In a world where trade is conducted on a global scale, there is increasing competition between the different territories and their activities, both inside the European Union and elsewhere. But not all regions enjoy the same economic, social and geographic conditions, and not all can compete on an equal footing.

For many years, the regional disparities in levels of development and standards of living - which existed well before the Community was created - were dealt with entirely by the Member States concerned. There have been clear improvements since the European Union started trying to reduce these disparities. But substantial differences remain, and the gross domestic product (GDP) of the ten most dynamic regions is still almost three times higher than that of the ten least developed regions. The EU's regional policy is still needed to encourage harmonious development of the Community's territory. It must enable all the regions in the Union to benefit fully from the opportunities offered by the single market and contribute to the success of economic and monetary union (EMU).

Above all, EU regional policy is about solidarity: it is designed to provide Community-level assistance to help the most disadvantaged regions overcome their handicaps.

Regional policy is also tangible: its results can be clearly seen by Europe's citizens, who themselves benefit directly from assistance in the form of help to find work and adapt to the changing job market, through training in particular. It improves the lives of all who live in the regions by augmenting the funding available to the public authorities for providing new infrastructure and helping firms become more competitive.

Articles 2 and 3 of the Treaty establishing the European Community state that one of its tasks is to "promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, (...) the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States".

More specifically, Title XVII (Articles 158 to 162), on "Economic and social cohesion" explains that the Community aims to reduce disparities between the development of various regions and the backwardness of the least favoured regions or islands, including rural areas. The Community is to support the cohesion effort by the action it takes through the Structural Funds.

GDP per head and labour productivity (in PPS) relative to the EU25 average (2004)

Instruments

At present, the European Union grants financial assistance under multiannual regional development programmes negotiated between the regions, the Member States and the Commission, as well as under specific Community Initiatives and schemes, through four Structural Funds:

• the European Regional Development Fund (ERDF) finances infrastructure, productive investment to create jobs, local development projects and assistance to small and medium-sized firms;
• the European Social Fund (ESF) is there to help the workforce adapt to changes in the labour market and help the unemployed and other disadvantaged groups to get back to work, in particular by funding training and recruitment schemes;
• the European Agricultural Guidance and Guarantee Fund (EAGGF, Guidance Section) finances rural development measures and assistance to farmers, mainly in regions whose development is lagging behind, but also under the common agricultural policy in the rest of the EU;
• the Financial Instrument for Fisheries Guidance (FIFG) finances structural reform in the fisheries sector.

In addition, a special solidarity fund, the Cohesion Fund , helps finance projects relating to the environment and transport networks in those Member States whose GDP is below 90% of the EU average.

The requirements of the ten new Member States in all these areas - infrastructure, industry, services, SMEs, agriculture, environment - are staggering. In 2000-06, the EU has been gradually preparing these countries for membership by setting up with them Accession Partnerships, which are strategic documents for programming aid from two new Funds:

• the Instrument for Structural Policies for Pre-Accession (ISPA), which provides assistance in the ten new countries along the lines of the Cohesion Fund to finance transport and environment projects;
• the Special Accession Programme for Agriculture and Rural Development (Sapard), which was set up to help these countries prepare for the CAP.

At the Berlin European Council in March 1999, the Heads of State and Government reached agreement on Agenda 2000, an action plan put forward by the Commission principally to strengthen the Community's policies and provide the Union with a new financial framework for 2000-06 which took account of enlargement on 1 May, 2004. In this context, Agenda 2000 also included the reform of the Structural Funds. Consequently, the Structural Funds and the Cohesion Fund now have a new legal framework , which should remain in place until 2006. This concentrates assistance from the Funds and simplifies and clarifies the respective roles and responsibilities of the Member States and the Commission.

The reform of the regional policy set out in the financial perspective insisted that structural assistance be concentrated on the regions whose development was lagging furthest behind, and that implementation of the structural policies be simplified. Better placed to understand the specific details and real situation on the ground, the Member States and regions are now better equipped to take control of their future and directly administer the funds provided by the EU, which now only acts to coordinate and check that European funding is properly used. Not only has cohesion policy contributed to reducing regional disparities, it has also managed to establish a partnership between the European Union, the Member States, the local authorities and the private sector centring on development strategies defined to achieve Community-level objectives. In this connection, target-based tripartite contracts and agreements between the EU, the Member States and the regional authorities have been introduced to define the roles and powers of these three administrative levels in future regional policy.

Enlargement vastly increases the stakes for economic and social cohesion and shifts the stage eastwards. The accession of ten new States means rethinking the existing regional policy model to take account of several major new issues:

• the disparities in per capita GDP in the 25 Member States are substantial. In 2003, GDP ranged from 41% of the EU average in Latvia to 215% in Luxembourg. In all the new Member States, per capita GDP is less than 90% of the average in the EU-25, while in Poland, Latvia, Lithuania, Estonia and in Romania and Bulgaria (the two new candidate countries for accession in 2007) it is only half that;
• the political centre of gravity is shifting to the east: the southern Member States currently benefiting from the Cohesion Fund are wondering where they will then fit in.

• These challenges do not call into question the continued existence of economic and social cohesion policy, but they do raise the question of what form assistance should take. Of course, debate on the future of the regional policy goes far beyond the mere financial machinery to touch on the very core of this Community project.

New Cohesion Policy

In July 2004, the Commission presented a package of five proposals for Regulations on the reform of regional policy, a reform that should enter into force on 1 January 2007. The basis of the reform is constituted by the Regulation on the general provisions applicable to the European Regional Development Fund (ERDF) the European Social Fund (ESF) and the Cohesion Fund , which is supplemented by other specific Regulations on the ERDF, the ESF, the Cohesion Fund and the new European grouping of cross-border cooperation.

The legislative proposals of the Commission for the reform of regional policy for the period 2007-13 make provision for a total allocation of EUR 336.1 billion, equivalent to approximately one third of the European Union's budget. The reform aims to target structural actions which are more focused on the strategic orientations of the Union, more concentrated on the most disadvantaged regions, and more decentralised and simplified.

A General Regulation defines common principles, rules and standards for the implementation of the three cohesion instruments, the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Cohesion Fund. Based on the principle of shared management between the Union and the Member States and regions, this regulation sets out a renewed programming process, based on Community Strategic Guidelines for Cohesion and their follow-up, as well as common standards for financial management, control and evaluation. The reformed delivery system will provide for a simpler, proportional and more decentralised management of the Structural Funds and the Cohesion Fund.

In the attachment IV of Regulation 1083/2006 (page 76), the categories 11 to 15 concern both objectives, convergence and regional competitiveness and employment, and not just the convergence objective as suggested by the colours.

The regulation on the European Regional Development Fund (ERDF) defines itsrole and fields of interventions such as the promotion of public and private investments helping to reduce regional disparities across the Union. The ERDF will support programmes addressing regional development, economic change, enhanced competitiveness and territorial cooperation throughout the EU. Funding priorities include research, innovation, environmental protection and risk prevention, while infrastructure investment retains an important role, especially in the least developed regions.

The European Social Fund (ESF) will be implemented in line with the European Employment Strategy and it will focus on four key areas: increasing adaptability of workers and enterprises, enhancing access to employment and participation in the labour market, reinforcing social inclusion by combating discrimination and facilitating access to the labour market for disadvantaged people, and promoting partnership for reform in the fields of employment and inclusion.

The Cohesion Fund contributes to interventions in the field of the environment and trans-European transport networks. It applies to Member States with a Gross National Income (GNI) of less than 90% of the Community average which means it covers the new Member States as well as Greece and Portugal. Spain will be eligible to the Cohesion Fund on a transitional basis. In the new period, the Fund will contribute alongside the ERDF to multi-annual investment programmes managed in a decentralised way, rather than being subject to individual project approval by the Commission.

The fifth regulation introduces a European Grouping of territorial co-operation (EGTC). T he aim of this new legal instrument is to facilitate cross-border, trans-national and/or inter-regional co-operation between regional and local authorities. The latter would be invested with legal personality for the implementation of territorial cooperation programmes based on a convention agreed between the participating national, regional, local or other public authorities.

The Commission proposes that the actions concentrate on a limited number of Community priorities, reflecting the Lisbon (growth, competitiveness and employment) and Göteborg (environment) agendas. On this basis, a core list of key themes has been drawn up for the operational programmes: innovation, knowledge-based economy, environment, risk prevention, accessibility and services of general economic interest. The principles for implementation remain: programming, partnership, part-financing and evaluation.

The objective is to strengthen economic and social cohesion in order to promote the harmonious, balanced and sustainable development of the Community. The Community action aims to respond to the challenges linked to economic, social and territorial inequalities, to the acceleration of economic restructuring and to the ageing of the population.

The main innovation comes with the three new Objectives: Convergence, Regional Competitiveness and Employment and Territorial Cooperation.

THREE NEW OBJECTIVES

Convergence

This Objective aims to accelerate the convergence of the least developed Member States and regions by improving growth and employment conditions. The fields of action will be physical and human capital, innovation, knowledge-based society, adaptability to change, the environment and administrative effectiveness. It will be financed by the ERDF, the ESF and the Cohesion Fund.

The total resources allocated to this Objective are EUR 264 billion, equivalent to 78.5% of the total. The following will be eligible:

• for the Structural Funds (ERDF and ESF):

- regions where per capita GDP is below 75% of the Community average. They must be at NUTS II level. They will receive 67.3% of the funds allocated for this Objective;

• for the Cohesion Fund: Member States whose per capita Gross National Income (GNI) is below 90% of the Community average and which are running economic convergence programmes. They will receive 23.9% of the resources allocated for this Objective. This Fund will contribute to sustainable development and to improving administrative capacities and the effectiveness of public administrations;
• for specific financing from the ERDF: the outermost regions, which will receive 0.42% of the funds. The aim is to facilitate their integration into the internal market and to take account of their specific constraints (such as compensation of excess costs due to their remote location).

The contribution of the Funds to each priority is limited as follows:

• 75% of public expenditure part-financed by the ERDF or the ESF. The ceiling can be raised to 80% where the eligible regions are located in a Member State covered by the Cohesion Fund, and can even be raised to 85% in the case of the outermost regions;
• 85% of public expenditure part-financed by the Cohesion Fund;
• 50% of public expenditure part-financed in the outermost regions (a new additional allocation from the ERDF to compensate for excess costs).

Regional competitiveness and employment

• regions which fell under Objective 1 during the period 2000-06, which no longer meet the regional eligibility criteria of the Convergence Objective, and which consequently benefit from transitional support. The Commission will produce a list of these regions. Once adopted, the list will be valid from 2007 to 2013;
• all other regions of the Community not covered by the Convergence Objective.

With regard to the programmes financed by the ESF, the Commission proposes four priorities following the European Employment Strategy (EES): to improve the adaptability of workers and businesses, to increase social inclusion, to improve access to employment and to implement reform in the fields of employment and inclusion.

The resources intended for this Objective total EUR 57.9 billion, equivalent to 17.2% of the total and divided equally between the ERDF and the ESF. Of this total, 16.7% is ear-marked for tapering transitional support.

Under this Objective, measures can be financed using up to 50% public expenditure. The ceiling is raised to 85% for the outermost regions.

European territorial cooperation

This new Objective aims to strengthen cross-border, transnational and inter-regional cooperation and is based on the existing INTERREG Initiative. It will be financed by the ERDF. It aims to promote common solutions for neighbouring authorities in the fields of urban, rural and coastal development, the development of economic relations and the creation of networks of small and medium-sized enterprises (SMEs). Cooperation will be based around research, development, information technology, the environment, risk prevention and integrated water management.

Regions eligible for funds are those regions at NUTS III level which are situated along internal land borders, certain external land borders and certain regions situated along maritime borders separated by a maximum of 150 km. The Commission will adopt a list of eligible regions.

In the case of networks of cooperation and exchange of experience, the entire territory of the Community is eligible.

The ceiling for part-financing is 75% of public expenditure.

PROVISIONS SPECIFIC TO THE THREE OBJECTIVES

Resources are not transferable between the different Objectives. 0.3% of the total is allocated for technical assistance. For the Convergence and Regional Competitiveness and Employment Objectives, 3% of the total constitutes a "quality and performance reserve". In no case may the annual allocation of resources exceed 4% of the GDP of the Member State in question. Provision has also been made for a new "national contingency reserve" to supply extra assistance in the event of an unforeseen sectoral or local crisis due to the effects of economic and social restructuring or trade opening. It is constituted by the Member States by taking 1% of the convergence contribution and 3% of the "competitiveness" contribution.

Strategic approach

The Commission proposes that the Council adopt a global strategic document for regional policy on the basis of its proposal before the new programming period, after an assent from the Parliament. These "Community Strategic Guidelines for cohesion" transpose the priorities of the Community, taking into account the Broad Economic Policy Guidelines (BEPG) and the European Employment Strategy . More specifically, these strategic Guidelines identify Community priorities to be supported by the cohesion policy in order to strengthen synergies with the revised Lisbon strategy for growth and employment and to help in its implementation. Furthermore, the Guidelines constitute the basis for the elaboration of the national strategic reference framework elaborated by each Member State.

The "national strategic reference network" presents the priorities of the Member State for cohesion policy after 2006. It prepares the programming of funds and replaces the current Community Support Frameworks (CSFs) and the single programming documents (SPDs), as well as the programme complements. It comprises the description of the strategy of the state in question and its operational implementation. It must be sent to the Commission for adoption. This national strategy will be subject to monitoring, together with an activity report, which must be presented by the Member State by 1 October at the latest each year. The main lines of the European Employment Strategy are also evaluated at the national level each year. From 2009, the Commission will itself produce a report at the beginning of each year on the progress achieved with regard to the strategic priorities of the Union. This report will be sent to the Council, which will adopt conclusions on the implementation of the strategic guidelines, which the Commission is responsible for monitoring.

Operational programmes

The Funds work through operational programmes, which cover the period between 1 January 2007 and 31 December 2013. They include analyses, financing plans, implementation provisions and the identification of the priorities. Each programme is concerned with one Objective only. They receive financing from a single Fund, except for the cases of transport and the environment (jointly from the ERDF and the Cohesion Fund).

Programming has been simplified as follows:

• on the policy level, each Member State prepares a document based on the Community strategic guidelines approved by the Council and negotiated with the Commission, which will serve as a framework for the preparation of the programmes;
• on an operational level, the Commission approves programmes on the basis of the national strategic reference framework. These programmes contain only the largest operations; the "programme complement" and management by measure will be abandoned.

The ERDF and the ESF can finance, in a complementary manner and up to 5% for each priority of an operational programme, measures relevant to the field of application of the other Fund as long as they are necessary to the proper implementation of the operation and they have a direct link with the other measures. The programmes must be produced in close consultation with the economic, social and regional partners.

The European Investment Bank (EIB) and the European Investment Fund can also participate in the preparation of national strategic reference frameworks, operational programmes, major projects and public-private partnerships. At the Commission's initiative, the Funds can also finance preparations, monitoring, administrative and technical support, evaluation, audit and the necessary inspections for the implementation of the current Regulation within the 0.3% limit of their annual allocations. However, when the initiative is taken by the Member States, the ceilings rise to 4% of the total amount allocated to a programme for the Convergence and Regional Competitiveness and Employment Objectives and to 6% for the European Territorial Cooperation Objective.

Participation

• the gravity of the specific problems;
• the importance of each priority for the priorities of the Union;
• protection and improvement of the environment;
• the rate of mobilisation of private financing.

The participation of the Funds at the priority level cannot be below 20% of public expenditure. Up to 100% of the costs of technical assistance can be financed. Priorities and operations can only be funded by one Fund and one operational programme at the same time, respectively. For businesses, the total amounts of public aid must respect the ceilings established for state aid. Finally, expenditure part-financed by the Funds cannot make use of any other Community financial instrument.

The new regional policy insruments and financial engineering

Three  new regional policy instruments for 2007 – 2013 will help Member States  and regions to establish sound and efficient management of the funds and to make better use of financial engineering instruments. A closer co-operation between the European Commission, the European Investment bank (EIB) and other financial institutions will streangthen capacity building at the level of national and regional institutions.

JASPERS

JASPERS, “Joint Assistance in Supporting Projects in European Regions”, is a new technical assistance partnership between the Commission, the European Investment Bank and the European Bank for Reconstruction and Development. It will be placed at the disposal of the Member States to assist with the preparation of large projects which will be supported by the Cohesion Fund and the ERDF. This reflects the wide experience of the EIB and the EBRD in large project preparation, notably in the transport and environmental sectors. The combined efforts of the three institutions are intended to support the successful implementation of cohesion policy in the programming period 2007-2013 by greatly increasing the resources available for project preparation.

The main objective of JASPERS is to assist the Member States in the complex task of preparing quality projects so that they can be approved more quickly for EU support by the services of the Commission. This will include support for developing projects based on mature public-private partnership arrangements. JASPERS will provide comprehensive assistance for all stages of the project cycle from the initial identification of a project through to the Commission decision to grant assistance.

JEREMIE

In order to improve access to finance for business development, a new initiative has been established in partnership with the European Investment Fund (EIF). The initiative, Joint European Resources for Micro to Medium Enterprises (“JEREMIE”), began work in 2006 with an evaluation of the gaps in the provision of financial engineering products in Member States and regions (such as venture capital funds, loans and guarantees).

This will prepare the ground for a second phase in which the EIF or similar financial institution will support the authorities responsible for cohesion programmes to bridge the gaps identified. This support will take the form of expert management of resources set aside under the programme for developing access to finance, as well as the attraction and accreditation of financial intermediaries who would on-lend for business development. The successful implementation of the JEREMIE initiative will, however, require the full support and cooperation of the authorities in the Member States and regions.

JESSICA

Work has begun on JESSICA (Joint European Support for Sustainable Investment in City Areas) as a framework for enhanced cooperation between the Commission and the EIB, the CEB (Council of Europe Development Bank) and other International Financial Institutions (IFIs) on financial engineering for sustainable urban development. Its objective is to provide the authorities with a ready-made solution to the complex task of financing projects for urban renewal and development through the use of revolving funds.

JESSICA is being put in place in a partnership between the Commission, the European Investment Bank and the Council of Europe Development Bank.