy and its instruments, the Structural Funds?

The four principles establishing the grounds of regional policy instruments are the following: additionality, concentration, partnership and programming defined in the Delors I Plan in 1988. The objective of the reform was to make the operation of the Structural Funds increasing transparent. Consequently, rules applicable earlier were repealed, and entirely new ones were introduced. The same four main basic principles has been in operation ever since. 

Additionality

Ever since the early days, the EU has been emphasising – in connection with the EU regional policy - how funding granted by the EU does not substitute member state funding, but instead wishes to provide additional funding for this framework. A specific rate of owns contribution is needed in the case of all funded programmes in order to maintain additionality. Concurrently, regulations set forth that the member state is not authorised to reduce the rate of funding allocated for assistance in relation to the previous budgetary period, during the period in which the given member state requires funding granted by the Community. This means that the Community will not approve programmes and objectives that the member state does not finance. In accordance with the basic principle, local and regional governments, as well as central political players are required to supply proof of appropriate rates of funding in the case of all projects they wish to finance from Community funding.

Concentration

There are two dimensions to concentration: on the one hand, it refers to the concentration of instruments available for regional policy, whilst on the other hand, it implies that assistance must be concentrated in regions where funding is most needed. 

Coordination of financial instruments implies the joint use of assistance granted from various funding frameworks, namely, the Structural Funds, the European Investment Bank and member state funding. The objective is to establish partnership between institutions, as well as consistency amongst, and coordination of the various types of funding (loans, guarantees, interest subsidies). The EU concurrently endeavours to allocate the funding to the lowest possible number of regions. This dual concentration endeavours to ensure the effective economic impact of the funding frameworks.      
Thanks to these basic principles, the rate of per capita funding has increased in the regions during the past few years. Increase in the rate of funding, as well as population decrease in the funded areas explains this phenomenon. Therefore, the rate of funding is now approaching the "critical" mass needed for resolving problems. 

Partnership

This principle refers to the cooperation of players involved in the preparation, implementation and control of the regional programmes. Moreover, it also indicates how funding granted by the Community supplements, however does not substitute national funding, as well as how all of the various levels take part in the programming phases. Partnership has a horizontal, as well a vertical angle, since cooperation of the various levels of decision-making equally implies the cooperation of local governments.     

The objective of the latter is for small settlements to avoid competing with one another, but instead to view other settlements as potential partners in the race for funding. Several small settlements are jointly capable of implementing larger projects, since the rate of own contributions made available increase due to cooperation, which consequently increases the rate of funding they are eligible for. 

Programming

This principle resolved one of the most serious problems of EU financing by shifting the focus of attention to long-term and complex objectives and priorities that better support development, instead of financing individual projects. Ever since the Delors Plan, this implies that there are three stages of programme preparation, namely: the National or regional Development Plan (development plan), the Community Support Framework Plan (Community Support Framework) and the operational programmes (Operational Programme).

What does Structural Funds stand for?

Regional policy is currently financed by four funds. These funds were set up at various points in time, and their operations were coordinated for the first time during the 1988 reform. The objective was to facilitate the increasingly effective use of funding granted by the funds. From this point on, the funds are called the European Regional Development Fund (ERDF), European Social Fund (ESF) and the European Agricultural Guidance and Guarantee Fund (EAGGF), jointly referred to as the Structural Funds, to which the Financial Instrument for Fisheries Guidance (FIFG) was also added when the last enlargement took place. We will present the various instruments in detail in the following, since they grant funding on different grounds.   

European Regional Development Fund

This is the most decisive component of the Structural Funds, since the highest proportion of funding intended for regional policy, approximately 45%, is granted to member states through this fund. The plan of establishing the European Territorial Development Fund was pout forth for the first time at the Paris Summit in 1972; ERDF was set up three years later in 1975. The fund is allocated a pre-defined funding framework from the common budget, defined in advance for a several year-period, which rate of funding has been increased each year from 1988 on.   

In the initial period, the fund supported national regional policies, since at this point the Community did not dispose of independent regional policy objectives and priorities. This also implied project financing, within which framework approximately 4750 projects were financed during the 1975-1978 period. The regional policy of the Community became gradually independent from 1984 on, which engendered the re-formulation of the regulation on ERDF.  .

The current regulation was approved in 1999. This is when the fund defined the promotion of economic and social cohesion, elimination of regional disparities and participation in the development of regions as key tasks of the fund. The fund concentrates assistance in the following areas: [Forman, 2000.]:

Production infrastructure development increasing competitiveness, especially in the case of small and medium size enterprises;
Research and development supporting the introduction of new technologies and innovation;
Development of the Information society;
Environmental protection and rehabilitation within the framework of economic developments;
Gender equal opportunity;
National, cross-border and inter-regional cooperation.

European Social Fund

This fund was the fund that was set up earliest; this was even referred to in the Treaty of Rome of 1957, however, only effectively started operating in 1960. Its objective is to improve labour market adaptability, and consequently the fund supported employee mobility. The fund was reformed for the first time in 1971, from which point on approved projects were selected on he basis of Community criteria, instead of national criteria, in addition to applying the national quota system. The next reform was introduced in 1983, when the centre of gravity was shifted towards increasing the opportunities of young employees.


ESF became an integral part of the Structural Funds during the reform of 1988, as a result of which its operations were integrated in the operations of the other funds, whilst its task focused on involvement in human resource development.  

The Treaty of Amsterdam, the Council Regulation (EC) on the general rules of the Structural Funds and the Council Regulation (EC) specifically relating to the fund defines its current regulatory framework. The objectives of its funding system cover, amongst others, increasing the efficiency of the educational system, as well as ensuring cost-efficient operations. In addition, training skilled labour satisfying social needs of the information economy and society is increasingly prioritised.  

European Agricultural Guidance and Guarantee Fund – Guidance Section

This fund was set up in 1962, with the objective of promoting agricultural productivity and increasing the salaries of workers employed in this sector, in addition to stabilising the agricultural products market. From 1968 on, the fund also supported re-training and retirement, in order to decrease the agricultural population. The Community has its own agricultural structural policy since 1972, pursuant to the impact of which additional elements have been added to the scope of funding. Further reform was introduced in 1985 in order to increase agricultural productivity, following which the entire EAGGF Guidance Section budget was integrated into the Structural Funds, which currently disposes of 15% of the overall EAGGF budget. Today, this fund is equally closely connected to agriculture and rural development, which is why special rules are applicable in certain cases.       

Financial Instrument for Fisheries Guidance

A special problem justified the establishment of the fund, namely the waters of the Community were over fished. The Treaty of Rome stipulated that the coastal waters of member states are common waters; consequently, when member states realised in the mid-1980s that the fish population has drastically decreased, the way in which a regulation restructuring fishing did not exist caused a problem. This is, amongst others, attributable to how the allocation of fishing quotas among countries caused a serious problem for the Community, since it was not possible to explicitly define what the basis of allocation of the limited quantity should be. Due to declining fishery operations, the structural transformation and diversification of the economies of the settlements concerned became the main basic task. The fundamental objective is to re-introduce fish species and support the establishment of competitive enterprises. It is strange how member states without coastal sea waters now also receive a share of the fund.

What can Structural Funds money be spent on?

94% of the Structural Funds will be concentrated in the area of the following three objectives in order to be able to reach the best possible results:

Objective 1 (territorial)
Supports closing the development gap in regions lagging behind through investments in infrastructure and measures increasing economic competitiveness.

Condition: GDP per capita for the region must be below 75% of the EU average. Exceptions: remote regions and the coastline of Sweden.

Typological unit: NUTS 2

Funds: ERDF, ESF, EAGGF, FIFG

Approximately 22% of the EU population lives in regions classified as Objective 1 regions, which regions receive 70% of the total budget. 

Objective 2 (territorial)
Supports economic and social change in industrial, rural, and urban or fishery dependent areas facing structural difficulties. 

Condition: subject to special agreement with the EU. In general, regions in which there is an exceptionally high rate of unemployment (e.g. factories or mines had to be closed, and it is now necessary to attract new industrial plants to the region), or crime is prevalent and salaries are low (e.g. modern industrial sectors are incapable of developing, due to the shortage of skilled labour, which is why this needs to be developed) are classified as Objective 2 regions. 

Typological unit: NUTS 3

Funds: ERDF, ESF

Approximately 18% of the EU population lives in regions classified as Objective 1 regions, which regions receive 11.5% of the total budget. 

Objective 3 (territorial)
Modernisation of training programmes and promoting employment

Condition: Programmes must support the above objective. All regions are eligible to receive a share of the funding, except for regions classified as Objective 1 regions, since these regions already receive a share of ESF funding.

Funds: ESF

12.3% of the total budget may be invested in implementing Objective 3 programmes.