Opinion on the Fifth Periodic Report on the Social and Economic Situation and Development of the Regions of the Community (95/C 236/07)

On 28 October 1994 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Economic Community, on the Fifth Periodic Report on the Social and Economic Situation and Development of the Regions of the Community.

The Section for Regional Development and Town and Country Planning, which was responsible for preparing the Committee's work on this subject, adopted its Opinion on 19 May 1995. The Rapporteur was Mr Christie.

At its 326th Plenary Session (meeting of 31 May 1995) the Economic and Social Committee adopted unanimously the following Opinion.

1. Introduction

1.1. The Fifth Periodic Report provides a detailed account of the movement of regional economic indicators during the recent past and presents an analysis of the forces shaping the economic development of the regions of the Community. In addition the Report identifies a number of issues and problems that will confront the regions during the remainder of the decade.

1.2. The Committee welcomes the presentation of the Fifth Periodic Report as an opportunity to reflect on the evolving pattern of regional economic performance across the European Union. It provides a valuable insight also on the development of policies designed to secure a greater measure of economic and social cohesion in the EU, an objective that the Committee considers central to the process of economic and political integration in Europe.

1.3. On this occasion the Commission presents an analysis that incorporates key questions concerning the challenges presented to economic and social cohesion posed by the enlargement of the EU to include countries of Eastern and Central Europe and the drive to achieve monetary union by the end of the decade. These are major issues and the Fifth Report identifies a number of problems that must be addressed in both contexts.

1.4. The Fifth Periodic Report is presented at a time when the EU economy is emerging from a particularly sharp recession. It therefore provides a timely reminder that the fundamental determinant of regional economic performance is not the efficacy of the Structural Funds per se, but the broader macroeconomic conditions prevailing across the EU economy as a whole.

1.5. However, the Economic and Social Committee takes this opportunity of restating the importance it attaches to the Structural Funds as one of the critical instruments for the development of the European Union. It is important to emphasize the complementary nature of the Structural Funds, i.e. they can only be effective if they are complementary to effective regional policies at the national level.

2. Structure of the Report

2.1. The Fifth Periodic Report is divided into four sections:

The first section reviews the main regional trends over the immediate past, setting these into a longer term perspective. In particular, and as has been the case in previous Reports, data on regional trends in output, employment and unemployment are recorded.

The second section considers the factors underlying regional economic disparities and assesses those factors that together contribute to regional competitiveness. In explaining the development of relative regional economic prosperity, emphasis is placed on infrastructure and human resource endowments, foreign direct investment and the role of research and technological development (RTD).

The third section of the Report considers the economic development record in those regions eligible for assistance under the Structural Funds, and previews the development of the Structural Funds to the end of the decade.

The final section of the Report considers the implications for economic prospects in the regions resulting from further moves designed to deepen and widen European integration. In particular, the impact of monetary union and another round of enlargement are considered.

3. General Comments

3.1. The broad picture presented in the Report is one in which there has been a limited degree of convergence in per capita GDP at the level of the Member State since the mid-1980s. Real convergence has been particularly successful in Ireland, Spain and Portugal, although not in Greece. In Ireland this success in recording a growth in per capita GDP is explained by changes in macroeconomic policy, foreign direct investment, emigration, and the operation of the Structural Funds. Both Spain and Portugal also benefitted from the implementation of macroeconomic stabilization programmes as well as from an increase in exports. This does not alter the fact that real convergence, at least at the national level, is best achieved during periods of economic growth.

3.2. The Committee notes, however, that at the level of the region the picture is more mixed with the poorest regions failing to narrow the gap with the richer regions. This reinforces the importance of targeting assistance at the Union's poorest regions. However, it remains the case that despite significant financial resources being allocated to these Objective 1 regions, convergence appears to be taking place extremely slowly - even during periods of generally high rates of economic growth for the EU as a whole. The Report clearly demonstrates that it is in these regions that the factors which are required to achieve regional economic competitiveness are in shortest supply.

3.3. As is expected during periods of recession, unemployment increased across the EU since 1991. This has resulted in a widening of regional disparities in unemployment. An added problem is that the EU labour supply continues to rise at a faster rate than previously forecast, particularly in the regions with highest unemployment.

3.4. The Report stresses that the prospects for a reduction in unemployment, and regional disparities in unemployment, is linked to overall economic performance at the EU level. The Committee endorses this position although it recognizes that a certain degree of disparity is inherent in a dynamic, market oriented society. Nevertheless the Committee urges that attention is given to the consequences for unemployment in the implementation of other major EU policies.

3.5. It is clear that whilst the reformed Structural Funds are having an overall positive impact upon cohesion, that this is occurring extremely slowly and is prone to interruption and reversal during recessionary periods. The resources available to the Structural Funds may require to be increased significantly if cohesion is to occur more rapidly and to lead to a sustained improvement in the economic conditions in the less developed and declining regions.

3.6. It is inappropriate to regard the Structural Funds as sufficient in themselves for the development needs of particularly structurally weak areas. To this extent national and regional efforts to secure economic and social cohesion sometimes do not receive sufficient support. As the Fifth Report makes clear, much depends on the effectiveness of national regional programmes as well as general economic (cyclical) developments. Whilst the Structural Funds continue to impact favourably in the drive to secure a greater measure of cohesion, they do so only within constraints determined by national economic policy programmes and the broader external environment.

3.7. In future Periodic Reports the Committee would welcome a general commentary by the Commission indicating the impact that national policies were having on economic and social cohesion. Two issues in particular require closer attention. The first concerns the extent to which national measures are promoting domestic economic development in ways that might run counter to the strict principles of EU competition policy. Where such policies are being undertaken by certain Member States, this will tend to make cohesion more difficult to achieve. Secondly, although the Committee underlines the importance of sound fiscal policy within Europe both for its own sake and for achieving a monetary union, it would point to a risk that as some Member States implement the convergence programmes designed to enable progress towards full monetary union, the associated reduction in fiscal expenditure could further weaken the economic prospects of the poorer regions. In turn this may jeopardize the delivery of national policy measures aimed at regional economic development.

3.8. Although the Report does include commentary on the likely consequences of monetary union and enlargement for the regions, there are a number of significant omissions from this analysis. Reform of the CAP is bound to have a major impact on the economic prospects for the EU's weakest regions; that is, those in which employment and income are dependent upon agricultural activity. Moreover, further liberalization of international trade as embodied in the Uruguay Round final agreement is set to impact adversely upon a number of the EU's weakest regions, particularly those with a significant textile industry. The Committee notes that the Commission is required to present a comprehensive cohesion report by the end of 1996. It is essential that the effect of both CAP reform and trade liberalization are given full consideration in that report. In addition further detailed analysis of the impact of monetary union and enlargement on cohesion is required in that report. The CAP reforms, the new GATT arrangements, monetary union, and enlargement could all work strongly against cohesion in the European Union. The Cohesion Report must address these problems in detail and identify how cohesion can be achieved in the context of these new developments.

4. Specific Comments

4.1. The Report shows that, in 1991 and excluding the new German Lander, the per capita GDP in the top 10 regions was some 3.6 times greater than the bottom 10. The present disparity is wider than existed in 1980, due primarily to the effect of the second and third enlargements of the EC. If the new German Lander are included in the current analysis, then regional disparities increase to 4.5 times.

4.2. The inter-regional disparities in rates of unemployment are worse than disparities in per capita GDP. The rate of unemployment in the 10 most affected regions is some 7 to 8 times higher than in the 10 least affected regions. There is thus no convergence in regional unemployment trends and the evidence shows a strong regional disparity in the 'job-content' of economic growth.

Taken in isolation, these statistics paint a somewhat disappointing picture. However, the Report provides little by way of direct explanation for the underlying cause of apparently worsening regional disparities in unemployment and, although to lesser extent, per capita income. In particular, to what extent do the trends identified reflect underlying problems with the Structural Funds (e.g. insufficient resources, a need to target assistance even more narrowly, inappropriate planning, inefficient application of financial resources and poor project appraisal, etc.) and to what extent do these trends reflect external influences (e.g. the impact of national economic policies, low productivity, recessionary forces, etc.)?

4.3. The ESC welcomes the careful analysis contained in the second section of the Report. By focusing on infrastructure, human resources, foreign direct investment and research and technological development the Commission indeed has identified the major factors underlying regional economic performance. Moreover, by indicating the intra-EU divergence in the endowment of these productive factors the Report clearly shows what is required before the weaker regions will be in a position to record sustained economic growth.

However, what is much less clear from the Fifth Report are the mechanisms - both national and Community - that are required before real progress can be made in securing a greater supply of these productive factors in the weaker regions.

4.4. The Economic and Social Committee notes that many features of this analysis of major factors affecting the underlying regional economic performance, in chapters 4.5 and 6, have been presented using information only at a national level and sometimes for only four countries: Ireland, Portugal, Spain and Greece. Whilst there may be statistical problems in obtaining regional information, the Committee would ask the Commission to attempt to remedy this deficiency in later reports by seeking information on a regional basis, including each of the Objective 1 regions.

4.5. It is evident that many of the factors underpinning strong growth are self-reinforcing and self-sustaining. There are clear and self-reinforcing links between infrastructure and human resource development on the one hand and inward investment and RTD on the other hand. Consequently, both virtuous and vicious circles are likely to be a feature of regional economic development. That is, regions that presently are handicapped by an absence of productive factors will have to make increasingly greater efforts to break the vicious circle whilst it is equally likely that the strong regions will find it increasingly easier to attract a greater supply of productive factors.

It is disappointing that the Report provides no policy guidelines about mechanisms that might interrupt these self-reinforcing tendencies. Undoubtedly some emphasis can be given to labour market reforms of the type proposed in the Commission's paper, 'Growth, Competitiveness and Employment'. However, beyond this there clearly is a continuing need for public policy measures designed to promote the economic potential of the less favoured regions.

4.6. The Committee endorses the importance placed on FDI (Foreign Direct Investment) as a mechanism for promoting growth and employment in the Community's less favoured regions. However, although the importance of FDI is to be recognized, it is also worth noting that FDI by itself is unlikely to ensure that indigenous RTD capabilities will increase. Public policy may well be required to ensure that technological skills are diffused around regions and that local firms adopt best practice technologies wherever possible. It is to be stressed that the application of RTD is as relevant to the traditional sectors of the economy as it is to the high technology industries.

4.7. In discussing factors determining competitiveness, the Report concentrates on the volume and availability of key factors. However, locational decisions are also based on straightforward cost of production considerations. Consequently, public policy has to be aimed at delivering a supply of key productive factors at a competitive cost.

4.8. The Committee regrets that the Report did not include information, in parallel to Table A.19, (which illustrates the changes to unemployment) which showed the changes in employment in recent years in the Objective 1 regions. In some regions there is little correlation between changes in employment and unemployment and where this occurs an explanation may be useful in the evaluation of policy effectiveness. In addition, the Committee would welcome the publication of information on changes in value-added per person in employment in the Objective 1 regions so that trends in productivity may be examined.

4.9. The Committee considers that greater stress should be given to the role of services in generating lasting economic activity. The service sector itself can be a major source of employment and income. This is especially true in the case of the tourism industry which is a key sector in many rural and peripheral areas. Moreover, the availability of high quality services (financial services, management advice, marketing assistance, quality control techniques, managerial training, etc.) is generally regarded as a key input for the development of manufacturing industries, especially those with a high value added content in production.

The Committee would wish to see the question of the services sector addressed specifically in a subsequent Periodic Report.

4.10. In addressing the problems of peripherality the Report fails to identify that what is crucial is not peripherality per se, but the disadvantage in peripheral areas of securing economic opportunities vis-à-vis the core parts of the Union. The core parts of the Union benefit from a range of economic advantages associated with agglomeration and proximity to a large market. On the other hand peripheral areas are seriously disadvantaged in these respects. Although it is likely that investment in transport and communications infrastructure in the peripheral areas will improve their economic opportunities, what matters most at the end of the day is the level, and rate of growth of, labour productivity. This suggests that greater weight needs to be given to policies which directly add to labour productivity, such as training and education. Consequently, public investments in transport and communications are to be regarded as a necessary but not as a sufficient condition for economic growth in the peripheral areas of the EU.

4.11. The Report notes that the transition to monetary union is likely to impose additional constraints on the regions, and this could have an important effect on economic and social cohesion. In other words that monetary union carries with it risks for the weaker regions and Member States. This is a well founded concern. To date it has not adequately been addressed by the Commission. The Fifth Report also fails to fully assess the possible regional economic consequences arising from monetary union. Further, the Commission should also consider the implication for economic and social cohesion of a partial move to monetary union - that is, one which involves a small number of core countries to the exclusion of the weaker, cohesion, countries.

The Committee's concern is twofold. As already indicated, the Committee is concerned that national policy measures designed to satisfy the convergence criteria will, at the same time, impose a severe adjustment burden on the weaker countries of the EU. It is difficult, for instance, to envisage fiscal policy in some weaker economies meeting the convergence criteria in the absence of a significant reduction in public spending. Such a course of action is likely to impact adversely on the weaker regions to the extent that public spending on policies designed to deliver on regional economic assistance are reduced.

A second concern involves the consequences for countries participating in - and those seeking membership of - the currency union in the event of an adverse external shock that affects one country in isolation. In that instance the country will be unable to respond to the shock by changing its monetary policy, including its exchange rate. This raises the difficult problem of how best the affected country might otherwise deal with this shock. In virtually all monetary unions this type of adjustment problem is assisted by an automatic interregional transfer of funds through the operation of fiscal policy. However, the Structural Funds presently are wholly inadequate to serve this purpose. This raises important questions concerning how individual countries might manage what could be an extremely difficult adjustment process.

4.12. It is clear that a future enlargement of the EU to include the countries of Central and Eastern Europe will pose a major challenge to the Structural Funds. This is likely notwithstanding the considerable advances expected to be made in the economic prospects of those countries during the next few years. It is vital that the Commission provides detailed estimates of the additional Structural Funds required as a consequence of enlargement.

Moreover, as implied in the Fifth Report, the Visegrad countries themselves already display 'dualistic' tendencies whereby the most rapid rate of economic development will occur in a very few core areas with the agriculturally dependent hinterland area in particular significantly lagging behind. Therefore, in addition to the regional problems commonly identified with the Visegrad countries, there will almost certainly be added difficulties created by the accession of agriculturally dependent areas against a background of fundamental reforms to the Common Agricultural Policy.

4.13. The impact of an Eastern enlargement will also be felt more intensely in those EU Member States whose production pattern is similar to that of the acceding countries. This is especially true for Member States with a high dependence on agriculture and the traditional industries. To the extent that this occurs, and where there is a displacement of economic activity from an existing Member State to a new Member, a response through an increase in the activities of Structural Funds also will be expected.

4.14. Equally, enlargement will impact on countries who remain outside the EU and, inevitably, will disturb the prevailing pattern of trade with such countries, many of whom occupy a privileged place in the hierarchy of EU external economic relations.

5. Conclusions

5.1. Whilst comprehensive in parts, the Fifth Report suffers from an excess of description and insufficient analysis of the trends identified in the Report. This Committee would wish to see much more explanation for the actual pattern of economic development in the Objective 1 and 2 regions themselves with a view to improving the design and implementation of measures under the Structural Funds.

5.2. The contribution of the Structural Funds must be set in the context of national economic measures as well as external economic developments. The Committee would wish to see more attention given to assessing the Structural Funds within these constraints. Otherwise an unrealistic set of expectations concerning what the Structural Funds can achieve is likely to emerge.

5.3. Given the fact that the end of the decade is the next opportunity for reforms to be made in the operation of the Structural Funds, it is important that the Commission give considerable thought to the needs of the weaker regions before that date. Consequently, the next Periodic Report should contain more analysis regarding the regional consequences of monetary union and enlargement - both internally and on our external partners.

5.4. By the time of the next Periodic Report the regional consequences of both CAP reform and the trade liberalization measures agreed upon at the Uruguay Round should be becoming clear. These issues should be addressed in some detail at that time.

5.5. The Commission is required under the Treaty to report on cohesion by the end of 1996. That report must address frankly the problems for cohesion arising from the CAP reforms, the new GATT arrangements, monetary union and future enlargements. All of these issues are important to the social and economic situation of the regions of the Community.

Done at Brussels, 31 May 1995.

The President

of the Economic and Social Committee

Carlos FERRER