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EU REGIONAL POLICY
REF: EUREGIONALPOL 2010 /FEB 23feb10
(1) Introduction Aim - to overcome regional
disparities in the EU and support the integration process
Structural funds (SFs) provide financial assistance to do this– invest in backward regions– encourage future growth in these regions
Effective? Sufficient funds?
(2) Europe’s regions Concern for Europe’s disadvantaged
regions has always been part of EU priorities.– In Treaty of Rome preamble.
Pre-1986, most spending on regions was national– Rural electrification, phones, roads, etc.
1973, Ireland (poor at the time joined); 1981, Greece joined but no major reorientation of EU spending priorities.
Entry of Spain & Portugal created voting-bloc in Council (with Ireland and Greece) that induced a major shift in EU spending priorities, away from CAP towards poor-regions. – QMV was 71% of vote, 31% to block
• See graph “Structural spending” increasing % of
EU budget since 1980s.
QMV was 71% of vote
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Structural Funds
Poor Vote-Share
CAP
Important figure for ‘blocking’
Europe’s Economic Geography: Facts Europe highly
centralised in terms of economic activity. – ‘CORE’
• 1/7th land, but 1/3rd of pop. & ½ GDP.
Periphery has lower standard of living etc.
Periphery
Centrality of EU25 Regions
Intermediate
Core
Periphery
Centrality of EU25 Regions
Intermediate
Core
(3) Why is an EU regional policy required?
To overcome regional disparities in the EU and support the integration process
Do your own research / see presentations for recent data on – Income inequality– Unemployment inequality– Core v periphery issue
• See European Commission Economic and Cohesion Reports, Eurostat, UK House of Lords European Committee (module web)
Geographic income inequality Within nation
economic activity is very unevenly distributed
Guyane (F)
Guadeloupe
(F)
Martinique
(F)
RÈunion
(F)
Canarias (E)
AÁores (P)
Madeira
(P)
Kypros
Index, EUR-26 = 100
< 30
30 - 50
50 - 75
75 - 100
100 - 125
>= 125
no data
Source: Eurostat
0 km100 500
REGIO.A1- GIS/HP/(statmap) - m98001_uk_C_A4P - 09 Jan 01
SIG16SIG16
© MEGRIN for the administrative boundaries
GDP per head by region (PPS), 1998
< 30
30 - 50
50 - 75
75 - 100
100 - 125
>= 125
Index, EU-25 = 100
< 30
30 - 50
50 - 75
75 - 100
100 - 125
>= 125
Index, EU-25 = 100
< 30
30 - 50
50 - 75
75 - 100
100 - 125
>= 125
Index, EU-25 = 100
Why an EU policy in addition to national policy?
Controversial– interventionist
Arguments for an EU policy– Overcome market failure in EU,eg labour
immobility– Counterbalance; EU policies may worsen
regional imbalances, eg CAP, EMU, SEM– EU co-ordinate national policy
(4) Main types of funds Structural funds (SFs)
– ERDF– ESF– EAGGF (guidance)– FIFG– Cohesion fund
Others incl.– Pre accession aid
(5) Regional Policy Objectives & Reforms
‘Minor’ reforms pre- single market 1989 Reforms
– Linked to SEM– Principles incl:
• Made collaborative /EU co-ordinator• Multi-annual programme• additionality
Agenda 2000– 2000-2006
Aim to increase efficiency New streamlined objective regions
– 6 to 3 objectives • See below
RP Objectives
1989-99 Objective1 regions
– structural adjustment
Obj.2 regions– industrial decline
Obj 3 regions Obj 4 regions Obj 5 regions Obj 6 regions
2000-06 concentration increased
Objective 1– structural adjustment– < 75% EU GDP– 70% SF here!– ERDF
Objective 2 – Regions in decline &
rural areas Objective 3
– human resource development
– ESF
Simplification and decentralisation Clearer division of responsibilities Subsidiarity emphasised But, budget fixed at 0.46% of EU GDP
2007-13
New allocations following enlargement Some EU15 regions now less funding
(now >75%) – phase out funding 3 objectives streamlined to 2 objectives
Issues incl.
Dependency Additionality Subsidiarity Enlargement Absorption by CEECs Each stage of integration - different
effects on regional disparities
(6) RP: Effective? Sufficient? Some EU convergence across EU
– Convergence v divergence (see El Agraa)– Some evidence indicates divergence– At best, narrow convergence– Convergence may be explained by Theory
of Comparative Advantage Still ‘core-periphery’ disparities
Geographic Specialisation Krugman index of
specialisation shows most EU nations becoming more specialised.– EU economies
seem to be specialising more in their comparative advantages.
Source: Midelfart-Knarvik and Overman (2002)
Krugman index comment
EU states: more specialised on a sector basis– explained by Theory of Comparative
Advantage – Eg Portugal cloth, Germany
pharmaceuticals…..;
Comparative Advantage and Specialisation
-52%
-50%
-42%
-35%
-30%
-16%
-9%
-4%
13%
15%
25%
44%
58%
83%
-80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Germany
DenmarkSwedenAustria
FinlandNetherlands
France
BelgiumUK
Ireland
GreeceItaly
Spain
Portugal
Low-education labour Medium-education labour High-education labour
Source: Midelfart-Knarvik and Overman (2002)
comment
Federal systems (Canada & US) have lower regional disparity than EU – US - 1/2 that of EU– Convergence slow (2% pa)
Underfunding despite increased finance in 1990s– SF 0.46% of EU GDP– need ability to transfer funds between
regions
Aims– Realistic? Attainable?– Elimination of disparities or equality of
opportunity? Inefficiency due to problems with planning,
implementation and operation (EU 1999)
BUT, within EU states - greater disparities– clustering of economic activity
(agglomeration, see later for economic geography theory)
(7) Theory 2 major approaches linking economic
integration to change in the geographic location of economic activity.
Comparative advantage suggests nations specialise in sectors in which they have a comparative advantage.– Some convergence between states
New Economic Geography & endogenous growth suggest integration tends to concentrate economic activity spatially.– Greater disparities within states
Agglomeration Theory Economic geography can
– help explain empirical indications– assess the effectiveness of structural
policies Agglomeration forces exist when spatial
concentration of industry creates forces that encourage further concentration– positive externalities– dynamic– attract complementary factors
In the figure below Curve A; agglomeration index (the ratio of
the number of firms in the rich region to the total no. of
firms) – Agglomeration rises, income disparities
widen• As firms locate in core/rich areas
Generally more profitable to produce in rich area (larger market) to benefit from economies of scale
If transaction costs between regions fall, firms will increasingly locate in the region & serve all regions
Curve R; regional income inequality index (ratio of income in the rich region to the total no. of firms)
As agglomeration rises income disparities narrow– Aggm. Reduces innovation costs
• Raises innovation & NEW ENTRY• Greater competition for firms in rich region,
lower profits & reduces disparity between regions
Curve S; agglomeration rises, so does innovation & growth– Agglomeration (spatial clustering) reduces
cost of innovation & raises growth rates– Also, high innovation rate encourages
market entry/competition, reducing profits of incumbent (concentrated in rich region), & hence reduces regional income disparities
See Martin (1999) for analysis
AgglomerationIncome inequalities
Innovation rate & LR growth rate
Industrialagglomeration
RA
S
Income inequalities
Innovation rate & LR growth rate
Industrialagglomeration
RA
S
Equilibrium degree of agglomeration,Innovation/LR growth rate
Different impact of regional policy
RP may fail– EU RP often targets infrastructure to
support SEM– Often unwanted & desired effects (trade-
off)– Thus, need to chose policy carefully
Eg 1. SFs reduce transactions costs within poor regions (eg…………………)
Curve A shifts left A to A1– For a given level of inequality , aggn falls– Firms attracted to poor region
Result: trade-off– aggn– inequlity!!!– Growth/innovation!!!
Income inequalities
Innovation rate & LR growth rate
Industrialagglomeration
RA
S
x
x
x
Income inequalities
Innovation rate & LR growth rate
Industrialagglomeration
RA
S
A1
x
x
x
Income inequalities
Innovation rate & LR growth rate
Industrialagglomeration
RA
S
A1
xy
x
y
xy
Eg 2. No trade-off is possible – Raise innovation/growth– Reduce aggm– Reduce inequality
If SFs reduce costs of innovation – Incl. R&D, education, telecommunications
(faster broadband)– ‘less regional’!! See Martin (1999) for analysis
(8) Conclusion Despite some narrowing of disparities,
they still exist– Disparities within countries widening
RP linked to integration policies Regional policy
– effective?– sufficient?
Further reading Baldwin & Wyplosz, J Pelkmans, S Senior-Nello (all
on general reading list) Martin (1999), ‘Are European regional policies
delivering?, EIB Papers, vol 4,2 Amiti M, “New trade theories and industrial location
in the EU, Oxford Review of Econ Poliy Krugman & Venibles (1990), Integration and the
competitiveness of peripheral industry, in Bliss & Braga de Macedo (eds), Unity with diverisity in the European Economy, Cambridge Uini Press
Midelfart-Knarvik & Overman (2002), Delocation &European integration. Is structural spending justified?, Economic Policy
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