Regions brace themselves to pay a heavy price in aid cuts as EU expands eastwards

Date: 03/12/1998

Union governments will lock horns in the new year over the proposed reform of regional funding. Myles Neligan explains why

The European Commission's decision in 1997 to attempt to welcome up to six cash-strapped central and eastern European countries into the EU fold without increasing overall Union spending had one obvious implication: expenditure on agriculture and regional development would have to be slashed.

The Commission announced its detailed plans for achieving the necessary cuts in both areas, which between them account for 87% of all EU spending, a few months later and EU farmers and agriculture ministers have made sure that the political battles over reducing farm expenditure have dominated the headlines ever since.

But negotiations over reducing regional development spending will begin to offer the farm discussions some serious competition for media attention as talks enter a crucial phase in the new year.

The wheeling and dealing over the Commission's proposals for trimming the EU's regional funds holds out just as much promise of explosive political battles as the parallel agriculture talks.

The Commission has proposed capping the total budget for developing the EU's economically backward regions between 2000 and 2006 at 257 billion ecu, equivalent to about 30% of all projected EU expenditure over the same period.

Of this, 52 billion ecu would flow eastwards before 2006, either in the form of preaccession aid or pump-priming investment projects in those of the applicant countries which are invited to join.

With a further 20 billion ecu committed to the EU's poorest 'cohesion' countries (Greece, Portugal, Spain, and, for the time being at least, Ireland), this leaves just 210 billion ecu to cover all mainstream regional development projects during the first six years of the new millennium.

Regional Affairs Commissioner Monika Wulf-Mathies says that this is equivalent to the 12% reduction in spending levels which would have been possible if the budgetary arrangements for the previous period (1994-1999) had simply been rolled over. But critics of the plan, using different economic assumptions, argue that the true cut in spending is in fact much greater.

In order to deflect some of this criticism, the Commission is proposing to introduce a 'safety net' to limit the total reduction in funding which regions in industrial decline would have to endure.

The level of this safety net remains to be decided, and promises to be one of the more contentious issues during the final round of ministerial negotiations early next year.

But whatever figures are used, it is clear that there will be far less money to go around.

Wulf-Mathies' strategy is to concentrate these depleted funds on the regions that need them most, with the aim of achieving more with less.

Even her sternest critics agree that this is preferable to the alternative of spreading the available cash around so thinly that no concrete benefits are felt, although those living in regions which suddenly find themselves deprived of EU grants will probably take a different view.

Along with the proposed cuts in development assistance, the Commission is planning a radical simplification of the mechanisms for distributing money from the four 'structural' funds which administer EU regional aid. This essentially involves reducing the seven present categories of regions which the Commission uses to set total aid levels for eligible areas to just three.

The old 'Objective 1' category, made up of EU regions with gross domestic product per head below 75% of the Union average, would remain the same.

Objective 2, traditionally reserved for regions in industrial decline, would become a new catch-all category designed "to promote economic and social restructuring". The highest levels of Objective 2 aid would continue to be directed towards regions in industrial decline, but certain types of project in other regions would also be eligible for funding.

Objective 3, originally designed to integrate the young and the long-term unemployed into the work force, would take over all programmes aimed at combating unemployment except for those already provided for under Objectives 1 and 2.

Wulf-Mathies hopes to achieve the necessary spending cuts by tightening up the funding eligibility criteria under Objectives 1 and 2, which account for a large majority of EU regional spending.

She particularly wants to convince national governments that the 75% cut off point for Objective 1 status, which entitles regions to by far the most generous level of EU funding, must be applied strictly.

With regard to Objective 2, she is pushing ministers to restrict eligibility to those regions which have an unemployment rate above the Union average.

It is this which is at the heart of the political battle between the member states and the Commission.

At the start of the EU's last major financing package in 1993, things were very different. Enlargement was a barely visible speck on the horizon, there was a relatively plentiful supply of cash, and one of the Commission's top political priorities was to eliminate economic disparities between regions.

In this more profligate atmosphere, national governments managed to slip 11 regions which did not strictly meet the 75% GDP threshold under the Objective 1 net. Objective 2 cash was also flung around far more liberally.

Now the Commission is adamant that there can be no exceptions to the Objective 1 cut-off point, and is equally determined that Objective 2 should be used primarily as a tool for combating unemployment.

Most national governments, however, are hell-bent on watering down this programme of austerity, either by bilaterally negotiating exceptions to the Objective 1 rule, or by collectively bargaining for an increase in the 75% threshold.

Similarly, several economically influential countries which have escaped the worst of the EU's unemployment crisis are pushing hard for the Commission to use a wider range of criteria in assessing eligibility for Objective 2 status.

It will be another four months before ministers reach a final deal, with most commentators predicting that the major decisions will be left until the special EU summit in Brussels on 24-25 March 1999.

But the vague outlines of an accord are already discernible.

A major piece of the jigsaw fell into place last week when the EU statistical office Eurostat published the latest figures on how the Union's wealth is currently distributed between the administrative regions that it officially recognises.

These show that if the Objective 1 cut-off point is applied strictly, 11 EU regions that currently hold Objective 1 status would have their previously generous EU handouts phased out from 2000 on, because their average GDP per head is now above 75% of the Union average. The unlucky 11 are substantially the same as those that were illicitly slipped in under the Objective 1 net in 1993.

In the final analysis, there will probably be no way around the Commission's determination to apply the Objective 1 threshold strictly.

Just two specific exceptions are likely. The Republic of Ireland, which has until now been considered as a single Objective 1 region but is set to lose this status, may persuade the Commission to recognise nine administrative sub-regions which would continue to qualify for the most generous level of support.

The UK may also prolong Northern Ireland's Objective 1 funding on the grounds that extra investment is needed to shore up the fragile peace process.

As a quid pro quo for accepting the strict Objective 1 wealth test, governments are likely to argue successfully that a wider range of criteria than unemployment rates should be considered in deciding eligibility for Objective 2.

The Commission will probably agree to include economic indicators such as gross national product per head of population in assessing which regions are eligible. This will mitigate the decrease in the proportion of the population which benefits from Objective 2 coverage.

There are clear signs also that the Commission will give ground on its so-called efficiency reserve, under which the institution would withhold 10% of the funding allocated to individual programmes until it can be shown by means of a mid-term audit that the money is being efficiently spent.

National governments are unanimously opposed to the idea, and Wulf-Mathies said two weeks ago that she was willing to reduce the proportion of withheld cash to 5%. With most member states determined to do away with the reserve altogether, she will probably be forced to make further concessions before she gets up from the negotiating table.

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