Analytics, EU – Baltic States, Modern EU

In June 2015, the Commission launched an initiative to examine the factors that hold back growth and investment in the low-income and low-growth EU regions. In line with this initiative, the new report analyses the investment needs, growth determinants, macro-economic framework and need for structural reforms of these regions.

The initiative and the report are part of a wider commitment of the Commission to provide tailor-made assistance to regions in order to help them improve the way they manage and invest Cohesion Policy funds (see MEMO 15/4654) and foster more ownership, coordination and prioritisation in regional investment and development strategies.

Lagging behind regions in EU

New Commission’s report assesses supporting and hindering effects of EU funds, which are supposed to increase competitiveness of these regions. The report identifies the investment needs of the regions, namely human capital, innovation, quality of institutions, better accessibility, as well as the tools available within the framework of EU Cohesion Policy that could support them in their future.

The report is available at: http://ec.europa.eu/regional_policy/sources/docgener/studies/pdf/lagging_regions%20report_en.pdf 

Regional DG carefully studied and categorised 47 regions in eight EU states as either being “low-growth regions” (with GDP per capita of up to 90% of the EU average but with a persistent lack of growth), or “'low-income regions” (where GDP per head is growing, but is still below 50% of the EU average). These regions are home to 83 million inhabitants, i.e. 1 out of 6 EU residents (over 16% of the total). One group is clustered mostly in southern Europe, and a second group is concentrated in the EU’s eastern borders.

The report covers essentially period 2000-13, with update of data to 2014-15 where possible; the report does not analyse the sector of agriculture. 

Regional Policy Commissioner Corina Creţu underlined that “for each obstacle to development, there is a Cohesion Policy answer”. Therefore, tailor-made EU regional development strategies, combined with preconditions for successful investment, can make these regions attractive places for residents, workers and businesses.

The Commission helps regions identify their needs and their competitive assets and provide them with the tools for better-policy making, Commissioner said. 

“Low-income regions” need effective mix of investments

EU smart specialisation strategies can help improve the innovation capacities of regions which score poorly on the Regional Competitiveness Index and where there is a lack of efficient interaction between academia and the local business sphere.

Investments in human capital and improving the skills of the labour force, via vocational training and lifelong learning, both of which can be supported by Cohesion Policy funds, should be incentivised. By doing this, the depreciation of skills and mismatches between educational supply and labour market demand can be avoided.

Making a region more attractive to young talent and businesses also means linking the regions cities better, as well as its fringes and rural areas. This will generate more spills over from the main economic poles to the benefit of the entire region. Many low-income regions face significant gaps in their infrastructure which is why investments in key transport networks should be prioritised, the report mentioned.

According to the report, “low-income regions” cover EU regions with a GDP per head below 50% of the EU average in 2013. This group covers several less developed regions in Bulgaria, Hungary, Poland and Romania. 

“Low-growth regions” can gain improve institutional capacity and structural reforms

The report provides further evidence that development policies can only deliver full results in an investment-friendly environment and only if they are carried out by solid administrations in a transparent, accountable and efficient way.

This is especially relevant for low-growth regions, which have demonstrated limited improvement in their institutional capacity, have not been able to make the most of Cohesion Policy interventions and have consequently grown less and been more exposed to the effects of the economic crisis.

To enhance the impact of EU, national and regional spending, horizontal and sectoral barriers that hinder investments should be broken down, argues the report. The Cohesion Policy preconditions for successful investments can be powerful incentives to address the main obstacles to investments identified in the report.

Priorities should be to make business environments more flexible, with less red-tape, time and costs involved in setting up start-ups and running SMEs, increasing the efficiency, transparency and accountability of public administrations and services and modernising public procurement with digital procedures.

“Low-growth regions” cover EU less developed and transition regions (regions with GDP per capita up to 90% of EU average) that did not converge to the EU average between the years 2000 and 2013 in EU states with a GDP per head below the EU average in 2013. This means almost all the less developed and transition regions in Greece, Spain, Italy and Portugal.

For more information, see:

- Competitiveness in low-growth and low-income regions – the lagging regions report; = Q&A on the report

Reference: Commission reports on how the EU Cohesion Policy can help low-income and low-growth regions, Brussels, 11 April 2017. In:

http://europa.eu/rapid/press-release_IP-17-893_en.htm?locale=en

Regional differentialisation

Commission’s report on regions that are lagging behind argues that moving to the next level of development cannot be accomplished by a one-size-fits-all policy, but requires regionally differentiated investments and policy responses.

It also assesses the effectiveness of regional development strategies mixes and how Cohesion Policy investment supports these in line with the region's specific needs. This can enhance a region's competitiveness, and that of Europe as a whole.

Overall, both groups of regions score well below the EU average in terms of employment rates, research and development as a share of GDP, institutional capacity and accessibility. While unemployment rates are higher in low-growth regions, low-income regions score lower on competitiveness and social progress indices.

Both low-income and low-growth regions have lower productivity, educational attainment and employment rates compared to the other regions in their countries. Their competitiveness potential is undermined by underdeveloped regional innovation systems, with a lack of efficient interactions between academia and the business sphere, skills gap and poor institutional capacity.

Low-income and low-growth regions are more vulnerable to a poor economic framework and a lack of structural reform as their labour market performance and business dynamics tend to be weak. The effects of the crisis were particularly exacerbated in countries with low-growth regions, which saw the levels of public and private investment drop sharply and some of their economic advances wiped out.

As for low-income regions, they suffer from significant population losses and the out-migration of the younger and more educated population limits their growth prospects. These regions also still face significant gaps in their infrastructure. 

Solutions in the Cohesion Policy tools

• Improving the investment environment

The experience of both types of regions provides further evidence that investment policies can only deliver full results in an environment that is conducive to growth and investment. It underlines the need for structural changes in order to maximise the impact of EU, national and private investments. The Cohesion Policy preconditions for successful investments can be powerful incentives to conduct needed structural and legislative changes. They support the implementation of Country Specific Recommendations and help tackle bottlenecks to investments. For example, they have required EU states to improve and simplify the regulatory and policy environment for SMEs, where needed, with measures to reduce the time and cost involved in setting up a business.

• Developing innovation, human capital and skills. Obstacles to growth can be overcome by virtue of smart specialisation strategies. These strategies would help focus R&D investments in a limited number of areas according to the competitive assets of each region. They would also help identify opportunities for public private partnerships and for better interaction between businesses, industry, research centers and higher education institutions. Smart Specialisation platforms can foster interregional cooperation based on similar competitive strengths.
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Investments in skills and human capital, via lifelong learning and vocational training, should be prioritised, especially in low-income regions. Attention needs to be paid to the insertion of university graduates into the labour market, avoiding problems of mismatch between educational supply and labour demand. €34.5 billion of Cohesion Policy will be invested in educational and vocational training over the 2014-2020 financial period. 

• Ensuring better accessibility and linking cities with surrounding areas. As both types of regions continue to urbanise, better linking cities to the surrounding areas and improve accessibility is essential in order to generate positive spill overs from the urban economic engines to the entire region. Cohesion Policy investments in transport infrastructure, especially along key European networks will improve the competitiveness of low-income regions.
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• Strengthening institutional quality and administrative capacity. Strengthening institutional capacity and improving the efficiency of public administrations, by increasing the accessibility, transparency and accountability of public services, promoting e-government, reducing regulatory red tape and modernising public procurement will be key to the success of regional development strategies, especially in low-growth regions.
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In addition to the Cohesion Policy preconditions aiming at reinforcing institutional set-ups and the specific Cohesion Policy envelope dedicated to this priority, the Commission launched a number of initiatives (see MEMO 15/4654 ‘Improving how EU Member States and regions invest and manage EU Cohesion Policy funds') to boost administrative capacity when dealing with EU funds, which can be beneficial for public administrations overall.

The report presents concrete ideas to address obstacles to growth worked out within the initiative. Examples from pilot regions in Poland and Romania, aimed at improving local business conditions, show how Cohesion Policy can trigger an economic change.

Reference: European Commission, Fact Sheet, MEMO/17/895, Brussels, 11 April 2017. In:

http://europa.eu/rapid/press-release_MEMO-17-895_en.htm?locale=en