II. Economic and social Cohesion

• Maintaining the political priority

Economic and social cohesion was introduced in the Single European Act, paving the way for the 1988 reform of the Structural Funds. The Treaty on European Union turned cohesion into one of the three pillars of the European construction alongside economic and monetary union and the Single Market. Finally, the Amsterdam Resolution on growth and employment enshrines the priority to be given to fighting unemployment.

There is no doubt that economic and social cohesion must remain a political priority. In fact, the prospect of enlargement to new countries with widely differing levels of development makes it still more essential. European solidarity will become more important than ever in achieving the major goal of reducing disparities in levels of development explicitly set by Article 130a. It makes a vital contribution to the stability of the Union and the promotion of a high level of employment. There is still a need to address the unequal abilities of the regions to generate sustainable development and their problems in adapting to new labour market conditions, which require a more forward-looking adaptation of the skills of working men and women. The Structural Funds should aim at fostering competitive development and sustainable and job-creating growth throughout the Union and the promotion of a skilled, trained and adaptable workforce.

• Assuring financial solidarity

The European Council in Edinburgh decided that this solidarity should reach a significant proportion of the Union’s GNP (0.46%) at the end of the current financial perspective.

The priority given to economic and social cohesion has been translated into comprehensive programmes implemented in partnership with Member States and regions, both for regions where development is lagging behind (Objectives 1 and 6), and for declining industrial areas (Objective 2) and rural areas (Objective 5(b)). A substantial effort is also being devoted to employment and industrial change (Objectives 3 and 4).

The first Cohesion Report drawn up under Article 130b of the Treaty showed the need for and relevance of the Community’s structural support system and allowed for lessons to be learnt for the future. It also demonstrated that the Member States and regions which lag behind and are eligible under Objective 1 have made progress towards real convergence, not least as a result of assistance from the Structural Funds and the Cohesion Fund. However, despite significant successes, there is still much left to be done, particularly as regards employment: unemployment has not fallen significantly and is growing not only in many less-developed regions where disparities are widening but also in the more prosperous parts of the Union. The effort to support both the balanced development of the Union and the development of human resources throughout it will therefore have to continue over the next period of the financial perspective.

However, budgetary constraints will make it impossible to go beyond the effort made in terms of Union GNP in 1999 (0.46%). Nevertheless, with the extra resources generated by growth and a more efficient use of the resources available, it should be possible to finance both the development of structural policies in the Union of 15 and the gradual integration of new Member States from the moment of their accession.

Category 2 of the Community budget, covering structural operations, will therefore have to retain a privileged place in the budget. However, automatic and systematic rebudgeting in the framework of multi-annual programming is to be avoided.

An amount of ECU 275 billion (at 1997 prices) will be available for Structural operations (under both the Structural Funds and the Cohesion Fund) as compared with ECU 200 billion for 1993-99. On the basis of the assumptions made in Part Three of this communication, ECU 45 billion will be earmarked for the new Member States, including ECU 7 billion by way of pre-accession aid. The increase in transfers to the acceding countries will be gradual in line with their absorption capacity. At all events, total transfers from the Structural Funds and the Cohesion Fund to a present or future Member State should not exceed 4% of its GDP.

• A better division of responsibilities

Making the Structural Funds more effective will require simplification of management and greater flexibility and decentralisation in implementation, in line with modern management principles and future staffing restrictions. In return, the Commission will require greater selectivity and rigour when priorities are defined at the outset. This is where the concept of partnership between the Commission and the Member States will have to be given a real meaning. The monitoring and evaluation systems will also have to be improved and checks made more efficient and rigorous.

2. Greater concentration

The Commission proposes to consolidate the budget effort of the Structural Funds over the period 2000-2006 at a level of ECU 210 billion for the 15 existing Member States. This means that over the new period average annual funding for the EU-15 will fall slightly from the 1999 level.

For reasons of visibility and efficiency, the present seven Objectives should be reduced to three: two regional Objectives and a horizontal Objective for human resources.

The percentage of the population of the Union of 15 covered by Objectives 1 and 2 should be reduced from 51% to 35%-40%. This figure will be smaller than the population covered by Article 92(3)(a) and (c), which should also be reduced from 1 January 2000. Furthermore, measures for the regions which will benefit from transitional (phasing out) support from the Structural Funds will have to comply with the competition rules on state aids.

• A continuing high priority for Objective 1

The regions lagging behind in development which are eligible under Objective 1 and which face the most serious difficulties in terms of income, employment, the productive system and infrastructure, should enjoy the same priority as at present. It should be noted that their average level of unemployment is 60% higher than the Community average. In some regions, over one quarter of the labour force is unemployed.

That is why the total amount of the Structural Funds to be allocated to the Objective 1 regions should cover about two thirds of the Structural Funds available for the 15 Member States, a share comparable to the average for the current programming period.

In future, the threshold of a per capita GDP of 75% of the Community average should be applied strictly. Care should also be taken that there is complete congruence with the regions assisted by the Member States under Article 92(3)(a) of the Treaty. The efforts made following the 1993 revision of the Structural Funds regulations to achieve indicative financial allocations which are more objective, transparent and equitable should be continued. Using objective criteria broadly similar to those for the current period, only the eligible population, the gap between regional prosperity and the Community average, and national prosperity should be taken into account. Additional support would be granted to regions with a high level of unemployment.

For those regions currently eligible under Objective 1 but which will have passed the 75% threshold, phasing out of the relevant transfers over a transitional period will be required. The precise ways of achieving this will be defined at a later date. In view of their particular situation, the outermost regions covered by a new Treaty Article and Protocol will be treated as Objective 1 regions on an ad hoc basis. Similarly, the most northern regions with an extremely low population density which do not qualify for Objective 1 but which are at present eligible under Objective 6 should enjoy special arrangements.

As is presently the case, an integrated approach should be applied to the development of structurally backward regions. The success of efforts undertaken in partnership with the Member States depends on appropriate coordination of all the components of structural assistance, whether from the Regional Fund, the European Agriculture Guidance Fund (EAGGF - Guidance Section), the Social Fund or the Financial Instrument for Fisheries Guidance (FIFG). Each region will have to be looked at in terms both of specific needs and Community priorities. Programmes will be drawn up taking account as much as possible of the priorities voiced by the regions concerned. There will be special emphasis on improving competitiveness, which is vital if jobs are to be created and maintained. This will require support for measures to assist infrastructure, innovation, SMEs and human resources.

• Redefining Objective 2 - economic and social restructuring

A new Objective 2 devoted to economic and social restructuring will bring together measures for other regions suffering from structural problems. These are areas undergoing economic change (in industry or services), declining rural areas, crisis-hit areas dependent on the fishing industry or urban areas in difficulty. All these areas are facing structural problems which take the form of economic restructuring problems, a high rate of unemployment or depopulation. A limited number of significant areas should be identified in order to facilitate an integrated strategy for economic diversification.

Almost one fifth of the population of the Union outside the Objective 1 regions lives in areas where the unemployment rate is above the Community average. Youth unemployment is still over 30%. In some urban areas, unemployment ranges from 30% to 50%.

Vigorous structural measures are required to foster diversification, restore economic dynamism and promote an active business culture. Such measures should help exploit the very high economic development potential of such areas, accompany restructuring and encourage the adjustments required. Particular attention will have to be paid to education and training and to access to new technologies to the extent that skills do not meet the requirements of a modern economy.

The new programmes to support the Objective 2 areas will favour economic diversification, including in regions heavily dependent on a single declining economic sector. This will require increased support for small and medium-sized enterprises and innovation as well as a greater emphasis on vocational training, local development potential, the protection of the environment and combating social exclusion, particularly in urban areas in difficulties. Investment in human resources, based on anticipation and on activating the labour market and on permanent training, should be increased in these areas undergoing changes. The development of rural areas should build better links between the countryside and local towns. This should facilitate the diversification of industrial, craft, cultural and service activities.

The Commission would like to see simpler, transparent and specific eligibility criteria developed for the various types of areas covered by the new Objective 2. Account will have to be taken of relevant socio-economic criteria, and in particular of the rate of unemployment, the levels of industrial employment, the level and development of activity in agriculture and in the fishing industry, and of the degree of social exclusion. In the interest of simplification, the different funds (ERDF, Social Fund, EAGGF Guidance Section, FIFG) will be involved through a single programme per region. The use of Community criteria in the context of partnership with the Member States, and with due regard for their regional priorities, should result in geographical concentration on the areas most affected at Community level. This will lead to a zoning which is less scattered and as consistent as possible with the areas assisted by the Member States under Article 92(3)(c) of the Treaty.

The areas currently eligible under Objectives 2 and 5(b) which would no longer be eligible under the future selection criteria should enjoy limited financial support for a transitional period.

In addition to the aid provided under Objectives 1 and 2 of the structural policies for changes taking place in the fisheries sector, the FIFG could support restructuring on the Union’s coastline from category 1 of the financial perspective.

• Developing a strategy for human resources: a new Objective 3

The development of human resources will be a key element both in the Objective 1 and 2 regions and elsewhere in the Union and should be implemented in a consistent way. A determined effort should be made to modernise labour markets in a way consonant with the multi-annual plans for employment and the new Title on employment introduced in the Treaty of Amsterdam. Priority should be given to access to employment, the development of life-long learning and the promotion of local employment initiatives, including territorial employment pacts.

A new Objective 3 will be introduced for regions not covered by Objectives 1 and 2. It will help the Member States to adapt and modernise their systems of education, training and employment. This is required both to make their economies competitive and for reasons related to safeguarding the European model of society. Education is, in fact, a powerful tool for social equity and inclusion.

The new Objective 3 will be based on a common European framework, but with sufficient flexibility so as to reflect a variety of systems, approaches and levels of development in the Member States. Strategy and funding should therefore be sufficiently flexible so as to be modulated as a function of Member State and the scale of intervention foreseen. The policy dialogue with Member States should ensure that Objective 3 programmes provide concentration within a realistic and effective range of measures and that monies are used in a way which both ensures consistency with the mainstream of national policies and also guarantees visibility of the Union contribution. Objective 3 will promote activity in four areas which will complement the guidelines developed as part of the European Employment Strategy:

• accompanying economic and social changes;
• lifelong education and training systems;
• active labour market policies to fight unemployment;
• combating social exclusion.

• Reducing the number of Community Initiatives

There are at present 13 Community Initiatives, which have resulted in 400 programmes, as many as all the other structural measures put together. This is clearly excessive, particularly since the Initiatives often deal with he same topics as the main programmes.

Reform is obviously required to bring out more clearly the Community interest of the Initiatives and their innovative character. The Commission is therefore proposing to restrict them to three fields where the value added by the Community is most obvious:

• cross-border, trans-national and inter-regional cooperation to promote harmonious and balanced spatial planning;
• rural development;
• human resources, paying special attention to equal opportunities.

The schemes covered by other Initiatives will be incorporated in the programmes financed under the various Objectives. This will enable the share of the resources of the Structural Funds allocated to the Community Initiatives to be reduced to 5%.

Finally, innovative measures and pilot projects, which currently absorb 1% of the Structural Funds must be improved. Such an arrangement will make it possible to test innovative measures, to provide an interesting financial lever and to develop stronger partnerships. However, a scattering of means and the proliferation of mini-projects which are difficult to manage effectively and to monitor should be avoided at all costs. Consideration should therefore be given to concentrating on significant projects and making implementation simpler and more transparent.

3. The Future of the Cohesion Fund

One of the major innovations of the Treaty of Maastricht was the decision to establish a Cohesion Fund "to provide a financial contribution to projects in the fields of environment and trans-European networks in the area of transport infrastructure." (Article 130d).

Assistance from this Fund is subject to three conditions: it goes to those Member States whose per capita GNP is less than 90% of the Community average. It is aimed exclusively at projects concerned with the environment and transport and it is applicable only where a national programme leading to the fulfilment of the requirements of economic convergence referred to in Article 104c of the Treaty has been drawn up.

It is proposed that this fund be maintained in its present form; Member States whose per capita GNP is less than 90% and which take part in the third phase of EMU should remain eligible for assistance from the Fund. The latter’s national coverage enables Community support for the whole territory of the less prosperous Member States to be continued. Macroeconomic conditionality should continue to apply. For countries taking part in the third phase of EMU, this will require compliance with the Stability and Growth Pact and in particular the stability programmes. A review of eligibility under the criterion of per capita GNP being less than 90% of the Community average will be carried out half-way in the period.

It is proposed that the Fund should have available, for all its beneficiaries, a total of some ECU 3 billion per year.

4. Structural support for the new Member States

As soon as the next enlargement of the Union takes place, support from the Structural Funds and the Cohesion Fund should in theory apply to all the countries which join. There is ample reason for Community solidarity towards these new democracies, which have enormous development needs, particularly as regards infrastructure, including in the environmental field, the productive sectors and human resources.

To avoid major problems with regard to absorption, the level of annual aid should increase gradually, subject to the general limit of 4% of national GDP, which would apply to the Structural Funds and the Cohesion Fund together.

As a result, the resources under category 2 of the Community budget available for the new member states would be about ECU 45 billion for the Structural Funds and the Cohesion Fund. At the end of that period, the level of structural transfers to the new member states would represent approximately 30% of the total for category 2.

Pre-accession aid, to be drawn from the ECU 45 billion allocation for the new Member States, would be made available from the year 2000. This assistance, to be granted at a constant rate of ECU 1 billion per year, would initially be granted to all the applicant countries and would subsequently be focused on countries due to join the Union at a later stage. It would be primarily intended to help bring the applicant countries’ infrastructures up to Community standards, particularly in the transport and environment fields, along the lines of existing Cohesion Fund transfers. It would also enable the countries concerned to become familiar with the procedures concerning structural operations.

5. Enhancing cost-effectiveness

The reduction of economic and social disparities depends not only on a real medium-term vision of territorial development and human resources supported by adequate resources, but also on a demanding and decentralised partnership to facilitate the preparation of integrated regional and social development strategies. This is the background against which the Union’s structural instruments will be radically adapted to make them more effective through simplification, evaluation and auditing.

The reduction in the number of Objectives and Community Initiatives constitute a first step towards simplification. Other approaches, aiming at the simplification of operational procedures, should also be explored. There would be a single multi-annual programme for each region for Objectives 1 and 2. For the horizontal Objective 3, there would be a national programme or a set of regional programmes. This would substantially reduce the administrative burden while strengthening the integrated strategic approach to development and further building on the political dialogue between the Member States, the regions, the economic and social partners and the Commission concerning the effectiveness and the results of measures financed by the structural policies.

Simplifying the system for implementing the structural policies requires first of all a clear division of responsibilities between the national, regional and local authorities and the Commission. This division should be based on the following elements:

• The Commission and the national, regional and local authorities will identify in partnership the priorities for development and assistance in relation to verifiable targets.
• Management in the Member States and the regions will be decentralised, with special treatment of major projects. It will be facilitated by simpler financial management at both Commission level and that of the Member States. In return for decentralised management, the Member States and the regions will systematically have to account directly for the use made of the Structural Funds.
• To provide more stringent checks and verification of results, the Commission will ensure that the Member States have adequate systems for management, evaluation and auditing.

Finally, increased effectiveness could be backed up by a reserve, which should be substantial (at least 10%) and allocated only half-way in the period to regions with good performance in terms of results that are verifiable, including from the standpoint of budget implementation. It should be simple and transparent in application.

The multiplier effect of structural resources should be increased by greater use of other forms of assistance than grants (interest-rate subsidies, guarantees, venture capital holdings, other holdings) in order to better respond to economic needs and take better account of the returns from projects. This would also apply to infrastructure, including the trans-European networks. In this respect, greater cooperation between the EIB, the EIF and the Structural Funds appears to be an essential first step.