1 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 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.
2 Further alignment to economic governance in the regulations for the 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 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 regulations Consistently with the scenario synthesised above, for the 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 2
3 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 3
4 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 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. 473/2013 1, 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 account 2. 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 1 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. 2 Barbiero F. Darvas Z. (2014), In Sickness and in Health: Protecting and Supporting Public Investment in Europe, Bruegel Policy Contribution, February. 4
5 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 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, 5
6 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? 6