Background paper INFORMAL MEETING OF MINISTERS

Preparation of the Informal Ministerial Meeting of Ministers responsible for
Cohesion Policy, Milan 10 October 2014
“Cohesion Policy and economic governance: complementing each other”
Background paper
September 2014
1. Introduction
The relationship between Cohesion Policy and economic governance is not new.
The link with Member States‟ economic policies has been evident since the
beginning. As early as 1988, the reform of the EU Structural Funds included
additionality among its basic principles. Additionality means that Cohesion Policy
aims at complementing – rather than substituting – national policies for regional
development implemented by beneficiary Member States by means of their national
resources. Additionality levels were established with reference to the wider
macroeconomic context and trends. Member States‟ national resources are also
important in order to ensure national co-financing to EU Funds, which has been
another basic principle of Cohesion Policy since 1988, ensuring greater responsibility
of beneficiaries and the leverage effect of EU Funds.
In 1994 the Cohesion Fund was introduced, with a clear link to the economic
governance of the time. The rationale was to allow some Member States to continue
the required reform efforts in order to join the European monetary union, also
implying fiscal consolidation, while preserving the possibility to invest in certain
policy areas likely to sustain their competitiveness – namely, transport infrastructure
(Trans-European Networks) and environmental projects. Eligibility to Cohesion Fund
was consistently defined based on compliance with two criteria: i) GNP lower that 90
per cent of the EU average; and ii) a programme leading to fulfilment of economic
convergence conditions “as set out in Article 104c of the Treaty”. Moreover, explicit
conditionality was established introducing the option to suspend the Fund financing in
case of excessive deficit of the beneficiary Member State. The Cohesion Fund was
also exempted from the additionality rule.
In 1999, a ceiling to the total annual receipts from Structural Funds (i.e. “capping”),
equal to 4% of Member State GDP, was introduced with reference to a concept of
national absorption capacity. The rationale was to keep the annual support in line with
the need to prevent the overheating of beneficiary Member States‟ economies with
too high investment levels, by also considering requirements on national cofinancing
and additionality.
Further alignment to economic governance in the regulations for the 2014-2020
programming period reflects, nevertheless, the new circumstances emerged since
2008, after the eruption of the economic crisis and the lessons learnt. The background
is the reinforcement of EU economic governance rules carried out in 2011 in order to
ensure fiscal consolidation and the re-establishment of a framework of sound
economic policies.
The most striking evidence relevant for Cohesion Policy through the economic and
financial crisis is the reversal of a long trend of GDP convergence, the increase of
unemployment, poverty and social exclusion, at a time when there has been the
dramatic fall of public investments within the EU. As shown by the European
Commission in the Sixth Cohesion Report, public investment in the EU fell by 20 per
cent in real terms between 2008 and 2013. This cut to investments also partly overlaps
with the cut to national cofinancing. As revealed by the European Commission, across
the crisis the majority of EU Member States reduced their commitments to ensure
national cofinancing of Cohesion Policy programmes. National cofinancing went
down by 18 per cent (or approximately 25 billion euros).
The economic and financial crisis has had a strong and durable impact on
investments. Public investments have dropped during the crisis, partly due to
budgetary pressures. This, in turn, implied lower effectiveness of Cohesion Policy. It
became even clearer that Cohesion Policy needs to be underpinned by sound
economic policies in order to achieve its pursued results.
2. Links between Cohesion Policy and EU economic governance within 20142020 regulations
Consistently with the scenario synthesised above, for the 2014-2020 period a number
of concrete provisions were introduced in Cohesion Policy regulations, with a view to
ensuring contribution to the effort to combine the required fiscal consolidation
measures with the re-launch of EU growth along the lines defined in the Europe 2020
Strategy.
As mentioned by the Sixth Cohesion Report of the European Commission, the main
elements introduced in Cohesion Policy regulations are as follows:
- Alignment with the European semester – Country Specific Recommendations
(CSRs), which are a core element of the European semester, will orient the use of
Cohesion Policy resources (actually of a wider set of funds, namely the European
Structural and Investment (ESI) Funds), whereby relevant for programmes‟
implementation. A number of CSRs go well beyond the scope of Cohesion Policy.
However, this does not apply to some policy areas linked to competitiveness of a
country where Cohesion Policy investment may be important to support national
efforts. Such cases range from public administration and judiciary reforms or
adoption of anti-corruption measures, to support to R&D and innovation,
development of energy networks and energy efficiency, a more favourable context to
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entrepreneurship, labour market reforms and access to employment, education
systems and vocational training, and reduction of poverty and social exclusion.
Member States have taken into account relevant CSRs when drafting their respective
programming documents (partnership agreements and programmes) and may also be
asked to adjust those documents within the framework of macroeconomic
conditionality provisions (see below);
- Measures to ensure sound economic governance – These measures, also known as
„macroeconomic conditionality‟, strengthen the link between economic governance
and EU funds i.e. a new provision for all ESI Funds except for Cohesion Fund, as
mentioned. The objective of these measures is to increase the effectiveness of ESI
Funds expenditure. Indeed, Regulation n. 1303/2013 – in line with political decisions
taken at the February 2013 European Council – clearly states the rationale for
introducing the new provisions: (recital 24) “A closer link between cohesion policy
and the economic governance of the Union is needed in order to ensure that the
effectiveness of expenditure under the ESI Funds is underpinned by sound economic
policies and that the ESI Funds can, if necessary, be redirected to addressing the
economic problems a Member State is facing”.
The rule is based on two distinct strands. Based on the first strand, the Commission
may request Member States to reprogramme ESI Funds when this is justified by the
economic challenges identified through different economic governance mechanisms.
It may propose a suspension of payments in case there is non-effective action by the
Member State. Based on the second strand, the Commission shall propose to the
Council the suspension of ESI Funds (commitments or payments when immediate
action is sought and in the case of significant non-compliance) when certain steps of
the different economic governance procedures (excessive deficit, macroeconomic
imbalances and financial assistance programmes) are reached. Suspensions are
adopted based upon a proposal by the Commission and a decision by the Council.
Whereby proposing suspensions, the Commission shall take into account a number of
mitigating factors concerning the economic and social context and inform the
European Parliament, which may invite the Commission for a structured dialogue. In
this context, the European Parliament may invite the Commission to explain the
reasons for its proposal;
- Measures preserving growth enhancing investment (investment clause) – As argued
in the previous section, fiscal consolidation coincided with a significant drop of public
investment in real terms, as well as of national cofinancing of Cohesion Policy
programmes. Indeed, national cofinancing (contrary to EU cofinancing) is not
exempted from the calculations for complying with the Stability and Growth Pact
(SGP) requirements. Consistently, over the past few years, the EU institutions have
devoted increasing attention to the issue of ensuring adequate levels of investment
which could support the resumption of sustained growth.
In June 2012, the “Compact for growth and jobs” agreed upon by the European
Council referred to the monitoring by the Commission of “the impact of tight budget
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constraints on growth enhancing public expenditure and on public investment” also
mentioning that the Commission was expected to “report on the quality of public
spending and the scope for possible action within the boundaries of the EU and
national fiscal frameworks”. The request for possible action within the framework of
existing rules was reiterated in the following European Councils in 2012 and 2013. As
a consequence, in November 2012 the Commission prepared the Communication “A
blueprint for a deep and genuine economic and monetary union – launching a
European debate” which, among the short-term measures to be undertaken, also
included the possibility to explore ways “to accommodate investment programmes in
the assessment of Stability and Convergence Programmes” within the preventive arm
of the SGP. In Spring 2013, technical work was developed by the Commission in
order to translate the concepts of the “Blueprint for a deep and genuine economic and
monetary union”, clearly identifying Cohesion Policy programmes among those
which could benefit from flexibility under specific conditions. A request to the
Commission to report on the possibility of flexibility within the preventive arm of the
SGP by end-July 2013 became a regulatory requirement of one of the “Two-Pack”
regulations (Regulation n. 473/20131, Art.16.2). Consistently, in July 2013, the Vice
President of the Commission, Mr. Rehn, in a letter to finance ministers, informed of
the Commission‟s intention to introduce an “investment clause” by interpreting
existing rules (Regulation n. 1466/1997 Art.5.1) in a way to allow for temporary
deviations from the medium-term budgetary objectives or from the adjustment path
towards it under specific circumstances and eligibility conditions for Member States
in the preventive arm of the SGP. As a consequence, the investment clause has been
applied in 2013 for Bulgaria and in 2014 for Bulgaria and Romania. Moreover, in
October 2013, the European Parliament approved the resolution “Budgetary
constraints for regional and local authorities regarding the EU's Structural Funds”
which “calls [...] for public expenditure related to the implementation of programmes
cofinanced by the European Structural and Investment Funds to be completely
excluded from the definition of SGP structural deficits because this is expenditure
devoted to achieving the goals of Europe 2020 and supporting competitiveness,
growth and job creation, especially where youth employment is concerned”. Although
independent think tanks evaluations are mixed on this proposal, some consider
unfortunate that the request of the European Parliament has not been taken into
account2. In December 2013, the regulation on Cohesion Policy (Regulation
n.1303/2013, recital 26) included a provision requiring that national cofinancing
commitments of Member States‟ be considered when applying the second strand of
macroeconomic conditionality.
Within a framework of implementation of structural reforms, the invitation to make
best use of flexibility in the existing rules of the SGP was reiterated in the
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Regulation (EU) n. 473/2013 of the European Parliament and of the Council of 21 May 2013 on
common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of
excessive deficit of the member states in the euro area.
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Barbiero F. Darvas Z. (2014), “In Sickness and in Health: Protecting and Supporting Public
Investment in Europe”, Bruegel Policy Contribution, February.
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Conclusions of the European Council of June 2014 and included into the “Strategic
agenda for the Union in times of change”.
- Greater consistency of additionality verification with stability and convergence
programmes – Additionality was traditionally defined in “incremental” terms (i.e. by
ensuring that financial resources increase from one programming period to another,
irrespective of their actual level). Conversely, in the 2014-2020 period additionality is
defined in such a way to ensure greater coherence with Member States‟
macroeconomic contexts. It will be set in terms of GDP share devoted to gross fixed
capital formation, consistently with the information provided in the stability and
convergence programmes submitted annually by Member States in order to comply
with EU economic governance rules on surveillance and coordination of economic
policies and budgetary positions. Comparability and transparency should be
increased, thus improving the way the rule is applied. The improvement scope has,
however, been reduced by its actual application to a restricted number of Member
States only;
- Ex-ante conditionalities – Ex ante conditionalities are very closely related to the
structural reforms agenda (which are a crucial element of economic governance aimed
at preventing new macroeconomic imbalances); ex-ante conditionalities are an
incentive to carry out (some of) those reforms and were set to ensure that the right
framework conditions are in place to fully reap the benefits of Cohesion Policy.
3. Cohesion Policy and economic governance: complementing each other
As mentioned by the European Commission in the Sixth Cohesion Report, the EU
economic governance and Cohesion Policy share “the same ultimate objective –
sustainable, sustained and balanced economic growth”. Following the economic and
financial crisis, the need to reinforce coherence between the two policy domains in
order to reach such shared objective has indeed grown and new Cohesion Policy rules
accordingly reflect such need.
On the one hand, Cohesion Policy cannot properly work within a context of unsound
macro-economic policies. Indeed, in such a case, Cohesion Policy loses one of its key
elements – namely its “additional” nature – compared to national interventions which
become more difficult to implement. Moreover, as shown in the Sixth Cohesion
Report, the possibility to co-finance Cohesion Policy programmes with national
resources is also put at risk. However, Cohesion Policy cannot compensate for what
national policies no longer do.
On the other hand, compliance with EU economic governance can gain from
Cohesion Policy targeted investment supporting the implementation of the Europe
2020 Strategy in Member States and regions. With a number of guarantees on the
content of Cohesion Policy investment ensured by new provisions such as those on
thematic concentration and ex-ante conditionalities, Cohesion public investments
consistently complement a budget discipline framework and sound macro-economic
policies. They provide contribution to improving productivity and competitiveness,
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which are basic elements for the sustainability of the mix of economic policies aiming
to comply with EU economic governance criteria.
The two policies should complement each other: compliance with EU economic
governance requirements helps to attain the results pursued by Cohesion Policy
investments, while Member States and regions becoming more competitive also
through Cohesion Policy investments are more likely – and upon a more sustainable
basis – to fulfil EU economic governance criteria. In other words, this is recognition
of Cohesion Policy as a relevant part of EU economic policies, whose contribution to
restoring growth is an essential component of a wider mix.
Such complementarity should be reflected in the Council‟s working methods, within
its decision-making process, in line with political commitment towards ensuring
higher effectiveness of investments. This will contribute to implementing the
“Strategic agenda for the Union in times of change” agreed by the European Council
in June 2014, notably concerning actions to be taken under the “Union of jobs, growth
and competitiveness” priority.
4. Questions for debate
Based on the elements mentioned by this background paper, Ministers responsible for
Cohesion Policy are invited to express their views on the following questions:
4.1 To what extent has the stronger link with EU economic governance been a driver
in the programming process to ensure that the Cohesion Policy funds are programmed
in the most effective way to deliver jobs and growth? How can such a stronger link
ensure greater effectiveness in the implementation of Cohesion Policy?
4.2 How should the monitoring arrangements at a political level in relation to
Cohesion Policy implementation and respect for economic governance principles be
carried out so as to ensure full respect for the complementarities between the two, in a
cooperative approach to achieve their ultimate shared objective, namely “sustainable,
sustained and balanced growth” in the EU?
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