Rjea Vol4 No2 July2004

RomanianJournalofEuropean Affairs

EUROPEAN INSTITUTE OF ROMANIA

Vol. 4, No. 2, July 2004

DDiirreeccttoorrNicolae Idu

RReeddaaccttoorr {{eeff // EEddiittoorr--iinn--CChhiieeffOana Mocanu

RReeddaaccttoorrii // AAssssoocciiaattee EEddiittoorrssIrina RâmniceanuGilda Truic`Elisabeta Andronache

CCoonnssiilliiuull eeddiittoorriiaall // EEddiittoorriiaall BBooaarrdd

Farhad Analoui - profesor, Managementul interna]ional al resurselor umane, Universitateadin Bradford / Reader, International Human Resource Management, Director Professional &Development Services Committee, DPPC, University of Bradford

Daniel D`ianu - profesor, Academia de Studii Economice, Bucure[ti; fost Ministru de Finan]e/ Professor, Academy of Economic Studies, Bucharest; former Minister of Finance

Eugen Dijm`rescu - Ministru delegat pentru comer]; fost Ministru al Economiei [i Finan]elor/ Delegated Minister for Trade; former Minister of Economy and Finance

Nicolae Idu - director general al Institutului European din România / Director General of theEuropean Institute of Romania

Andras Inotai - profesor, director al Institutului de Economie Mondial`, Budapesta /Professor, Director of the Institute for World Economy, Budapest, Hungary

Mugur Is`rescu - Guvernator al B`ncii Na]ionale a României / Governor of the NationalBank of Romania

Alan Mayhew - profesor, Sussex University / Professor, Sussex University

Costea Munteanu - profesor, Academia de Studii Economice, Bucure[ti / Professor, Academyof Economic Studies, Bucharest

Jacques Pelkmans - cercet`tor al Centrului pentru Studii Politice Europene, Bruxelles / SeniorResearch Fellow of the Centre for European Policy Studies Brussels

Andrei Ple[u - rector al Colegiului Noua Europ`, Bucure[ti; fost Ministru de Externe, fostMinistru al Culturii / Rector of New Europe College, Bucharest; former Minister of ForeignAffairs, former Minister of Culture

Cristian Popa - Viceguvernator al Bãncii Na]ionale a României / Vice Governor of theNational Bank of Romania

Tudorel Postolache - membru al Academiei Române; Ambasador al României în MareleDucat al Luxemburgului / member of the Romanian Academy, Ambassador of Romania tothe Grand Duchy of Luxembourg

Helen Wallace - profesor, director al Centrului pentru Studii Avansate Robert Schuman,European University Institute, Floren]a / Professor, Director of the Robert Schuman Centre forAdvanced Studies, European University Institute, Florence

CCOONNTTEENNTTSS

A POLICY AT WAR WITH ITSELF? STATE AID AND REGIONAL COHESION IN THE EU 5 PPhheeddoonn NNiiccoollaaiiddeess aanndd AArrjjaann GGeevveekkee

THE EU STRUCTURAL AND COHESIOH FUNDS: SOLUTION OR SMOKESCREEN TO EUROPE’S REGIONAL DISPARITIES? 41AAddrriiaann RReeiillllyy

SCOTLAND AND EUROPE, OR: ROOM AT THE TOP FOR 'CONSTITUTIONAL REGIONS'? 55EEbbeerrhhaarrdd BBoorrtt

EU POLICY REGARDING THE COMPETITIVENESS ISSUE 65MMaarriiaa BBâârrssaann

IInnttrroodduuccttiioonn

One of the fundamental objectives of theEuropean Community is economic and socialcohesion [see Articles 2, 3 & 158 of the EC Treaty]. Toachieve that objective the EC spends considerablefunds in supporting structural actions – about EUR 35billion in 2003. The EC also modulates its policies totake into account cohesion [see Article 159EC]. Thismeans that policies such as competition have toaccommodate the pursuit of cohesion.

At the same time, member states are required toconduct their own economic policies and coordinatethem in such a way as to attain the objectives ofdevelopment, cohesion and reduction of regionaldisparities [Article 159EC]. It follows that to theextent that national state aid policies affect cohesionthey need to be adjusted accordingly.

To facilitate the achievement of cohesion and toallow member states to implement policies thatcomply with Article 159EC, the Treaty exempts fromits general ban of state aid certain types of aid,including regional aid. Indeed regional state aid maybenefit from exceptions under Article 87(3)(a) andArticle 87(3)(c).

The purpose of this paper is threefold. First, it

reviews the reasons for granting state aid andidentifies theoretical and practical problems indesigning effective state aid schemes. Second, itexamines the rules and practice of the EuropeanCommunity on regional aid and identifies here toothe practical difficulties in implementing aid schemeswhich are capable of contributing to regionaldevelopment. Third, it assesses the record of themember states in using regional state aid as aninstrument of cohesion.

The main findings of the paper are that, first, stateaid in general does not show any significantcorrelation with regional disparities. Second, sometypes of state aid may worsen regional disparities asthey appear to be granted to regions with higher percapita income. Third, although the overall amounts ofstate aid in the EU have recently declined, someregions have received larger amounts of aid. Fourth,the amounts of state aid received by regions fluctuateconsiderably from year to year. Fifth, although mostregional state aid goes to poorer regions, whenexamining just the poorer regions, there appears tobe no precise correspondence between regionalincome and either the overall amount of state aid orof regional aid received by those regions.

ROMANIAN JOURNAL OF EUROPEAN AFFAIRS VOL. 4, NO. 2, 2004

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A POLICY AT WAR WITH ITSELF? STATE AID AND REGIONAL COHESIONIN THE EU

** Professor and Assistant, respectively, at the European Institute of Public Administration, Maastricht, The Netherlands. We are grateful toRobin Smail for comments on an earlier draft. We are solely responsible for the views expressed in this paper.

PPhheeddoonn NNiiccoollaaiiddeess aanndd AArrjjaann GGeevveekkee **

AABBSSTTRRAACCTT.. The entry of ten new countries in the EU raises a number of questions about theneed and type of reform of EU policies on cohesion and regional state aid. This paper examinesthe impact of regional state aid on regional disparities. It finds that the effect of state aid on regionalcohesion is ambiguous, partly because state aid is not proportionally granted to the most needyregions. In the context of the forthcoming debate on reform of regional policy it follows thatmember states should limit the geographic coverage of regional aid and should take into accountthe possible trade-offs between other types of state aid and regional development or cohesion.

KKEEYY WWOORRDDSS:: state aid, cohesion, regional policy

PHEDON NICOLAIDES AND ARJAN GEVEKE

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Sixth, and most importantly, the policy implicationof these findings is that member states need to limit thegeographic spread of their regional state aid and, ifindeed their intention is to contribute to regionaldevelopment, they should give proportionally more tothe poorest of the poor regions.

The structure of the paper is as follows. First, thenext section places research on the effects of state aidin the context of the wider research effort on regionaldisparities and the structural policy and actions of theEU. Then the paper explains how the EU defines theconcept of state aid and reviews briefly the mainrules on state aid. Next it examines the variousarguments in favour and against the granting stateaid. The section that follows reviews the rules onregional aid and evaluates the applicability of thoserules. Against this background the paper proceeds totest a number of empirical propositions on theregional distribution of state aid and its impact onregional disparities. It uses data from a variety ofsources such as the European Commission andnational central and regional authorities.

TThhee nneegglleecctteedd iissssuuee ooff ssttaattee aaiidd

The primary empirical question that has beenasked in relation to cohesion is whether rich and poorregions converge. The answer has been tentatively inthe affirmative. Small rates of convergence have beenobserved by several studies.22

The second issue that has been tested is whetherregional expenditure and in particular spending fromEU structural funds has any effect on regionaldevelopment and cohesion between member states.Again the answer has been tentatively in the affirmative.3

Since state aid is part of national expenditure, itmay be tempting to conclude that national spendingin the regions has the same effects as expenditurewhich is categorised as state aid. This, however,would be a premature conclusion. Apart from the factthat overall national spending in the regions is manytimes larger than the amount of state aid, the latteralso has different objectives or different targets thannational expenditure that takes place in regions. Thatis trivially true in the sense that the largest proportionof member states’ budgets is devoted to salaries,social welfare, public health, public works anddefence and runs into trillions. By contrast, state aidgranted by the fifteen member states totals no morethan EUR 85 billion per year.4

In addition to these rather obvious differences inspending objectives and overall amounts, there areother factors for which spending one euro of nationalmoney in member states’ regions may have adifferent impact than spending one euro of state aid.The differences are spelled out later on. We believethat they justify empirical research on the impact ofstate aid on cohesion. With a few exceptions, this hasnot yet been systematically explored in the literature.5

The Commission has also looked into this matter.6

In the next two sections, we define moreprecisely the meaning of state aid and the kinds ofstate aid which member states may legally grantunder current EC rules. Then we examine theeconomic rationale of state aid and whether it isframed in a way that maximises the economicbenefits from public support of enterprises andregions. Afterwards we proceed to frame ourempirical hypotheses on the impact of state aid oncohesion.

22 See R. Barro and X. Sala-i-Martin (1992), Convergence, Journal of Political Economy, vol. 100(2), pp. 223-251; A. de la Fuente (2000),Convergence across Countries and Regions, EIB Papers, vol. 5(2), pp. 25-45 and references therein.33 See M. Boldrin and F. Canova (2001), Inequality and Convergence in Europe’s Regions, Economic Policy, no. 32 (April), pp. 206-252; M.Reiner and M. Steinen (1997), State Aid, Regional Policy and Locational Competition in the European Union, European Urban andRegional Studies, vol. 4(1), pp. 19-32 and references therein. See also European Commission (1997), First Cohesion Report; Commission(2001), Second Cohesion Report; and Commission (2003), Second Progress Report on Cohesion.44 See the Commission’s State Aid Scoreboard. It can be accessed at “http://europa.eu.int/comm/competition/ state_aid/scoreboard/”. Itcontains data submitted by the member states. It does not necessarily include all state aid granted by national central and regionalauthorities. About 15-20% of all cases of state aid investigated by the Commission each year concern non-notified aid. This suggests that ifmember states fail, for whatever reason, to notify all cases of state aid, it is also likely that they fail to report the true amount of state aidgranted by public authorities within their territories.55 These studies are by M. Reiner and M. Steinen (1997), State Aid, Regional Policy and Locational Competition in the EU, European Urbanand Regional Studies, vol. 4(1), pp. 19-32; L.-H. Roller, H. Friederiszick and D. Neven (2001), Evaluation of the Effectiveness of State Aidas a Policy Instrument, report for the European Commission; J. Gual (1998), State Aid and Convergence in the European Union, Barcelona.66 See the report prepared by Jordi Gual (1998), State Aid and Convergence in the European Union.

WWhhiicchh ppuubblliicc mmeeaassuurreess aarree ssttaattee aaiiddss??

Not all public expenditure is state aid.7 It isnecessary, therefore, to define what is state aid. The firstparagraph of Article 87 of the EC Treaty stipulates that:

“Save as otherwise provided in this Treaty, anyaid granted by a Member State or through Stateresources in any form whatsoever which distorts orthreatens to distort competition by favouring certainundertakings or the production of certain goods shall,in so far as it affects trade between Member States, beincompatible with the common market.”

This wording indicates that a measure of publicsupport is classified as state aid only if the conditionsdefined in that paragraph are all satisfiedsimultaneously. Alternatively, not all measures of publicsupport, even those that may involve public subsidies,are necessarily classified as state aid.

The five conditions that must all hold at the sametime are the following:

(a) aid must favour or confer an advantage to therecipient undertakings;

(b) this advantage must be granted by the state orthrough state resources;

(c) the advantage must favour certain (selected)undertakings or economic activities;

(d) it must affect trade between member states;and

(e) it must distort competition in the commonmarket.

The five conditions taken together imply that thefollowing types of measures are not state aid:

• financial assistance from one private companyto another,

• public assistance to individuals,• financing of entities which are not

undertakings, such as hospitals or schools,• financing of projects which are not related to

undertakings, such as infrastructure,• regulatory measures that confer advantages to

undertakings without transferring public money orwithout increasing state liabilities,

• general measures of economic policy that donot favour any particular undertakings, such asreduction of the standard rate of corporate taxation,

• measures that do not distort competition, suchas incentives for early retirement of professionals,

• measures that have a purely local effect, suchas the funding of municipal recreational facilities.

In relation to the last point, small amounts ofpublic subsidies are not considered to have an effecton trade and competition and, for this reason, theyare not classified as state aid. This kind of aid is theso-called “de minimis” aid and is defined as aid thatdoes not exceed EUR 100,000 per beneficiaryundertaking over a three-year period.

Lastly, funding that is classified as state aid mustcome from national sources (including regional andother sub-national authorities), not the EU budget.Community money that is used to finance the sameproject together with national money is still Communitymoney (but, confusingly, it is taken into account incalculating the intensity of aid received by thoseprojects).

TTyyppeess ooff ssttaattee aaiidd ggrraanntteedd bbyy tthheemmeemmbbeerr ssttaatteess

Since Article 87(1) of the EC Treaty makes anyform of state aid incompatible with the commonmarket, member states may not grant any aid unlessit is otherwise allowed by the Treaty by way ofderogation from that general prohibition. The variouspossible exceptions are the following:

Article 36 provides that the “... rules ofcompetition shall apply to production of and trade inagricultural products only to the extent determinedby the Council ...”. Regulation 26/62 subsequentlyapplied all competition rules to agricultural productswith the exception of the then Article 92 which hasnow become Article 87. This means that, in practice,state aid in agriculture is controlled by the manyCommunity Regulations on the organisation of themarket for each agricultural product. Becausefarmers receive considerable assistance directly from

A POLICY AT WAR WITH ITSELF? STATE AID AND REGIONAL COHESION IN THE EU

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77 For a fuller explanation of EC state aid rules see C. Quigley & A. Collins, EC State Aid Law and Policy, (Oxford: Hart Publishing, 2003);S. Bilal & P. Nicolaides (eds.), Understanding State Aid Policy in the European Community: Perspectives on Rules and Practice, (TheHague: Kluwer Publishers, 1999).


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the EU budget, those Regulations allow state aid onlyfor certain purposes such as research in new strainsof plants.

Article 77 allows state aid for the purposes ofcoordinating public transport. Regulation 1191/69 oninland transport exempts this kind of state aid fromprior notification to the Commission.

Article 86(2) exempts, under a narrowly definedset of conditions, state aid to providers of services ofgeneral economic interest. The recent Green Paperon Services of General Interest considers thepossibility of issuing a block exemption Regulationfor state aid intended to compensate providers ofservices of general economic interest.8

Article 87(2) declares compatible with thecommon market state aid that is given to individualsfor social purposes, aid to remedy the effects ofnatural disasters and aid to redress the effects of theold division of Germany. This last category ofcompatible aid is not used anymore.

Lastly, Article 87(3) identifies five categories ofaid that may be compatible with the commonmarket:

(a) aid to promote the economic development ofareas where the standard of living is abnormally lowor where there is serious underemployment;

(b) aid to promote the execution of an importantproject of common European interest or to remedy aserious disturbance in the economy of a member state;

(c) aid to facilitate the development of certaineconomic activities or of certain economic areas, wheresuch aid does not adversely affect trading conditions toan extent contrary to the common interest;

(d) aid to promote culture and heritageconservation where such aid does not affect tradingconditions and competition in the Community to anextent that is contrary to the common interest;

(e) such other categories of aid as may bespecified by decision of the Council acting by aqualified majority on a proposal from theCommission. This provision has been used only twiceto define special rules for state aid to shipbuildingand aid to coal mining.

All aid must be authorised by the Commissionbefore it is put into effect. The Commission is obligedby EU law not to approve any aid scheme orindividual award of aid unless it falls into one of thecategories above. Most aid authorised by theCommission falls into just two categories: 87(3)(a)and 87(3)(c).

The guidelines issued by the Commission are agood indication on the kinds of state aid that may beexempted under Article 87(3)(a) & (c). Theseguidelines cover the following themes:9

• Transactions by public authorities:Government Capital Injections, Financial

Transfers to Public Enterprises, State Guarantees, RiskCapital, Public Land Sales, Export Credit Insurance,Fiscal Aid (Direct Business Taxation).

• Horizontal schemes:Research and Development Aid, Environmental

Aid, Rescue and Restructuring Aid, Regional Aid.• Sectoral schemes:Synthetic Fibres, Motor Vehicle Industry,

Shipbuilding, Steel, Coal, Road, Rail and InlandWaterway Transport, Maritime Transport, Air Transport,Agriculture, Fisheries, Electricity, Broadcasting.

In addition there are three Regulations ontraining aid, employment aid and aid to SMEs Aidgranted in compliance with the provisions of theseregulations need not be submitted for prior approvalby the Commission before it is put into effect.

It is obvious that only regional aid has a directrelationship with assisted areas for the simple reasonthat it may not be granted to any other area.

However, aid for R&D, training, employment andenvironmental protection and aid to SMEs also allowfor higher intensities when the aid is granted withinassisted areas. The problem is that it is not knownhow much of the aid that falls in these categories isgranted within assisted areas and how much in otherareas. Even if higher intensity rates are allowed forthese kinds of aid, the total amount that may begranted within non-assisted areas may overwhelmthe effect of any aid in assisted areas for the simplereason that most R&D, training and creation of new

88 COM(2003) 270 final, 21/5/2003.99 They can be accessed at “http://europa.eu.int/comm/competition/state_aid/”.

jobs may take place outside assisted areas. The endresult would be economic divergence rather thanconvergence.

In terms of absolute amounts, the data collectedby the Commission and published in its State AidSurveys and the various editions of the State AidScoreboard indicate that there are large variations inthe aid granted by each member state. For example,aid to manufacturing makes up between 15% and35% of the total aid granted by each member state. Aidto transport [mostly railways] varies between 15% and70%, while aid to agriculture varies between 10% and60%. For the EU as a whole, in 2001, manufacturingreceived 25% of total aid, transport 45% andagriculture 25%. The two biggest beneficiaries of stateaid are, therefore, transport and agriculture which takeup 70% of all aid. Over the years, these two sectorshave consistently absorbed the majority of state aid.(See Table 1 at the end of the article for the latestrecorded amounts of state aid granted by eachmember state expressed in absolute terms, as apercentage of GDP and in amounts per capita.)

This raises again the question about the impact ofstate aid on cohesion. Does state aid in agriculture andtransport benefit less prosperous regions? There may bepositive effects. Many poor regions also rely more onagriculture as their main source of income. In the caseof transport, good links also make subsequentinvestment in remote regions more attractive.

But there may be also negative effects. If state aid inagriculture follows the pattern of the CAP expenditure,then most aid may be granted to large farms. In the fieldof transport, most investment may be intended toimprove connections between large urban centres.

In conclusion, the largest proportion of state aidis not directly related to regional development.However, most types of aid allow for higherintensities when the aid is granted to undertakings in

assisted areas. (See Table 4 at the end of the article onthe rates of aid intensity and the permittedsupplements for companies located in assisted areas.)

TThhee iimmppaacctt ooff ssttaattee aaiidd oonn tthheeffuunnccttiioonniinngg ooff mmaarrkkeettss aanndd aa bbrriieeff

ccrriittiiqquuee ooff EECC ssttaattee aaiidd ppoolliiccyy

There is concern about the economic effects ofstate aid at the highest political level in the EU. TheLisbon European Council (March 2000) asked memberstates to reduce the general level of state aid and to shiftthe emphasis from supporting individual companies orsectors to tackling horizontal objectives of Communityinterest. The Stockholm European Council (March2001) urged reduction in the level of state aid in the EUand asked member states to demonstrate a downwardtrend in state aid in relation to GDP by 2003. TheBarcelona European Council (March 2002) askedmember states to reduce the overall level of state aid asa percentage of GDP by 2003, redirect aid towardshorizontal objectives of common interest and target itto identified market failures because less and better-targeted state aid is a key part of effective competition.The Brussels European Council (March 2003)reaffirmed the commitments of earlier Councils andwelcomed the Commission’s intention to simplify andmodernise state aid arrangements, focusing attentionon the most distorting aid.

The purpose of this section is to explain that,while preference for horizontal aid is a move in theright direction, economic distortions will notnecessarily be eliminated. There is a large amount ofliterature on whether, when and how governmentsshould aid their companies, industries or regions.10

By and large, this literature concludes that, onefficiency grounds, aid may be justified when it isintended to correct a market failure. The typical


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1100 See, for example, S. Bishop (1997), The European Commission's Policy Towards State Aid: A Role for Rigorous Competitive Analysis,European Competition Law Review, vol. 18(2), pp. 84-86; D. Collie (2000), State aid in the European Union: The Prohibition of Subsidiesin an Integrated Market, International Journal of Industrial Organization, vol.18(6), pp. 867-884; C.-D. Ehlermann (1995), State Aid Controlin the European Union: Success or Failure?, Fordham International Law Journal, vol. 18(4), pp. 1212-1229; G. Ioannis & M. Reiner (2001),State Aid Control in the European Union - Rationale, Stylised Facts and Determining Factors, Intereconomics, vol. 36(6), pp. 289-297; S.Lehner, R. Meiklejohn & A. Louw (1991), Fair Competition in the Internal Market: Community State Aid Policy, (Luxembourg: OOPEC); R.Meiklejohn (1999), The Economics of State Aid, European Economy, no.3, pp. 25-31; D. Neven (1994), The Political Economy of StateAids in the European Community: Some Econometric Evidence, Cahiers de Recherches Économique, no. 9402, (Lausanne: University ofLausanne); P. Nicolaides & S. Bilal (1999), An Appraisal of the State Aid Rules of the European Community: Do they Promote Efficiency?’,Journal of World Trade, vol. 33(2), pp. 97-124; F. Wishlade (2003), Regional State Aid and Competition Policy in the European Union,European Monographs 43, (London: Kluwer Law International).


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reasons cited for market failure are externalities (pluspublic goods), economies of scale and incomplete orasymmetric information. Because of these reasons, itis thought necessary for a government to interveneand subsidise training, undertake part of the cost ofresearch and other knowledge-generating activities,offer incentives for investment in environmentallyfriendly machinery and production processes, attractenterprises to particular regions, offer incentives forinvestment in small, higher-risk, enterprises, etc.

Note that market failure is a necessary but not asufficient condition for providing public support toindustry. The “first-best” policy would be to addressmarket failure directly, instead of granting state aid tocompensate for it. Only when direct measures arenot feasible should aid be considered, as a “second-best” option. However, the appropriate amount andmethod of aid may still be too difficult to determine.Not only may the government have to rely onincomplete information about the state of theeconomy, but it may also suffer from asymmetricinformation. The private sector seeking to benefitfrom state aid possesses information not directlyavailable to the government. The latter, by not havingthis information, runs the risk of being misled whendesigning and implementing its aid policy.

The problem with second-best measures isparticularly relevant to cohesion issues. This isbecause in markets with multiple distortions,addressing only one source of distortion byintervening in the market creates its own distortion,which may have the apparently paradoxical effect ofreducing welfare. For instance, subsidies to attractcompanies to certain regions may also worsenenvironmental pollution, increase congestion or putpressure on weak transport systems.

Public policy may also generate negativeregional (and cross-border) spillovers. Again this isparticularly relevant to cohesion, as aid to stimulatecreation of employment in one area may simplyresult in no net increase in jobs but simply in a shiftof economic activity from one area to another.

Even where a region benefits significantly, another

may suffer also significantly. An example will helpclarify this issue. Firms may choose to invest in alocation where other similar firms already maintainproduction facilities or have an established businesspresence. They may make that investment in order toobtain access to raw materials, transport networks,factors of production or to benefit from externaleconomies or agglomeration effects. The governmentmay initiate and speed up the process of agglomerationby offering regional investment incentives. This maysuck in economic activity from other regions.

In addition to those problems, there is the risk ofgovernment failure. The aid-giving agency may be indanger of being “captured” by special interestgroups. The “politicisation” of state aid is one of themajor problems facing aid-granting agencies. Hence,the cost of getting the policy wrong may outweigh thebenefits of intervention to correct market failure.

This is explicitly recognised in the Commission’snew multisectoral framework for regional aid, whichreduces the intensity of allowable aid for largeprojects because large companies are more mobileand because they can exert more pressure onregional authorities.11

The question which arises is whether EC rulesremedy these problems. From an economic point ofview Articles 87-89, secondary legislation andCommission guidelines are not perfect. First, notethat the prohibition in Article 87 is too wide. Itcatches virtually all aid schemes because very feware found in practice not to have an actual orpotential effect on intra-EC trade and competition. Ifa support measure is classified as a form of state aid,it is invariably found to affect trade and competition(which are often used interchangeably). Not all stateaid is economically significant.

But the most serious weakness of state aid policy isthat, with a few exceptions, it does not require memberstates or the Commission to carry out an explicit cost-benefit analysis of the impact of state aid, nor toexamine whether aid schemes represent an optimal (i.e.first-best) economic policy option. Besides, the nature ofmarket failure is often not even clearly identified.12

11 See the Notice on the Multisectoral Framework on Regional Aid for Large Investment Projects, OJ C107, 7/4/1998. The Framework hasbeen extended until 31/12/2003. A new Framework [OJ C70, 19/3/2002] will come into effect on 1/1/2004 and will be valid until31/12/2009.

The examination of aid schemes is not normallydone by considering what would happen in theabsence of government support (although for certainschemes, such as those to support R&D and theautomotive industry, the Commission does requirethat governments show their necessity; i.e. that R&Dwould not be undertaken without state assistance).This is surprising because the European Court ofJustice established early on in the case law that publicassistance should not replace market mechanisms.The Commission often asks how firms would behavewithout receiving state aid but it does not attempt toquantify the magnitude of the distortion.

Almost as a proxy for the magnitude of marketfailure it sets permissible aid ceilings (or intensities).These are defined in the various guidelines withrespect to the different types of aid schemes andindustrial sectors. For example the permissible aidceilings for regional development aid are setaccording to the perceived regional backwardnesswhich may be assumed to correspond to the degree ofmarket failure (if backwardness can be presumed tobe a market failure). But aid intensities are not derivedfrom models that quantify market failure. They aregood administrative instruments that prevent subsidyraces between member states and ensure that aid isproportional to the objective sought.

Even though the Commission always insists onproportionality and makes references to economicfactors such as “regional handicaps”, the guidelinesdo not relate aid to what is necessary to offsetunderlying market distortions. So aid intensities maybe construed only in some loose manner as theCommission’s way of relating allowable aid to themagnitude of market failure.

The absence of sufficient analysis of the need forpublic support is most obvious in aid schemes for therescue or restructuring of ailing companies. The maincriteria used by EC rules are that aid should betransitory and kept to the minimum necessary andshould make the recipient companies commerciallyviable again. It is not always clear what kind of

imperfection such state aid awards seek to redress(apart from the imperfections and failures of themanagement of those firms).

Admittedly, aid is frequently sought in thesesituations in order to offset charges related todismissal of workers and rationalisation of operations(e.g. compensation, pension liabilities, etc.). It ispresumably in the broader national interest tofacilitate industrial adjustment. The problem is thataid in cases of rescue and restructuring is notexclusively granted for those purposes.

More puzzling is the fact that aid is approvedwhen it is demonstrated that the beneficiaries will beable to function profitably without it. But if they canlive without public handouts, why do they need anyat all? Why is private capital not able to bring thatkind of change? Why are those companies not able toattract private capital if indeed they can demonstratethe feasibility of their long-term profitability?

The closest that the Commission comes tominimising explicitly any distortive effects ofauthorised aid schemes is when it imposes“compensatory” conditions. This conditionalauthorisation aims to prevent the recipient of the aidfrom using public handouts to strengthen itscommercial position at the expense of firms in othermember states. For example, aid to national airlinessuch as Air France, Alitalia, Olympic, Iberia andSabena has been approved on condition that theseairlines do not attempt to expand their market shareby reducing prices or acquiring other airlines.

Under certain conditions, Article 87(3)(c) of theTreaty enables the Commission to authorise aidintended to promote the development of particularregions or economic activities, provided that it is notcontrary to Community interest. The problem is thatthere is no definition of Community interest in theTreaty. Over the years it has been asserted that theinterest of the Community has been advanced by aidsuch as that to attract ships back to EU registries [seethe Guidelines on Maritime Transport] or to providefinancial services to Central and East European


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12 In a special seminar organised by EIPA under the auspices of the Danish Presidency in November 2002 and involving representativesfrom all the member states and a number of acceding countries, it transpired that no member state undertakes a proper and full impactand competition assessment of the state aid they grant. For a summary of the main points of the proceedings see P. Nicolaides and A.Geveke, Towards Efficient and Effective State Aid, that can be accessed at “http://www.eipa.nl/Topics/StateAid/”.

countries [see Commission Decision on the FinancialServices Centre in Triest]. The Treaty expresses somany different objectives that it is fairly easy for themember states and the Commission to claim that acertain project is not contrary to the Communityinterest. The EC also has a number of non-economicobjectives and some of those inevitably creep intothe Court’s rulings on state aid and into theCommission’s evaluations of state aid schemes [acase in point is economic and social cohesion]. Thefact that those objectives are not explicitly economicdoes not make them costless.

In conclusion, theory provides no grounds forbanning completely state aid. Some public assistanceis necessary to remedy market failure. In practice,however, not all state aid is intended to remedy marketfailure or maximise overall or regional economicoutput. Nor, are conflicts between different policiestotally avoided (e.g. competition versus cohesion). Thegranting of state aid requires judgement and balancingof opposing policy aims. That is why it is important toexamine the actual impact of state aid on fundamentalCommunity objectives such as cohesion.

Having examined the more general problemswith state aid and the various exceptions which areallowed by the EC Treaty, we now turn our attentionto regional aid. We begin in the next section with abrief explanation of the differences between regionalstate aid and other forms of regional spending. Thenwe review in more detail the Community rules onregional aid and test various empirical propositionson the impact of state aid on regional cohesion.

DDiiffffeerreenncceess bbeettwweeeenn nnaattiioonnaallssppeennddiinngg iinn tthhee rreeggiioonnss aanndd ssttaattee aaiidd

Not all types of public spending in the regionswould qualify as state aid. The first difference is thatthe objectives of state aid are broader than regionaldevelopment. State aid may finance, for example, therescue or restructuring of an enterprise in difficulty.Rescue aid is operating aid that does not promote newinvestments or jobs. Moreover, rescue andrestructuring aid may benefit enterprises located inareas which are not eligible for regional assistance. Ofthe estimated total amount of EUR 85 billion of state

aid granted by the member states only about EUR 8 billion are explicitly earmarked for regionaldevelopment [“87(3)(a)” areas]. It corresponds toabout 25% of aid to manufacturing. Perhaps notsurprisingly, Germany and Italy account for over 50%of the total regional aid granted by the member states.

Second, current rules on state aid, nevertheless,allow the granting of higher intensities of aid in assistedareas even when the aid in question does not haveregional development as its primary objective. This is thecase, for example, with aid for R&D or environmentalprotection. By contrast, national spending is notnormally modulated on a regional basis.

Third, not all national spending in the regions isregional state aid. For example, national funding ofinfrastructural projects is not classified as state aid.

Fourth, not all national spending in the regions isintended for regional development and, therefore, it mayhave a different multiplier than regional state aid [seenext section on regional state aid]. For example,spending of EUR 1 million on the construction of aschool may have less impact on the local economy thanthe spending of EUR 1 million on the construction of anew factory (especially if the school is intended to house,say, just 30 pupils and it is being built because thegovernment made a promise in its election manifesto).

Fifth, national spending in the regions may alsobe combined with EU structural funds and again havedifferent multiplier effects due to different co-financing arrangements. For example, one euro ofnational public money may be combined with half aeuro of EU funds and four euros of private money,while one euro of state aid may have to be matchedwith just three euros of private money.

Sixth, the funds for national spending in theregions come from public budgets. This means thatthey have an opportunity cost that reduces the netimpact on both the national economy and regionaleconomies. This opportunity cost is made up of thecost of tax collection and the related distortions oftaxation plus other direct distortions caused by publicexpenditure. By contrast, in the absence of anynegative externalities, the opportunity cost of privatefunds that co-finance projects receiving state aid canbe safely assumed not to exceed their marginal


12


13

product because no firm would voluntarily invest ina project unless it was reasonably certain that itwould be maximising its profits. Again, the end resultis that a project financed by a combination of stateaid and private money may have different multiplierand net economic impact than a similar projectfinanced by public money that is not state aid (e.g. abuilding to be used as office by a company versus asimilar building to be used by civic groups).

RReeggiioonnaall ssttaattee aaiidd

State aid for the purpose of regional developmentis allowed by Article 87(3)(a) & (c). Article 87(3)(a)exempts aid intended “to promote the economicdevelopment of areas where the standard of living isabnormally low or where there is seriousunderemployment”. This condition covers areas withper capita income at PPS that falls below 75% of theEU average. This is exactly the same criterion as forObjective 1 regions. Areas that qualify for aid underArticle 87(3)(a) are defined at NUTS II level, which isalso the same for Objective 1.

However, in practice Objective 1 regions and87(3)(a) areas do not coincide precisely so there aresome differences in the areas covered by national fundsand areas covered by EU funds. For example, Swedenhas a large Objective 1 region which, however, is notclassified as “Article 87(3)(a) area”. This means thatSwedish authorities are prevented from granting stateaid to their Objective 1 region at the higher rates ofintensity that are allowed for 87(3)(a) areas.13

Regional aid is also allowed by Article 87(3)(c)because it provides for “aid to facilitate thedevelopment of ... certain economic areas, wheresuch aid does not adversely affect trading conditionsto an extent contrary to the common interest”. Theseareas are defined by the Commission in cooperationwith the member states. In principle, areas thatqualify for this kind of aid should coincide withObjective 2 regions defined at NUTS III level.However, here too there is a small degree of

discrepancy.In the previous financial perspective of 1994-99,

the discrepancy between structural funds and stateaid was as follows:14

• Areas eligible for regional state aid [87(3)(a &c)] = 47% of EU population

• Regions eligible for structural funds = 51% ofEU population.

According to the Commission’s calculations, 6.6%of the EU population lived in regions receivingstructural funds but precluded from obtaining state aid.By contrast, 2.7% of EU population lived in regionswhich were covered by national regional aid schemesbut were not eligible under the structural funds.

For the current financial perspective of 2000-6,the Commission wanted to reduce the percentage ofpopulation covered by state aid to 42% of total EUpopulation and bring about coincidence between theregions that receive EU structural funds and nationalstate aid. Since the population eligible for Objective1 or 87(3)(a) status was objectively determined on thebasis of income, the Commission considered that notmore than 50% of the remaining population in eachmember state could benefit from state aid under87(3)(c). It therefore, invited each member state todetermine eligible areas using a formula based onbelow-average regional income and above-averageregional unemployment rates.15

Following the Berlin European Council of March1999, where a number of member states managed toobtain transitional arrangements for some of theirregions receiving structural assistance from the EU,the coincidence of regions that the Commission wasseeking was not completely achieved. Some areasare eligible for structural funds but not for state aidand vice versa. The current situation is as follows(Eligible population across the EU in %):

• in 87(3)(a) area = 19.8% but in Objective 1region = 22%

• in 87(3)(c) area = 22.9% but in Objective 2region = 18%

This means that while only 40% of the EU

13 For an excellent review of the changes in national support schemes in the current financial perspective of 2000-2006 see D. Yuill and F.Wishlade (2001), Regional Policy Developments in the Member States, University of Strathclyde, Glasgow (UK).14 Commission Communication on the Links between Regional and Competition Policy, OJ C90, 26/3/1998.15 See Commission Guidelines on National Regional Aids, OJ C74,10/3/1998.


14

population qualifies for EU structural action, 43% areeligible for regional state aid. It appears that in thisfinancial perspective the coverage of structural fundsand regional state aid has been reversed. Morepeople are eligible for state aid than they are eligiblefor structural funds.

At this point it is necessary to point out a politicalfactor that has crept into the process of designatingassisted areas and may have a bearing on the newregional aid maps after enlargement. For theidentification of Article 87(3)(a) areas the process isvirtually objective as it is based on the 75%threshold. Although the Commission tried to followan equally objective process with respect to Article87(3)(c) areas, in the end subjective considerationscould not be avoided. This is because according tothe rules defined in the guidelines on regional aid nomember state could include more than 50% and noless than 15% of its non-objective 1 regions underArticle 87(3)(c) status. In addition, any reduction inthe eligible population in relation to the previousperiod was not to exceed 25%.

Notwithstanding these problems, the situationwithin each member state is currently as shownbelow in Table 1. There are five member stateswithout areas eligible for aid under Article87(3)(a).(See Table 1 at the end of the article)

TThhee CCoommmmiissssiioonn GGuuiiddeelliinneess oonnrreeggiioonnaall ssttaattee aaiidd

Given that the provisions of the Treaty on thetypes of state aid that may be exempted are verygeneral, the Commission has issued detailedguidelines on regional state aid to help memberstates to design and notify regional aid schemes thatcan be authorised by the Commission. As is wellknown, guidelines of this nature are binding only onthe Commission. Member states in theory maydeviate from the guidelines but there has been nomember state that has successfully challenged suchguidelines before the Court [I will return on this pointin the third part of the paper when I consider likelyfuture reform].

The European Court of Justice has accepted thatcertain forms of regional aid are compatible with thecommon market because they serve to reduceregional handicaps. However, in the landmark caseof Philip Morris versus Commission, C-730/79, theCourt explained that state aid may be exempted onlywhen the advantage which is given to the regions thatreceive the aid outweighs the distortion tocompetition. So there is a balancing act to beperformed here that only the Commission has thecompetence to do. In addition, the Court has clarifiedthat the greater the regional handicap, the greaterthat the advantage which may be granted via state aid[see Spain versus Commission, C-169/95].

In line with these judgements, the regional aidGuidelines serve primarily three functions: to identifythe various categories of eligible areas, to determinethe allowable instruments of state aid and tomodulate the intensity of state aid that is received bydifferent eligible areas.16 Since the delineation ofeligible regions was explained in the previoussection, the rest of this section examines only therules on the instruments and the modulation of aidintensities.

With respect to the instruments of state aid, theGuidelines permit only two instruments: investmentand job creation linked to investment. They alsoexceptionally allow operating aid but only for87(3)(a) areas and only when it is temporary,degressive over time and clearly linked to offsettingregional handicaps (by a separate Notice, theCommission has in the meantime allowed operatingaid on a permanent basis to the outermost regions ofthe EU and for the partial compensation of transportcosts in the low density regions; i.e. the polar regionsof Finland and Sweden).17

Investment aid is restricted to initial or extensioninvestment. Replacement investment is not allowed.Subsidised assets must also be kept by the beneficiaryfirm for at least five years. Aid for job creation isrestricted only to jobs that are linked to either initialor extension investment. The jobs must be madeavailable within three years of the investment and

16 OJ C212, 12/8/1988.17 Commission Notice in OJ C285, 9/9/2000.

must be also be maintained for at least five years.It is worth noting that the recently adopted

Regulation on Employment Aid 2204/2002, hassevered the link between investment and aid forjobs.18 Under that Regulation firms may receive aidfor hiring more people as a result of expansion intheir operations rather than a net addition to theirasset base. Moreover, the Regulation requiresbeneficiary firms to keep new employees for aminimum of three years instead of five, while SMEscan keep them only for two years.

Lastly, the Guidelines set maximum ceilings for theintensity of granted aid. Intensity is measured as apercentage of aid in relation to the eligible costs. It isimportant to understand that while the Guidelines definemaximum rates, the rates which are applicable to eachregion are those approved by the Commission individuallyand included in each member state’s regional aid map.Table 2 shows the rates defined in the Guidelines. As canbe seen, there is considerable variation across regions.(See

Table 2 at the end of the article)

TThhee MMuullttiisseeccttoorraall FFrraammeewwoorrkk

An innovation of the Commission for the presentfinancial perspective has been the introduction ofrules of the individual notification and the reductionof aid to large projects. These rules were introducedin 1998 by the “Multisectoral Framework”. A newFramework has partially come into effect since theexpiry of the Treaty on the European Coal and StealCommunity in July 2002. The new Framework willfully be in force as of 1 January 2004.19

The Multisectoral Framework reduces allowableaid intensities for large projects because such projectshave a bigger impact on competition, they are morelikely to be undertaken by multinational companieswhich are less affected by regional handicaps (e.g.they have access to capital markets or cutting-edgetechnology) and because these companies can exertmuch more pressure on regional and local authoritiesto grant aid up to the permitted ceiling. The adjustmentthat is made is shown in Table 3. (See Table 3 at the

end of the article)For example, a project costing EUR 160 million

in area with a 25% ceiling can obtain aid up to EUR23.85 million. This is equivalent to aid intensity ofonly 14.9%.

Notification is required for every case where theamount of aid exceeds the aid that corresponds to aninvestment costing EUR 100 million. It follow, thatnotifiable projects vary from area to area dependingboth on the size of the project and also on the aidintensity allowed for each area.

For example, in an area with aid ceiling of 20%, afactory costing EUR 250 million can benefit from aid upto a maximum of EUR 25.2 million. Since, however, inthe same area an investment costing EUR 100 millioncan obtain EUR 15 million of aid, any amount of aid forthat factory that exceeds EUR 15 million will have to benotified individually. In other words, that factory willhave to obtain aid of less than to EUR 15 million toescape notification. This means that the intensity of thataid will have to be less than 6% (= 15/250), even thoughin principle the rate is 20% for that area.

Mention should also be made that otherGuidelines and Regulations on state aid allow forincreased rates of aid when the recipient companiesare located in eligible areas. Table 4 summarises themain possibilities for higher aid intensities. (See Table4 at the end of the article)

AAnn aasssseessssmmeenntt ooff tthhee wwoorrkkaabbiilliittyy oofftthhee GGuuiiddeelliinneess oonn rreeggiioonnaall aaiidd

It is very difficult to know how the Guidelines havebeen complied with by the member states, let alonehow they have been implemented. My intention hereis to make a number of observations with respect to theuser-friendliness of the Guidelines. These observationsare based on conversations with national officials andon my own work in advising national authorities onthe application of the Guidelines.

Overall, there is no doubt that the currentGuidelines represent a major improvement over theprevious Guidelines and the multitude of flanking


15

18 OJ L337, 13/12/2002.19 OJ C70, 19/3/2002.

rules they replaced. The aspects of the Guidelinesthat appear to have caused problems to nationalauthorities are the following:

1. The distinction between truly newinvestment and replacement investment: Whatcan be classified as new investment in an existingcompany very much depends on the nature ofthe industry in which that company operates. Forexample, whereas a printing firm would need toupdate regularly its printing software, the samesoftware would represent a genuine extensioninvestment for a training firm that wants to startpublishing its own information and other trainingmaterial.

2. The difficulty of national authorities toprevent companies from receiving aid to replaceold machinery: Companies can simply buy newmachines and equipment which they can declareas additional assets. After they receive aid, theyget rid of the old machinery and equipmentbecause granting authorities do not keep track ofassets that have not previously benefited fromaid. Replacement investment is regarded by theCommission as operating aid and thereforeexceptionally approved only in the case of87(3)(a) areas. But when aid is exceptionallyapproved, the Commission normally imposesextra conditions so that aid is temporary anddegressive. It also ensures that aid does not spillover into non-eligible areas. See to this effectCommission Decision 2002/780 concerninginvestment aid to the new German Länder andDecision 1999/678 concerning aid to thecreditors of a firm that went bankrupt in Sicily.

3. Aid for new jobs, not job maintenance: Aswith investment, firms that receive aid for jobsmust be adding new positions rather thanmaintaining the same number of positions. Fortwo reasons, it is difficult for granting authoritiesto comply with this requirement. First, nationalauthorities have a tendency to grant aid even if itsfor job maintenance when they know that firmswould fire their workers unless they receive aid.Second, jobs must be linked to new investment.But if replacement investment can be disguised

as new investment, it follows that the beneficiaryfirms may only maintain existing jobs when theysubsequently close down old capacity and makeredundant the workers related to the disposedmachinery. This can also happen when firms hirenew workers [the Guidelines require a netincrease in the workforce in terms of full-timeequivalent at the point in time when the aid isawarded] but then get rid of workers in otherdivisions of the firm.

4. The practice that investment must be newwith respect to the existing assets of the company:While regional authorities can check whether acompany adds new premises or equipment in theassisted area, it is difficult for them to ensurewhether such things are new for the company. Inother words, they cannot easily verify that thecompany that receives investment aid has notsimply transferred operations from one area toanother for the sole purpose of obtaining aid. TheCommission in its Decision 2000/795 concerningthe shift of the operations of the firm Ramondinfrom one Spanish region to another partiallyprohibited the aid that was granted to Ramondinbecause it found that the company was merelyseeking to benefit from the availability of regionalaid in the new region. Although in that case it wasobvious that Ramondin was trying to exploit stateaid (by transferring its plant to another locationliterally a few kilometres away) and that theDecision has since been confirmed by the Court ofFirst Instance [in Territorio Histórico de Álava -Diputación Foral de Álava versus Commission, T-92/00], it still leaves unanswered the veryimportant question whether a company may notmove its operations to an assisted area. After all,this is indeed the purpose of regional aid – toinduce companies to locate their operations inhandicapped regions. The regional Guidelines donot clarify whether the aid is intended for locationof new assets or re-location of existing assets.

5. The requirement that assets and hiredworkers have to be kept for a minimum of fiveyears: Although national authorities routinely askpast recipients of aid to declare whether they retain


16

the assets they bought and jobs they created withthe help of state aid, it is difficult for them to carryout any systematic on-site inspections. [Apparently,the on-site-inspection powers that were conferredto the Commission by Regulation 659/99 havenever been used either.]

6. Hiring from outside the assisted area: Aidfor job creation is allowed by the Guidelinesbecause it contributes directly to reducingregional unemployment and indirectly to raisingthe disposable income and hence prosperity ofassisted areas. It is virtually impossible forgranting authorities to confine the hiring ofworkers only to those who reside in eligible areas(perhaps in some member states it is alsounconstitutional). The situation is even worsewhen firms intentionally move their operationsfrom a non-eligible area to an eligible area andre-hire workers who commute from outside theassisted area. The Commission in its Decision1999/686 prohibited a German scheme forteleworking (i.e. working from home) becausesome beneficiary firms employed workers wholived outside assisted areas. This of course raisestwo uncomfortable questions: how can grantingauthorities know where workers live (especiallyin cases involving firms located in border areas)and if the intention is to create employment ineligible areas does that not contribute tounemployment in non-eligible areas when firmsshift their operations? The Guidelines do not dealwith these issues.

IImmppaacctt ooff ssttaattee aaiidd oonn ccoohheessiioonn

As explained earlier, national regional spendingand state aid have a different impact on cohesionwithin member states. The same applies to EUstructural funds, on the one hand, and nationalregional aid, on the other. This is because theirobjectives and the regions they cover are only partlyoverlapping.

What then should we postulate the impact ofstate aid to be? Only regional aid may be expected tobe positively correlated with regional developmentand cohesion. Although other types of aid may allow

for higher intensities of aid in assisted areas, theabsolute amounts of aid granted in those areas maybe significantly smaller than the amount of similaraid granted in non-assisted areas. There are noconsistent data on the regional distribution of thedifferent types of state aid.

In the cohesion literature there are twocompeting hypotheses about the effect of investmenton cohesion. The neo-classical hypothesis suggeststhat due to declining marginal productivity, regionsconverge because the impact of investment on theincome of poorer regions is proportionally largerthan the impact in richer regions with larger stocks ofcapital. This suggests that even though the state aidgranted in poor regions may be smaller in absoluteamount than the state aid in richer regions, the highermarginal productivity of the former will have acompensatory effect.

On the other hand, some analyses based on thenew theories of economic geography lead exactly tothe opposite predictions, although even within thesetheories there are conflicting perspectives. Onbalance, a euro of state aid has a much smallerimpact on the income of poorer regions becauseagglomeration effects and externalities are muchstronger in rich or central regions. This impact isattenuated further when the absolute amount of aid islarger in the rich regions.

On the whole, however, the empirical literaturehas found considerable evidence that there is somepositive relation between regional investment andconvergence of regional incomes. This suggests thatin general neo-classical factors outweighagglomeration factors. The implication of this is thata negative relationship between state aid andcohesion is likely to be the result of too much stateaid to rich regions, which overwhelms the highermarginal productivity of poorer regions.

Generally, we expect regional state aid andhorizontal state aid at the margin to have a positiveeffect on cohesion because most types of state aidallow for higher intensities in assisted areas. What isunknown is the total amount of aid that is grantedwithin non-assisted regions.

State aid for agriculture (and fisheries) and transport


17

is likely to have neutral effects for the reasons explainedearlier. Certain sectoral state aid, such as forshipbuilding, automobiles and textiles, is also likely tohave a positive impact, at least on employment, becausemost of the recipient industries are based in the oldindustrial regions many of which are assisted areas.

In terms of the opportunity cost of state aid, sincemost aid is financed by revenue from taxation andsince richer areas contribute a larger amount of taxrevenue, state aid must also have an indirect positiveeffect on assisted areas because it imposes a smallertax burden on them.

If there is a negative relationship between non-regional types of state aid and cohesion, then theremust also be a policy conflict. On the one hand,member states grant regional aid so as to promote thedevelopment of less prosperous regions. On theother, they grant aid for other purposes which mayindirectly have a negative impact on cohesionbecause it makes other regions more attractive. If thisis the case, then member states themselves neutralisethe effectiveness of their own policies.

The EU has a system of state aid control preciselyin order to avoid this kind of policy conflicts. Naturally,the aim of Community control of state aid is to preventsubsidy wars between member states rather thanbetween regions of the same member state.Nonetheless, the Commission, in its variousguidelines, tries to take into account the possiblycontradictory objectives of various state aid policies. Itis unknown whether it succeeds.

More importantly, if the member states neutralisethe impact of regional aid, then by implication, theymust also weaken the effect of structural policies.This is indeed an issue of concern for the EU.

EEmmppiirriiccaall tteessttss

In order to gain a better understanding of howmember states use state aid as a tool in combatingregional disparities, we have formulated the hypothesisthat state aid is positively related to divergent rates ofregional income (or positively related to disparities). Thismeans that, other things being equal, more state aid isgranted when disparities are larger and vice-versa.

More precisely the proposed test can be

formulated as follows:Dt+1 = a + bSt + emeaning that differences in regional income in

period t+1 are a function of state aid in period t plusan unknown error term. The independent variable islagged by a year because state aid is a policyinstrument that can be used proactively.

Data on state aid are divided into four categorieseach of which is tested separately:

- regional state aid,- horizontal state aid other than regional aid (e.g.

environmental aid),- transport and agricultural (plus fisheries) aid,- total state aid.We run two types of regressions. The first type is

over time for each member state. The relevant periodis 1990 to 2000. Given that we lag the independentvariable we lose one year so that we have only tenobservations per country. The second type ofregression pools data from all the member states fortwo periods: 1999 and 2000.

We measure the independent variable (i.e. stateaid) in terms of state aid per capita and state aid as ashare of GDP (both expressed in real figures) toaccount for the fact that larger countries are morepopulous and grant larger amounts of state aid inabsolute terms. We measure cohesion or differencesin regional income in terms of deviations fromnational average income per capita expressed in PPS.

Our most significant data problems are thediscontinuities in available statistics. For the time-seriesregressions, we have omitted Austria, Finland andSweden because for them data on state aid start in themid-1990s. We have also omitted Denmark, Ireland andLuxembourg because for Ireland the data on regionaldisparities do not go beyond the mid-1990s while forDenmark and Luxembourg we do not yet have data ondisparities. For the cross-country regressions we haveexcluded Denmark and Luxembourg for which we haveno data on regional disparities.

RReeggrreessssiioonn rreessuullttss

All the regression results on time series areshown in Table 16 and on cross-country data inTable 17 at end of the paper. The time series results


18

indicate the following:• In many cases, the sign of the slope of the

independent variable is negative, implying thatlarger amounts of state aid are granted whenregional disparities are smaller.

• The coefficient of correlation (R-squared) isin many cases very low.

• Regional aid has relatively high R-squaredvalues only in two countries, Belgium and Spain.

• Horizontal aid appears to be significantlyrelated to disparities in Belgium, Greece and theNetherlands, but in all three countries thecorrelation is negative.

• Agricultural and transport aid has anegative sign and is relatively significant only inSpain.

• Total state aid appears to be significant butnegatively related to regional disparities inBelgium and Greece. Where it is positivelyrelated to disparities it does not appear to besignificant, except perhaps in the case ofGermany.

The cross-country results for 1999 and 2000indicate the following:

• In most cases, the sign of the slope of theindependent variable is positive, implying thatlarger amounts of state aid go hand in hand withlarger regional disparities.

• However, the coefficient of correlation (R-squared) is in almost all cases very low and lowerthan in the time series.

• Regional aid is negatively related toregional disparities, but the values of R-squaredare very low.

CCoouunnttrryy ssttuuddiieess

The regression results obtained above are basedon analysis of data from Commission sources –primarily the State Aid Scoreboard. We have alsogathered data directly from national and regionalsources. These sources are indicated in the Annex atthe end of the paper. On the whole, the maindifficulties we encountered in the collection of datafrom diverse sources were to ensure the consistencyof available data with the definition of state aid and

to classify them in categories which are comparableto those used by the Commission in the Scoreboard.

As will be seen below, the data from thosecountries for which national sources exist, do notmatch those reported in the Commission’s Scoreboard.Some times our own numbers exceed those of theScoreboard, some times they fall below those of theScoreboard. By and large, categories of state aid do notmatch either across countries or with the Scoreboard.

The data reported below reveal three features ofnational state aid schemes which are common in mostcountries. First, the amounts of state aid granted ineach region vary considerably from year to year. Thisholds even when the national amounts appear to beeither stable or declining over time. The implication isthat the overall reduction of state aid reported in theScoreboard does not apply to all regions.

Second, the regional distribution of state aidvaries, depending on the type of aid. Some types ofaid such as aid to R&D appear to be granted mostlyin richer regions. Some other types such as aid forregional investment go mostly to poorer regions.

Third, although most regional aid is granted topoorer regions, within the groups of these regionsthere is no precise correspondence between theallocated amount of aid and the need of each regionas indicated by its level of income. This means thatregional aid is not concentrated in the regions thatneed it the most.

AAuussttrriiaa

The Commission’s Scoreboard puts Austria’s stateaid at EUR 2.06 billion in 2001 (at 2000 prices).More than 70% of that aid goes to agriculture,fisheries and transport. Only 5% of total aid or 20%of non-farm aid aims to promote regionaldevelopment.

Given the federal structure of the country, stateaid may be granted by the federal authorities, Länderauthorities, and by local authorities such asmunicipalities. Länder authorities also co-financeexpenditure under the European Union’s commonagricultural policy and structural funds.

As revealed by the tables below, Ländergovernments grant more state aid than the federal


19

government. If richer Länder are able to grant largeramounts of state aid, this raises an important questionconcerning the impact of aid by lower tiers ofgovernment on regional cohesion within Austria.

During the past few years, Länder authorities havetended to establish entities with the status ofcorporations for the purpose of managing funds, suchas investment aid, channelled to the private sector. Thistrend makes it more difficult to measure the preciseamount of state aid granted. (See Table 5, 6, 7 & 8 atthe end of the article)

FFiinnllaanndd

All the regions of the country at NUTS II level(five regions plus Åland Islands) have areas eligiblefor regional state aid. The population coverage for the2000-6 period has been reduced to 42.2%.

The Scoreboard indicates that in 2001 Finlandgranted a total of EUR 2,074 million of state aid (in2000 prices). More than 80% of that aid goes tofarmers (65%) and transport (17%). Theindependently collected data reveal a differentpicture. Aid for purposes other than agriculture isalmost as large as aid to agriculture. Admittedly,however, these data may underestimate the trueamount of state aid because it is not possible todetermine the aid element in the EUR 770 million ofloans and loan guarantees granted by publicauthorities or agencies under the control of the state.

In terms of regional distribution of the differenttypes of aid, the data present a conflicting picture. Aidto agriculture goes to northern regions in proportionof almost three to one. Most aid for investment goesto the three poorest regions (60%). Investment aidaccounts for 65% of all horizontal aid except R&D.The case of R&D is quite different. More than 80% ofthat kind of aid goes to the two richest regions.

It follows, therefore, that the regional distributionof aid varies depending on the purpose for which it isgranted. Since most companies undertakingsubstantial R&D are likely to be located in the mosteconomically active areas, R&D is concentrated inthe richer Finnish regions. By contrast, largeramounts of investment aid are granted to the poorerregions, even though the second richest region also

receives substantial investment aid.(Tables 9 & 10)

FFrraannccee

The Scoreboard indicates that France grants thesecond largest amount of state aid in the EU. In 2001,it reached EUR 15.84 billion (in 2000 prices). Twothirds of that aid goes to agriculture and transport.Only EUR 0.7 billion or 4% of total aid or 12% ofnon-farm and non-transport aid is granted explicitlyfor regional development.

The data relate to “DATAR” on state aid grantedto firms located in areas of “difficulty”, the so-called“zones PAT” (Prime d'Aménagement du Territoire).These areas are defined at NUTS IV level. Theamounts which are shown in the table 11 are verysmall; EUR 75.4 million over the three-year period of1999-2002. Even with these relatively small amountsof state aid, we can see that there is considerablevariation in their regional distribution, as indicated

by the amount of aid per head. (Table 11)

GGeerrmmaannyy

Germany is the largest grantor of state aid in theEU. According to the Scoreboard, the total amount ofstate aid provided in 2001 was EUR 23,274 million (in2000 prices) with almost 50% going to agriculture andtransport.

Given the federal structure of the country, stateaid may be given by the federal government, theLänder governments and local or municipalauthorities. The table 12 reveals that Ländergovernments grant larger amounts of state aid thanthe federal authorities. Just as in the case of Austria, ifricher German Länder are able to grant largeramounts of aid, this raises an important questionconcerning the impact of regional cohesion within

Germany. (See Table 12 at the end of the article)In terms of the regional distribution of state aid, the

following breakdown between “new” and “old” Länder

has been obtained. (See Table 4 at the end of the article)Given the fact that the “new” Länder are poorer

than the “old” ones, this kind of aid is, therefore,largely directed to the less prosperous regions by afactor of about eight to one. Substantial financial


20

assistance to the “new” Länder is also granted in thecontext of support for social housing but it is notpossible to determine the proportion, if any, of stateaid that it may include. Overall, there is a reductionin the amount of state aid granted by the federalauthorities over time.

GGrreeeeccee

The Scoreboard indicates that for 2001, Greecegranted EUR 1.3 billion of state aid. Agriculture,fisheries and transport absorb EUR 840 million. Ofthe remaining aid, EUR 419 million or 90% went toregional development. Indeed the main state aidinstrument in Greece is Law 2601/98 on investmentincentives for economic and regional development.Under that law, 420 and 465 investment projectswere approved in 2000 and 2001, respectively.

However, when the amount of state aid grantedthrough the approved investment projects isquantified, the reported figures show only EUR201.07 million and EUR 220.92 million for 2000 and2001, respectively. That is about half of the amountshown in the Scoreboard.

The table 14 indicates that some regionsexperience considerable annual variability in theamount of state aid. The table also indicates that mostinvestment incentives for regional developmentactually go to relatively richer regions which areeconomically more active. (See Table 14 at the end ofthe article)

Ireland

The Scoreboard shows that in 2001, Irelandgranted a total of EUR 1.3 billion in state aid (in 2000prices). Agriculture, fisheries and transport absorbedalmost half of that aid (46%). Regional aid accountedfor 33% of total aid or 60% of non-farm and non-trasnport aid. This is a very high proportion of aiddevoted to regional development. Of the 15 EUmember states, only Greece grants a higherproportion of regional aid.

Until 1999, Ireland comprised a single NUTS IIregion. Since 2000 it has been divided into twoNUTS II regions: the Southern & Eastern region withper capita income (PPS) at 126% of the EU average

(2000) and the Border, Midland and Western regionwith per capita income at 84% of the EU average.

Data have been obtained from the agenciesresponsible for attracting investors and are shown in

the Table 15 at the end of the article.

IIttaallyy

The Commission’s Scoreboard indicates that in2001 Italy granted EUR 4.11 billion of aid (in 2000prices) in sectors other than agriculture, transport andfisheries. Our data show a much higher amount for thesame year, reaching EUR 5.2 billion. Of this amountthe largest category of aid was for “reduction ofterritorial inequalities” (46%). In this connection, it isworth noting that Germany and Italy accounted for50% of all regional state aid granted in the EU in 2001.

The second and third largest categories of aid in Italy,other than for agriculture and transport, were aid to R&Dand aid to investment, accounting for 24% and 10% oftotal aid to manufacturing and services, respectively.Apparently, Italy has introduced “automatic” incentivesfor R&D, investment and purchasing of new equipment.This raises the question whether all of these incentivescan count as state aid. If they are state aid, then this mayalso explain the higher amount of aid recorded in thestatistics we have obtained.

Of the aid that was granted to business in 2001,62% went to SMEs. However, in the south, SMEsreceived 67% of aid while in the centre and norththey accounted for only 53% of aid. This suggests thatin richer regions of Italy, a higher proportion of aid isabsorbed by large companies.

The table 16 presents the amounts of aid tobusinesses per region in the years 2000 and 2001. Asis the case with other countries, larger amounts of aidare granted in the poor regions than in the richerregions. This is also indicated by the significance of theaid to the recipient regions. The proportion of aid inrelation to non-farm valued-added was 0.20% in thecentre and north while in the south it rose to 1.10%.

However, and in common again with othercountries, there is significant variation of the amountof aid within poor and within rich regions, with noclose correlation between the income of the regionand the amount of state aid within each group. There


21


22

is also variation from year to year in the reportedamount of aid granted in each region. (See Table 16at the end of the article)

SSppaaiinn

In Spain, state aid may be granted by publicauthorities at different levels of government.Unfortunately, we have not been able to find data onstate aid granted by each of Spain’s autonomous regions.

The regional distribution of regional state aid isshown in the table 17. Two things stand out from thetable. First, for some regions the amount of aid variesconsiderably from year to year. Second, there is nostrict correlation between the prosperity of eachregion and the amount of state aid. (See Table 17 atthe end of the article)

UUnniitteedd KKiinnggddoomm

Most of state aid in the UK is granted toagriculture, transport and fisheries (75% in 2001). Ofthe aid that is granted to sectors other thanagriculture, fisheries and transport, most of it goes tohorizontal objectives (90%) such as training, R&Dand for SMEs.

For the 2000-6 period, the UK has four 87(3)(a)areas at NUTS II level. Northern Ireland has a specialstatus as “exceptional region” enjoying higher ratesof aid intensity than other 87(3)(c) areas.

The most important regional instrument is theRegional Selective Assistance (RSA). England alsooperates the Enterprise Grant (EG). The table 18shows payments under these two schemes for fiscalyear April 2001 to March 2002. As it can be seen,there is a rough concentration of regional aid to areaswith lower per capita income. However, the amountsof aid do not correlate strictly with the need of eacharea as indicated by its per capita income. (See Table18 at the end of the article)

The UK is also one of the very few member statesthat have carried out regular evaluations of its regionaldevelopment policies. A recent report by the NationalAudit Office has cast doubt on the effectiveness ofstate aid in contributing to regional development.20

The report has found that only about half of the jobscreated through state aid are in fact truly new jobswhile a quarter of new jobs simply displace otherjobs. In addition, the process of application for grantsand selection of eligible firms generates bureaucraticcosts which are equivalent to about 5% of the amountof grants for firms and another 5% for the publicauthorities concerned. The NAO estimated that thefinancial cost per net new job in the 1991-95 periodwas about £21,000 (2002) resulting in a decrease ofunemployment by less than half of one percent. Ifthese findings are generalisable, they indicate thatstate aid achieves about half of its objectives atconsiderable cost to taxpayers and non-assistedregions and it is accompanied by non-negligiblewaste of resources in bureaucratic procedures.

MMaaiinn ffiinnddiinnggss aanndd ppoolliiccyy iimmpplliiccaattiioonnss

On the basis of the empirical testing and the datacollected directly from national sources, we reachthe following conclusions:

• There appears to be no overwhelmingevidence that member states grant more state aidwhen regional disparities grow larger or that stateaid correlates with reduced regional disparities.

• Although the overall amounts of state aidin the EU have recently declined, some regionshave received larger amounts of aid.

• The amounts of state aid received byregions fluctuate considerably from year to year.

• Some types of state aid like R&D aid areinversely related to regional income, with thericher regions receiving larger amounts of suchaid.

• By and large, most regional state aid goes topoorer regions. However, when examining onlypoorer regions, there appears to be no precisecorrespondence between regional income andeither the overall amount of state aid or regionalaid received by the poorer regions.

• In member states with federal structures,regional authorities grant significant amounts ofstate aid. Since richer regions can afford to grant

20 National Audit Office, Regional Grants in England, (London: Stationery Office, 2003).

larger amounts of aid, the policy decisions ofsub-national governments may also have aconsiderable impact on national cohesion.These findings have a significant policy

implication. If the purpose of regional state aid is tocontribute to regional development and if the poorestregions are facing more handicaps than less poorregions, it follows that member states should limit thegeographic spread of aid so that it benefitsproportionally more the poorest of the poor regions.

CCoonncclluussiioonn

The European Union is on the verge ofexperiencing its most ambitious enlargement ever. Allof the ten countries scheduled to enter the EU in May2004 are relatively poorer than the EU average. All of

them, with the exception of Cyprus, will have theirwhole territories or significant size of themdesignated as Objective 1 regions. This means thatmany assisted areas in the existing member states willlose their eligibility for state aid under Article87(3)(a). Politically member states treat this as anadverse development. The findings of this papersuggest that it should not necessarily be so.

The impact of state aid on regional cohesion isambiguous, partly because, as shown in this paper,state aid is not proportionally granted to the mostneedy regions. It follows, therefore, that memberstates should limit the geographic coverage ofregional aid and should be aware that there areprobably trade-offs between other types of state aidand regional development or cohesion.


23


24

Tables

Table 1: Eligible population for regional state aidMember state % of eligible population Type of 87(3) area

BelgiumDenmarkGermanyGreeceSpainFranceIrelandItalyLuxembourgNetherlandsAustriaPortugalFinlandSwedenUnited KingdomEC

30.917.134.910079.236.710043.63215

27.510042.215.928.742.7

cc

a + ca

a + ca + ca + ca + c

cc

a + ca + ca + c

ca + c

Table 2: Maximum allowable intensities of regional aid(expressed in terms of amount of aid as % of eligible cost)

87(3)(a) area 87(3)(c) areaMaximum rate- if regional GDP > 60%- if GDP > EU average & unemployment < EUaverage- if next to 87(3)(a) area

5040--

20-

1020

Outermost region- if regional GDP > 60%- if GDP > EU average & unemployment < EUaverage

6550-

30-

20

Low density region- if regional GDP > 60%- if GDP > EU average & unemployment < EUaverage

5040-

30-

20

SME + 15 + 10

Table 3: Multisectoral Framework: Aid intensities for large projectsEligible expenditure Adjusted regional ceiling (R)

A: up to EUR 50 millionB: EUR 50 – 100 millionC: over EUR 100 million

100% of ceiling50% of ceiling34% of ceiling

Formula for adjusting ceiling: Maximum eligible aid = R(A + 0.5B + 0.34C)


25

Table 4: Rates of aid intensity allowed by the various Guidelines & RegulationsStandard rates 87(3)(a) area 87(3)(c) area

Regional aidfor SMEs

-- 50/RAM+15

20/RAM+10

Environmental aidfor SMEs

30/40+ 10

+10 +5

R&D aidfor SMEs

25/50/100+ 10

+10 +5

SME Regulation 7.5/15 +15 +10

Training Regulation- for SMEs

25/50+ 10/20

+10 +5

Employment Regulation- for SMEs

--7.5/15

RAM+ 15

RAM+ 10

RAM: Regional Aid Map – it specifies rates of intensity for each region of every EUmember state.

Table 5. Austria: Federal state aid(EUR, million)Region GDP/head

(2000, PPS)Technology aid Technology aid

per headTechnology aidas % of regional

GDP2000 2001 2000 2001 2000 2001

Wien 157 104.48 85.83 64.93 54.18 0.18 0.15Salzburg 131 22.73 17.26 43.97 34.07 0.15 0.11Vorarlberg 118 36.48 32.37 104.53 94.51 0.39 0.35Tirol 113 53.25 19.38 79.48 29.51 0.31 0.11Oberösterreich 109 91.33 81.12 66.23 60.36 0.27 0.24Niederösterreich 97 37.18 31.89 24.11 21.06 0.11 0.09Kärnten 96 23.27 21.16 41.33 38.13 0.19 0.17Steiermark 96 65.23 44.27 54.27 37.46 0.25 0.17Burgenland 73 4.50 18.22 16.19 66.54 0.10 0.40

Total 438.51 351.51 54.1 44.16 0.21 0.17

Region GDP/head(2000, PPS)

Regional aid Regional aid perhead

Regional aid as% of regional

GDP2000 2001 2000 2001 2000 2001

Wien 157 0 0 0.00 0.00 0.00 0.00Salzburg 131 0.33 0.45 0.64 0.89 0.00 0.00Vorarlberg 118 0 0 0.00 0.00 0.00 0.00Tirol 113 5.17 3.21 7.72 4.89 0.03 0.02Oberösterreich 109 3.21 24.64 2.33 18.33 0.01 0.07Niederösterreich 97 12.72 34.09 8.25 22.51 0.04 0.10Kärnten 96 13.79 28.32 24.49 51.04 0.11 0.23Steiermark 96 24.86 22.24 20.68 18.82 0.10 0.09Burgenland 73 25.24 49.96 90.79 182.47 0.55 1.09

Total 85.32 162.91 10.52 20.47 0.04 0.08


Environment aid Environment aidper head

Environment aidas % of regional

GDP2000 2001 2000 2001 2000 2001


Total 59.56 52.25 7.34 6.56 0.03 0.02


SME aid SME aid perhead

SME aid as % ofregional GDP

2001 2001 2000 2001 2000 2001Wien 157 30.41 27.20 16.90 17.17 0.05 0.05Salzburg 131 15.93 13.78 26.65 27.20 0.10 0.09Vorarlberg 118 10.44 7.56 21.66 22.07 0.11 0.08Tirol 113 22.14 20.64 30.81 31.43 0.13 0.12Oberösterreich 109 33.41 43.69 31.68 32.51 0.10 0.13Niederösterreich 97 36.54 23.33 15.13 15.40 0.11 0.07Kärnten 96 13.75 17.86 31.72 32.19 0.11 0.15Steiermark 96 22.06 16.87 14.03 14.27 0.08 0.06Burgenland 73 7.41 8.27 29.75 30.20 0.16 0.18

Total 192.09 179.20 23.69 22.51 0.09 0.09


Total aid Total aid perhead

Total aid as %of regional GDP


Total 770.08 748.28 95.62 93.71 0.37 0.36


26


Aid to energy Aid to energyper head

Aid to energy as% of regional

GDP2000 2001 2000 2001 2000 2001

Wien 157 0 0 0.00 0.00 0.00 0.00Salzburg 131 1.286 1.805 2.49 3.56 0.01 0.01Vorarlberg 118 0 0 0.00 0.00 0.00 0.00Tirol 113 0 0 0.00 0.00 0.00 0.00Oberösterreich 109 4.146 3.823 3.01 2.84 0.01 0.01Niederösterreich 97 0.103 0.401 0.07 0.26 0.00 0.00Kärnten 96 5.54 6.647 9.84 11.98 0.05 0.05Steiermark 96 1.805 1.811 1.50 1.53 0.01 0.01Burgenland 73 0.766 0.973 2.76 3.55 0.02 0.02

Total 13.646 15.460 1.68 1.94 0.01 0.01


Aid to tourism Aid to tourismper head

Aid to tourismas % of regional

GDP2000 2001 2000 2001 2000 2001


Total 133.929 147.976 16.52 18.59 0.06 0.07


Aid to trade &industry

Aid to trade &industry per

head

Aid to trade &industry as % of

regional GDP2000 2001 2000 2001 2000 2001


Total 397.700 388.525 49.04 48.81 0.19 0.19


27

Table 6. Austria: Länder state aid(EUR, million)


28


Agricultural aid Agricultural aidper head

Agricultural aidas % of regional

GDP2000 2001 2000 2001 2000 2001


Total 573.803 570.187 70.76 71.64 0.27 0.27


Total aid Total aid perhead

Total aid as %of regional GDP

2000 2001 2000 2001 2000 2001Wien 157 141.524 110.632 87.96 69.83 0.25 0.19Salzburg 131 67.774 65.666 131.09 129.62 0.44 0.43Vorarlberg 118 43.490 46.578 124.61 135.99 0.47 0.50Tirol 113 131.226 147.634 195.86 224.81 0.77 0.86Oberösterreich 109 177.029 227.770 128.37 169.47 0.52 0.67Niederösterreich 97 194.709 197.752 126.27 130.56 0.58 0.59Kärnten 96 93.564 / 105.380 166.19 189.91 0.77 0.86Steiermark 96 151.563 132.890 126.09 112.44 0.58 0.51Burgenland 73 134.592 106.700 484.14 389.70 2.92 2.32

Total 1135.471

1141.002

140.03 143.35 0.54 0.54

Table 7. Austria: Municipal state aid(EUR, million)Region GDP/head

(2000, PPS)Agricultural aid Agricultural aid

per headAgricultural aidas % or regional

GDP2000 2001 2000 2001 2000 2001

Salzburg 131 2.962 2.655 5.73 5.24 0.02 0.02Vorarlberg 118 2.486 3.272 7.12 9.55 0.03 0.04Tirol 113 3.996 3.852 5.96 5.87 0.02 0.02Oberösterreich 109 4.682 4.961 3.40 3.69 0.01 0.01Niederösterreich 97 12.060 14.774 7.82 9.75 0.04 0.04Kärnten 96 5.006 6.693 8.89 12.06 0.04 0.05Steiermark 96 22.587 19.632 18.79 16.61 0.09 0.08Burgenland 73 7.836 8.300 28.19 30.31 0.17 0.18


29


Energy aid Energy aid perhead

Energy aid as %of regional GDP

2000 2001 2000 2001 2000 2001Salzburg 131 0.044 0.049 0.09 0.10 0.00 0.00Vorarlberg 118 0.257 0.040 0.74 0.12 0.00 0.00Tirol 113 0.043 0.035 0.06 0.05 0.00 0.00Oberösterreich 109 0.074 0.107 0.05 0.08 0.00 0.00Niederösterreich 97 1.470 1.374 0.95 0.91 0.00 0.00Kärnten 96 0.140 0.108 0.25 0.19 0.00 0.00Steiermark 96 0.092 0.110 0.08 0.09 0.00 0.00Burgenland 73 0.072 0.090 0.26 0.33 0.00 0.00


Tourism promotionaid

Tourismpromotion aid

per head

Tourismpromotion aid

as % of regionalGDP

2000 2001 2000 2001 2000 2001Salzburg 131 20.504 16.816 39.66 33.19 0.13 0.11Vorarlberg 118 19.362 22.411 55.48 65.43 0.21 0.24Tirol 113 11.117 9.146 16.59 13.93 0.07 0.05Oberösterreich 109 9.165 6.957 6.65 5.18 0.03 0.02Niederösterreich 97 15.660 15.581 10.16 10.29 0.05 0.05Kärnten 96 22.545 24.260 40.04 43.72 0.18 0.20Steiermark 96 18.723 19.300 15.58 16.33 0.07 0.07Burgenland 73 2.123 2.166 7.64 7.91 0.05 0.05


Trade & Industryaid

Trade &Industry aid per

head

Trade &Industry aid as% of regional

GDP2000 2001 2000 2001 2000 2001



Total economicdevelopment aid

Total economicdevelopment aid

per head

Total economicdevelopment aidas % of regional

GDP2000 2001 2000 2001 2000 2001


Table 8. Austria: Total state aid(EUR, million)Region GDP/head

(2000, PPS)Total state aid Total state aid

per headTotal state aid as

% of regionalGDP


Total 2208.74 2184.23 272.38 274.43 1.05 1.04

Table 9. Finland: Regional distribution of aid to agriculture(EUR, million)

2000 2001Aid f o r no r t he rnagriculture

349 337

A id f o r sou the rnagriculture

138 125

Total agricultural aid 576 554

Table 10. Finland: Regional distribution of state aid(EUR, million; 2002)Regions atNUTS II(excludingÅland)

GDP/head(PPS, 2000)

Aid forR&D

Aid forother horizontal

objectives(investment aid)

R&D aid/ head

Other hor.obj. aid /

head

Total aid/ head

Uusimaa 143 80.4 6.9 (0.5) 57.71 4.95 62.67South 96 30.8 38 (24.6) 16.86 20.81 37.67North 91 11.3 20.2 (14.6) 20.20 36.11 56.31Middle 83 4.8 16.1 (10.6) 6.78 22.75 29.53East 74 6.4 33.4 (24.5) 9.32 48.65 57.97

Total - 133.7 114.6 (74.8)

Regions atNUTS II(excludingÅland)

GDP/head(PPS, 2000)

R&D aid as% of

regionalGDP

Other hor.aid as % of

regionalGDP

Total aid as% of

regionalGDP

Uusimaa 143 0.18 0.02 0.19


30

South 96 0.08 0.10 0.17North 91 0.10 0.18 0.27Middle 83 0.04 0.12 0.16East 74 0.06 0.29 0.35

Total - - - -


31

Table 11. France: Regional distribution of state aid(EUR, million)


State aid State aid per head(euros)

1995-1998 1999-20021995-1998 1999-2002

Ile-de-France 158 0.00 0.00 0.00 0.00Rhône-Alpes 103 3.09 4.05 0.55 0.72Alsace 103 1.75 4.48 1.01 2.58Haute-Normandie 95 5.48 2.65 3.08 1.49Champagne-Ardenne 95 1.96 0.45 1.46 0.33Bourgogne 93 0.77 1.30 0.48 0.80Centre 91 0.58 0.97 0.24 0.40Provence-Alpes-Côte d'Azur 91 15.14 3.79 3.36 0.84Aquitaine 90 1.78 2.87 0.61 0.99Pays de la Loire 90 5.11 7.96 1.59 2.47Midi-Pyrénées 89 4.31 4.52 1.69 1.77Franche-Comté 88 0.78 3.28 0.70 2.94Auvergne 87 2.24 3.63 1.71 2.77Bretagne 86 6.44 4.33 2.22 1.49Basse-Normandie 85 2.72 5.09 1.91 3.58Lorraine 84 12.74 4.31 5.51 1.86Poitou-Charentes 83 2.02 3.18 1.23 1.94Picardie 82 1.68 1.32 0.91 0.71Limousin 82 2.51 1.47 3.53 2.06Nord-Pas-de-Calais 81 10.44 1.42 2.61 2.86Languedoc-Roussillon 78 0.98 4.54 0.43 1.98Corse 76 0.17 na 0.67 naTotal 101 82.25 75.35 1.41 1.29

Table 12. Germany: State aid by the three levels of government(EUR, billion)

2000 2001Federal 10.1 9.5Länder 11.2 11.2Local 1.6 1.6

Total 22.9 22.3

1995-1998

Table 13. Germany: Subsidies to investment undertaken by companies(EUR, million)

1999 2000 2001(budgeted)

“New” Länder 899 800 697“Old” Länder 100 96 115

Table 14. Greece: Aid to investment and regional development(incentives granted through Law 2601/98) (EUR, million)Region GDP/head

(2000, PPS)State aid State aid per

headState aid as % of

regional GDP2000 2001 2000 2001 2000 2001

Notio Aigaio 80 8.36 11.05 30.62 44.81 0.17 0.22Attiki 77 39.80 13.14 11.52 3.26 0.07 0.02Sterea Ellada 76 45.22 23.02 68.10 49.97 0.39 0.20Kentriki Makedonia 68 21.04 42.33 11.63 23.69 0.08 0.15Dytiki Makedonia 67 1.80 1.43 5.92 5.38 0.04 0.03Voreio Aigaio 66 5.45 5.22 29.78 28.84 0.20 0.19Kriti 66 13.91 12.30 24.58 23.79 0.16 0.15Thessalia 61 13.32 7.90 17.90 11.49 0.13 0.08Ionia Nisia 59 4.34 5.19 21.17 29.44 0.16 0.19Peloponnisos 57 3.98 14.02 5.93 27.37 0.05 0.16Anatoliki Mak.-Thr. 55 22.70 62.51 40.25 111.1

10.33 0.90

Dytiki Ellada 51 11.21 9.91 15.13 15.95 0.13 0.12Ipeiros 47 9.94 12.91 26.44 43.12 0.25 0.32

Table 15. Ireland: Incentive schemes (grants and equity)(EUR, million)Region GDP/head

(2000,PPS)

Grants & equity Grants & equity perhead

Grants & equity as %of regional GDP

2000 2001 2000 2001 2000 2001S&E 126 214.38 215.67 76.65 76.29 0.27 0.27BM&W 84 96.22 65.56 96.03 64.79 0.51 0.35

Total 310.60 281.23 81.76 73.26 0.31 0.28


32

Table 16. Italy: Aid to business(EUR, million)

Region GDP/head(2000,PPS)

Aid to business Business aid perhead

Business aid as %of regional GDP

2000 2001 2001 2001 2000 2001Trentino 136 11 8 11.68 8.42 0.04 0.03Lombardia 135 309 541 33.92 59.01 0.11 0.20Emilia-Romag. 129 180 214 44.97 53.12 0.15 0.18Piemonte 120 196 230 45.75 53.54 0.17 0.20Valle d’Aosta 123 1 2 8.33 16.49 0.03 0.06Veneto 119 192 161 42.35 35.26 0.16 0.13Friuli-Venezia 114 158 124 133.11 104.17 0.52 0.41Toscana 114 147 144 41.49 40.49 0.16 0.16Lazio 113 169 184 31.92 34.53 0.13 0.14Liguria 108 102 173 63.00 107.06 0.26 0.44Marche 102 75 68 51.12 46.05 0.22 0.20Umbria 101 48 41 57.21 48.58 0.25 0.21Abruzzo 84 143 123 111.81 95.70 0.59 0.51Molise 79 49 40 149.85 122.27 0.84 0.69Sardegna 76 218 246 132.44 149.13 0.78 0.88Basilicata 73 101 147 167.22 243.15 1.01 1.47Puglia 67 405 482 99.24 117.70 0.65 0.78Campania 65 558 782 96.64 134.85 0.65 0.92Sicilia 65 379 667 74.75 131.26 0.51 0.89Calabria 62 224 382 109.80 187.01 0.78 1.33


33


34

Table 17. Spain: Regional aid(EUR, million, 2001, 2002)Region GDP/head

(PPS, 2000)Regional aid Regional aid per

headRegional aid as %of regional GDP

2001 2002 2001 2002 2001 2002Madrid 110Navarra 105Pais Vasco 102Catalunia 100Balearic Ils 98Rioja 91Aragon 88 18.5 8.8 15.83 7.54 0.08 0.04Cantabria 80 15.7 10.3 29.73 19.41 0.16 0.11Valencia 79 33.6 34.9 8.32 8.43 0.05 0.05Canary Ils 78 27.6 33.3 16.34 18.73 1.28 1.54Castilla Leon 76 38.0 26.7 15.38 10.86 0.09 0.06Asturias 71 36.2 15.3 34.38 14.58 0.21 0.09Murcia 69 12.9 48.0 11.47 41.61 0.07 0.27Ceuta&Melilla 68 0 0 0.00 0.00 0.00 0.00Castilla Mancha 67 4.6 7.7 2.69 4.45 0.02 0.03Galicia 65 18.0 31.7 6.63 11.60 0.05 0.08Andalucia 61 57.7 42.0 7.97 5.72 0.06 0.04Extremadura 53 5.8 9.8 5.40 9.06 0.05 0.08

Table 18. UK: Regional selective assistance and enterprise grants(GBP, million; April 2001- March 2002)Region GDP/head

(PPS, 2000)RSA EG Regional aid

per head inRegional aid

as % ofeuro (2002) regional

GDPLondon 147 0.84 0.38 0.27 0.00South East 111 3.71 0.58 0.85 0.00East 104 0.71 0.22 0.27 0.00East Midlands 94 6.07 1.23 2.78 0.01West Midlands 92 10.57 1.39 3.58 0.02South West 91 5.82 0.57 2.06 0.01Yorkshire 88 6.19 1.46 2.42 0.01North West 87 31.44 2.23 7.81 0.04North East 77 32.65 2.16 21.50 0.12Scotland 97 42.55 -- 13.33 0.06Wales 81 52.16 -- 28.27 0.16Northern Ireland 78 -- -- -- --

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1.07

I68

4.8

3,25

2.7

7,87

8.1

11,9

98.6

0.12

0.24

0.66

1.06

IRL

429.

911

7.1

595

1,30

0.7

0.48

0.06

0.62

1.33

L10

.118

.724

0.3

273.

30.

090.

101.

201.

41

NL

4851

6.6

3,36

2.8

3,99

2.2

0.04

0.12

0.81

0.98

P64

.330

6.5

323.

31,

225.

10.

070.

280.

301.

17

S19

.137

4.2

1,35

6.8

1,86

2.9

0.01

0.16

0.55

0.77

UK

526.

41,

874.

57,

910.

810

,550

.10.

050.

130.

210.

41

Table 19

State aid in the EU


35

Table 19 continued

Country State aid per capita (2001)

Regional Horizontal Agri. & Trans. Total

A 13.32 49.71 185.88 253.17

B 26.68 48.26 248.67 324.53

DK 1.70 212.45 222.19 442.89

D 25.64 65.77 138.94 283.16

E 10.34 26.49 51.55 117.97

FIN 9.19 60.93 327.81 400.29

F 11.84 42.03 163.63 266.20

GR 39.68 4.06 79.55 123.59

I 11.84 56.23 136.20 207.43

IRL 112.54 30.65 155.76 340.50

L 22.90 4240 544.90 619.50

NL 3.00 32.32 210.40 249.78

P 6.42 30.58 32.26 122.23

S 2.15 42.13 152.74 209.72

UK 8.80 31.33 132.33 176.33


36

Table 20

Income Disparity(t+1) = _ + _(State Aid)(t) + _ (1990-2000)

[per capita GDP at PPS vs real state aid as % of GDP & real state aid per capita]

Country

Type of state aid

Intercept Independent Variable R-squared

Belgium

Regional 0.796 258.440 0.547

10.964 0.787 0.313

Horizontal 50.217 -41.147 0.959

51.304 - 0.203 0.960

Agric. & Transport 59.920 -26.134 0.094

29.179 2.28E-02 0.003

Total 65.738 - 18.650 0.936

66.705 - 8.7E-02 0.870

France

Regional 31.384 - 29.423 0.207

30.718 - 0.100 0.149

Horizontal 26.256 10.244 0.401

26.964 2.94E-02 0.285

Agric. & Transport 27.419 1.598 0.037

27.498 6.72E-03 0.033

Total 26.457 1.510 0.106

26.643 6.06E-03 0.094

Germany (1991-2000)

Regional 24.140 7.053 0.216

25.295 2.82E-02 0.115

Horizontal 33.777 - 32.639 0.039

38.477 - 0.219 0.073

Agric. & Transport 20.147 10.302 0.175

26.556 1.37E-02 0.010

Total 15.66 6.017 0.524

16.133 2.78E-02 0.342

Greece

Regional 6.832 4.312 0.110

5.734 6.80E-02 0.327

Horizontal 10.146 - 3.492 0.821

10.085 - 3.6E-02 0.830

Agric. & Transport 7.176 3.426 0.255

7.351 2.45E-02 0.149

Total 14.397 - 4.172 0.722

13.707 - 3.8E-02 0.567

Italy

Regional 28.699 - 3.343 0.216

29.284 - 0.024 0.418


37

Horizontal 30.613 - 11.590 0.213

32.329 - 0.090 0.557

Agric. & Transport 30.489 - 4.099 0.448

30.132 - 0.019 0.605

Total 30.204 - 1.711 0.351

30.618 - 0.010 0.598

Netherlands

Regional 14.761 - 29.531 0.149

14.304 - 0.109 0.106

Horizontal 18.831 - 28.385 0.804

17.486 - 0.094 0.685

Agric. & Transport 6.765 11.957 0.389

7.568 0.0453 0.386

Total 16.068 - 3.125 0.038

14.830 - 0.0084 0.020

Portugal

Regional 17.488 - 14.780 0.178

15.300 - 0.0159 0.002

Horizontal 16.930 - 6.462 0.065

15.015 0.0256 0.008

Agric. & Transport 16.142 - 1.106 0.007

13.578 0.0483 0.060

Total 13.826 1.469 0.151

13.217 0.0190 0.246

Spain

Regional 11.263 93.673 0.477

11.435 0.672 0.606

Horizontal 15.091 10.296 0.318

15.349 0.0560 0.147

Agric. & Transport 18.916 - 4.113 0.692

18.931 - 0.032 0.617

Total 21.279 - 3.990 0.203

21.335 - 0.030 0.439

UK

Regional 48.925 - 212.176 0.371

39.259 - 0.604 0.241

Horizontal 29.893 - 18.105 0.024

29.108 - 0.079 0.026

Agric. & Transport 26.464 4.791 0.001

18.118 0.159 0.100

Total 18.945 16.407 0.062

25.907 0.0116 0.004


38

Table 20 continued

Table 21

Income Disparity(t+1) = _ + _(State Aid)(t) + _ (1999, 2000)

[per capita GDP at PPS vs real state aid as % of GDP & real state aid per capita]

Type of state aid Intercept Independent Variable R-squared

2000

Regional 26.134 - 18.294 0.107

24.410 - 0.03 0.020

Horizontal 14.987 46.526 0.185

12.35 0.29 0.379

Agric. & Transport 20.100 4.919 0.041

18.94 0.03 0.112

Total 22.418 0.836 0.001

24.61 - 0.01 0.023

1999

Regional 24.946 - 9.584 0.059

23.71 - 0.02 0.006

Horizontal 16.639 37.896 0.162

14.83 0.24 0.289

Agric. & Transport 20.060 4.477 0.042

19.14 0.03 0.105

Total 20.667 1.980 0.007

15.39 0.03 0.145


39


40

21 http://europa.eu.int/comm/competition/state_aid/scoreboard/22 Second progress report on economic and social cohesion, Brussels, 30.1.2003, COM(2003) 34 final23 See: European Regional Statistics: Reference Guide, Luxembourg: Office for Official Publications of theEuropean Communities 200324 Behrens, A. (2003), Regional Gross Domestic Product in the European Union 2000, Luxembourg: Eurostat

AAnnnneexx:: DDaattaa aanndd SSoouurrcceess

This annex explains the sources of information used in this paper.The figures on state aid in Tables 15, 16 and 17 have been drawn from the online country-specific tables

in the Commission’s online state aid Scoreboard.21 These tables provide data categorised into different types ofaid for the years 1997-2001 in millions of euro.

The three categories of state aid used in our Tables (regional, horizontal and agricultural, fisheries andtransport aid) do not sum up precisely to the total amount of state aid shown in the fourth column of the Tablesbecause total aid also includes sectoral aid. More precisely we have omitted aid to shipbuilding, coal, etc.

We express all figures in 2000 prices which is the base year of our calculations. The state aid data for theperiods 1996-1994, 1993-1992 and 1991-1990 are extracted from the Sixth, Fifth and Fourth State Aid Surveysin the EU, respectively. The Surveys use three-year averages, because the Commission wanted to iron out thedifference between payments and commitments and the differences caused by inflation. There are no state aiddata available for Austria, Finland and Sweden prior to their accession to the EU in 1995.

In order to convert the state aid figures from the years before 1997 in real 2000 prices, we have used therates of inflation reported in the OECD main economic indicators. But for Table 17, it has been possible to useEurostat’s harmonised indices of consumer prices (HICPs) from the Eurostat statistical yearbook 2002.

The Gross Domestic Product (GDP) of the member states has been extracted from the same yearbook.Since they are expressed in current prices, real GDP has been calculated with the OECD deflator for Table 16and with HICPs for Table 17. The aid per capita is calculated from the population numbers, also given in theEurostat statistical yearbook 2002.

The regional income disparities have been drawn from the Commission’s Second Progress Report onEconomic and Social Cohesion 2003 (table 2).22 Denmark and Luxembourg have been omitted from ourcalculations because they do not have NUTS II regions.23 Ireland has also been omitted because data on Irishincome disparities are only available from 1995 onwards.

The country-specific state aid figures are drawn from reports as indicated below. The regional populationnumbers have been drawn from Eurostat’s main regional indicators. The regional GDP figures have beenextracted from Eurostat’s statistics in focus publication.24 Regional GDP figures for 2001 are not yet availableso we have used the 2000 GDP figures to calculate aid as % of regional GDP for 2001 and 2002. In the caseof the UK, the amounts of state aid have been converted into euro according to the ECB’s average exchangereference rate in that period (1£ = 0,62€).

SSoouurrcceess ooff tthhee ddaattaa uusseedd iinn tthhee ffoolllloowwiinngg ttaabblleess::

Table 5: FINKORD Data Base, BKA 2003 (Federal Chancellery)Tables 6 & 7: ISIS Data Base, Statistik Austria Tables 9: Information centre of the Ministry of Agriculture and ForestryTable 10: Tekes and TE-CentresTables 11 & 12: Bundesministerium der Finanzen (2001)http://www.bundesfinanzministerium.de/Anlage11114/18-th-Subsidies-report-of-the-Federal-

Government-Summery.pdfhttp://www.bundesfinanzministerium.de/Anlage6737/18.-Subventionsbericht-der-Bundesregierung.pdfTable 13: Ministry of National Economy, Greecehttp://www.mnec.gr/ypourgeio/Pinakes_n.2601.98.htmTable 15: Ministry of Productive Activities (2001)Table 16: Ministerio de Hacienda: La programación regional y sus instrumentos. Informe Anual 2001 y

2002. http://www.mineco.es/dgps/PaginasWeb/inicio.htm

41

IInnttrroodduuccttiioonn:: AAiimmss aanndd OObbjjeeccttiivveess

Since the establishment of the European SocialFund (ESF) in the Treaty of Rome, and the furtherestablishment of the European RegionalDevelopment Fund (ERDF) in 1975, the StructuralFunds have grown to cover 35% of the EU budget(CEC, 2002). And since the reforms to the Fundsintroduced in 1988, EU structural policy has beenseen as a possible exemplar of ‘multilevelgovernance’ (MLG). That the interaction of nationaland subnational actors has gradually beentransformed as the Funds have developed, both inreal terms and conceptually, is largely recognized(Marks et. al., 1996, Peterson and Bomberg, 1999).The emergence of local and regional level actors inthis key European policy field is thus explainedwithin the domestic contexts of shifts from‘government’ to ‘governance’ and the changingnature of the state as the EU has developed. This

paper will examine the extent to which subnationalactors have the ability to determine successful policyoutcomes and indeed, whether the Structural Fundsactually represent a successful policy (both in termsof enhanced cooperation between levels ofgovernment and in reducing the disparities betweenEurope’s regions). The key to any such success is seenas being the extent to which ‘partnership’ isunderstood and applied when implementing Fundprogrammes. Not only has partnership become a keyelement of European funding since 1988 butexplaining shifts in modes of governance in the EUfrom a multilevel governance perspective are alsodependent on common conceptions of partnership.

The paper will outline the effects of the Funds ina number of regions. This shows that the treaty aimsof the Funds remain, after nearly forty years,unfulfilled. However, this failure does not indicateimmobility on the part of subnational actors. On thecontrary, at the subnational level the guiding


TTHHEE EEUU SSTTRRUUCCTTUURRAALL AANNDD CCOOHHEESSIIOOHH FFUUNNDDSS:: SSOOLLUUTTIIOONN OORR SSMMOOKKEESSCCRREEEENN TTOO EEUURROOPPEE’’SS RREEGGIIOONNAALL DDIISSPPAARRIITTIIEESS??

** Adrian Reilly is a Research Fellow in Devolution, Institute for German Studies, European Research Institute, University of Birmingham, Email:[email protected]**** This paper is partly based on research conducted between November 2001 and November 2003. The project was entitled‘Intergovernmental Relations and the EU,’ funded by the Leverhulme Trust, UK.

DDrr.. AAddrriiaann RReeiillllyy**

AABBSSTTRRAACCTT..**** The EU has long had a goal of ‘reducing economic and social disparities.’ Sincethe reforms to the European Structural Funds in 1988 the Commission has encouraged enhancedsubnational actor participation in policy-making, although subsequent reforms in 1993 and 1999have been seen as attempts to ‘renationalize’ the policy. This paper argues that the minimal effectthe Funds have had on the ground results not from renationalization but from inherent differencesbetween multilevel actors on one of the key principles of Structural Funding i.e. partnership. Theresearch findings show that whilst intergovernmental mechanisms have not changed since 1988,neither has the acceptance of the need for partnership between national and regional actors,especially in federal or quasi-federal states. The inability of the Funds to reduce disparities and thelack of understanding of partnership both provide lessons for new entrants to the EU: transformingdomestic governance arrangements to accommodate the requirements of EU regional funding mayonly be successful if there are wider understandings of changes in ‘governance’; Europe’s poorerregions have not been able to close the gap with their richer neighbours with the implication thatthe regions of the Accession States will be in no better position in ten years time than they are nowwhen compared to other regions throughout the EU.

ADRIAN REILLY

42

principles of Structural Fund interventions i.e.complementarity, additionality and partnership, areadhered to more than at the national level. Butenhanced horizontal adaptation at the subnationallevel after the reforms to the Funds in 1988 has notbeen complemented by enhanced vertical adaptationbetween national and subnational actors. This doesnot though indicate a stronger role for nationalgovernments, ‘the 1999 reforms did not renationalizethe funds’ (Sutcliffe, 2000: 306) The failure of thefunds to deliver their objectives does not result frompoor quality subnational mobilization, but the abilityof national governments to redefine national policygoals – if indeed such goals exist – in equal measureto the innovativeness shown by subnational actors. Inthis respect, whilst EU Structural Funds may beconsidered an example of MLG, the relationshipbetween the operation of the Funds and nationalpolicy suggests that this is a bounded MLG. And thekey to unlocking these boundaries lies in differingnational understandings of one of the Funds keyprinciples i.e. partnership or as Bauer refers to it ‘thechange of participatory structures in the managementof partnership’ (Bauer, M. 2002: 772). The finalargument raised is that the inability of national andsubnational actors to embrace partnership will havesevere consequences for the development ofEuropean Governance the likely reduction ofdisparities in the Accession States.

BBaacckkggrroouunndd

National Disparities

In assessing the impact the regional question hashad on the operation of the Funds we need to beginby addressing the basic premise of structural policyi.e. ‘the Community shall have as its task . . . topromote throughout the Community a harmoniousand balanced development of economic activities . .. and economic and social cohesion and solidarityamong Member States’ (TEU, Article 2, 1993). Beforeexamining the regionally specific impact of the fundsit is perhaps enlightening to examine how nationaldifferences have been impacted by the Fund’s

existence. Table One provides a series of generalnational level data that can be used as a basis forassessing the effectiveness of European funding to‘reduce economic and social disparities’ (see Table 1at the end of the article).

Clearly, there has been a general increase inwealth throughout the EU 15, with GDP per headrising in 10 of the member states. There are twoconcerns with such a statement however. Firstly, ageneral increase in GDP at the national level is notsynonymous with a reduction in the gap between thepoorest and the richest member states. If we comparethe poorest and richest member states in terms ofGDP in 1994 i.e. Portugal and Luxembourg, then thegap between them is 99.9 points. If we make the samecomparison in 2001 i.e. between Greece andLuxembourg then the gap has increased to 127.Luxembourg is nearly three times richer than Greeceon the basis of GDP per head. During the period 1994to 2001, Luxembourg saw an increase in its GDP of29.5 points, compared to Greece’s 0.7 point increase.And this is despite the fact that Greece was in receiptof large amounts of Cohesion funding throughout theperiod. The disparity between the EU’s poorest andrichest regions could be seen as actually increasing,despite the existence of the Structural and CohesionFunds. There are clearly domestic influences onwealth creation, and the wider politics of securing EUfunding. Nevertheless, an initial assessment of thenational picture could be that the Funds themselveshave had less impact on differences in wealthbetween the Member States than is often argued.

Secondly, the national statistics may also mask amore deep-rooted problem and the point stillremains that the Funds were intended to reduce‘regional’ disparities. The next section thereforedisaggregates the national figures to consider if thedisparities between regions have decreased.

Regional Disparities

To understand the extent to which the Treaty aimof reducing regional disparities has been fulfilledthere is a need to examine in detail changes in keyindicators within the regions i.e. levels of GDP andunemployment.

The range of regions examined here includesregions in Cohesion states, Objective 1 and Objective2 regions. The mix includes rural and urban areas togauge wider economic disparities. The countrieschosen also reflect opportunities for partnershipformation and the emergence of multilevelgovernance i.e. they include federally structuredstates such as Germany, quasi federal states such asSpain, and unitary states such as the UK. An attempthas been made to also examine differences between‘poor’ and rich’ regions in terms of GDP in order toassess any overall reduction in disparities. Table Twooffers a number of insights into regional disparities(see Table 2 at the end of the article).

These Eurostat figures indicate that, with theexception of the Belgian regions, regions have generallyincreased their standard of living since 1985. However,the differentials between rich and poor regions haveactually increased. For example, over the period 1985to 2000, Lisboa in Portugal saw an increase of 26 pointsin its GDP per head, compared to an increase of 13points in the poorer region of Alentejo. The differentialbetween the two regions means that Alentejo iscomparatively worse of in terms of GDP now than it wasin 1985. The only exception to this pattern is betweenthe East German Land of Sachsen Anhalt and the WestGerman Land of Bayern. In all other cases, whether aregion was in receipt of Cohesion Funding or otherStructural Funding, the wealthier regions have becomewealthier and with a faster rate of wealth creation thanthe poorer regions i.e. those regions that already havethe greatest level of GDP are more likely to see a largerrise. Relatively, poorer regions have become poorer. Thesame argument could also be made in terms ofunemployment, although perhaps to a lesser extent. Allregions experienced a fall in overall levels ofunemployment, although the fall was greatest in thoseregions with the highest GDP.

Claims that the Structural Funds have reducedregional disparities therefore need carefulconsideration. For those regions that were alreadyeconomically developed, positioned within or closeto the trade center of the EU, then the Funds may,conceivably have helped speed their progress.Without the advantages of locality or resources,

poorer regions have faired less well from StructuralFund interventions. Given the stated aims of the EUpolicy i.e. to reduce social and economic disparitiesand improve cohesion, this calls into question theability of the Commission to actually set the agendaover the past thirty years in order to achieve socialand economic cohesion. The evidence would seemto support the idea that, looking beyond theintergovernmental budgetary bargaining over theFunds, the policy represents a form of client politics(see Wilson, 1980). And the main ‘clients’ ofStructural Funds policy are national or regionalauthorities, quasi-governmental bodies and agenciesand businesses in the eligible areas. The issue thisraises in terms of the inability of the Funds to reducesocial and economic disparities is that ‘according toits own logic of client politics and its distributivenature, the policy has been organized in such a waythat it protects dominant economic interests insidethe economically weaker regions, rather thanprotecting the vulnerable groups in European society’(McAleavy and De Rynck, 1997: 9). In itself thiswould produce problems for those encounteringeconomic restructuring but it is also compounded, aswill be seen later, by an adaptive incapacity in whatwill be termed ‘vertical partnership formation’between national and regional tiers i.e. in the face ofthe Single Market and economic globalization, someMember States are showing a reluctance to take onboard new governance regimes to provide flexibilityin decision-making within the Funds. The adherenceto intergovernmental mechanisms in existence since1988 in Germany and Spain in particular, with anychange being rooted in domestic dialogue (such as inGermany), suggests that the Funds provide suitablyvague and opaque mechanisms that can bemanipulated by national governments

EEuurrooppeeaann ssttrruuccttuurraall ffuunnddiinngg aanndd ppaarrtteenneerrsshhiipp

Moving on to understanding the reasons for theapparent lack of success of the Funds, we need tobegin by accepting that economic development hasincreasingly found itself moving towards the center of

THE EU STRUCTURAL AND COHESIOH FUNDS: SOLUTION OR SMOKESCREEN TO EUROPE’S REGIONAL DISPARITIES?

43

EU policy debates, not least because of the gradualdevelopment and increasing budget of the EuropeanStructural Funds. And as it has been argued, ‘it wasmainly the European Commission which gave, inmany different ways, impulses and incentives to alterregional behaviour and performance’ (Tömmel, I.,1998: 72). This changed behaviour on the part ofsubnational actors occurred primarily through thepromotion of socio-economic interests and over timehas taken root as a basis for subnational strategydevelopment across the EU.

Partnership

Under the title ‘Complementarity, Partnershipand Technical Assistance,’ one of the Commission’smost innovatory measures in 1988, and certainly thatwhich is of central importance to subnationalgovernments, relates to partnership as a requirementfor receipt of EU funds. Firstly, it was planned thatCommunity funded programmes were to act as acomplement to Member States own programmes,and not to replace them. Secondly, the reformsprovide for new channels of participation in theEuropean policy process. Programmes were to beprepared ‘through close consultations between theCommission, the Member State concerned and thecompetent authorities designated by the latter atnational, regional, local or other level, with eachparty acting as a partner in pursuit of a common goal’(CEC, 1988, Art. 4). Member State interpretations ofregional and local governments, as well as otherbodies, will of course differ, but the door was openedfor new actors to be involved in the ‘preparation,financing, monitoring and assessment of operations’(CEC, 1988).

Defining partnership in practical terms can provedifficult, particularly since it is in effect a matter ofdomestic political determination. However, withinthe context of a debate on MLG and the changingnature of EU governance, some form of commonunderstanding is essential given that it is nowgenerally accepted as a method of steering within amultilevel system and within the Funds themselves. Ifpartnership is seen though as a means by whichpolicy can be made between governmental and non-

governmental actors on the basis of an exchange ofresources (information, expertise etc) then ‘whilethere may be differences in details about whatexactly is to be understood as ‘partnershipgovernance’ in the various policy areas, itsimpressive expansion seems real. Furthermore,recently ‘partnership’ has stopped being discussedmerely as a means for optimizing intra-policy co-ordination across multiple arenas, and has beenviewed as a structural principle for ‘shaping the NewEurope’ (Bauer, 2002: 773).

The principle of partnership was extended atthe EU level in 1993 ‘to the competent authoritiesand bodies - including within the framework ofeach Member States national rules and currentpractices, the economic and social partner,designated by the Member State.’ The inclusion of'social partners' in the principle was notwelcomed by all Member States, in fact, someMember States have resisted the Commission'sefforts to include the social partners in the regionalpartnerships. However, the Commission wouldappear determined that ‘the social partners mustbe more involved in the programming proceduresthan they were in the past’ (CEC, 2002). Thisdetermination must face the reality though that theCommission is unable to enforce the participationof the social partners and it must work within legalframeworks operating in the Member States.Nevertheless, the principle has been elaboratedand provides greater opportunities for thedevelopment of intergovernmental relations ifnational frameworks permit. It is to this point i.e.the extent to which differing national systemsactively embrace partnership between levels ofgovernment, that the next section turns, lookingparticularly at the cases of: Germany as one of theEUs wealthiest Member States and with a highlydeveloped federal structure often seen as an idealmodel of government organization; and Spain, as arecipient of both Cohesion Funding and otherStructural Funding, and having a quasi-federalsystem that is often seen as applicable to countriesundergoing structural political change andtransformation.

ADRIAN REILLY

44

Germany

In Germany the Structural Funds have taken on amore precient role since reunification. Not only has thepolicy gained in profile but the existence of a strongdomestic policy on regional economic development has‘been described as one of the prime examples ofinterlocking federalism in Germany’ (Conzelmannm1995). Yet this system of ‘interlocking federalism’ hasthrown up the problem that trying to achieve consensusamongst sixteen Länder with very different policystrategies and needs has not proved very effective for theimplementation of the policy, certainly not in the termsthat the Commission views it. In terms of relationshipsbetween actors in structural fund policy, these aredescribed as ‘multi-lateral’ in Germany because of theclose consultation and interaction between the Bundand the Länder. There are also close links between theLänder and the EU. In both cases, regional actors try toinfluence the EU on its regional policy. The main pointto note is that for the German Länder the objective insuch interactions is to safeguard their own interests inthe process of ‘politikverflechtung.’

Country variables – national politico-institutionalsettings, national policy ‘styles’ and pre-existinginstitutionalized patterns of centre-peripheryrelations – are still a strong influence on defining whoparticipates in economic and regeneration issues,particularly when these mirror the operation of theStructural Funds. And to this extent, they can have amajor impact on how policy principles aredeveloped, especially ‘partnership’. In practice, it isthe institutionally well-equipped regions – like theGerman Länder – that gain most prominence withinthe partnerships. Thus, the reason why a variety ofcountries with different variables have been chosenfor examination here.

Economic and urban regeneration differs inGermany as it forms part of a coherent nationalregional policy and strategy. Since 1969, regionalpolicy in Germany has been part of a nationalframework termed Gemeinschaftsaufgabe (GA) or‘joint tasks.’ Joint tasks are the responsibility of boththe Federal government and the Länder governments.The negotiations which took place on regional policywithin this framework were exclusively

intergovernmental i.e. between the central andregional levels of government. Other governanceactors such as local authorities, businesses andvoluntary organisations, were excluded from thedecision-making process.

One of the characteristics of regional policy viathe GA is that it produces interactions that tend to beclosed to non-governmental actors. By having accessto resources at the national level the Länder havebeen able to increase their autonomy from, andcontrol over other subregional actors who do not haveaccess to the centre. The need of the federal level torely on the Länder to implement regional policy hasmeant that the Länder have been able to positionthemselves as ‘gatekeepers’ between federalinitiatives and subregional actors. And the ability ofthe Länder to shape partnerships within theirterritories has consequently increased, despite the factthat they have to share power with the federal level.

The emergence of the Commission as an actor inregional policy from 1988 onwards in particular, hashad a number of impacts on German regional policyand the partnerships associated with it. In attemptingto bring a degree of co-ordination between EU andGerman regional policies the Commission hascaused a number of problems for the GA process inGermany. In particular, the requirement by theCommission that the criteria used by the Germangovernment to allocate funding be changed to bringthem in line with those used by the Commission, hasmeant that not only did the national government feelas thought it was being attacked, but the regionalgovernments felt this even more strongly. TheCommission required that assistance from Germanregional policy be focused on fewer areas - the resultbeing that it tended to focus on urban and industrialareas. It also had to contend with a reduction inoverall financial levels of payment as a result. As thenumber of regional areas eligible for financialassistance declined in the GA process many of theLänder turned to Brussels as an alternative source offunding. However, it soon became apparent for theGerman Länder that financial assistance fromBrussels came at a cost i.e. “through legal challengesto Land-level regional programmes, the Commission


45

used its competition policy powers to place severeconstraints on the states’ manoeuvrability”(Anderson, 1996). For the Länder, the actions of theCommission resulted in what they saw as a directtransfer of sovereignty from themselves to Brussels.

The development of relationships andpartnerships within the Funds in Germany have someunique characteristics. Not least among the reasonsfor this are the resources available to the Länder i.e.constitutional resources, financial and economicresources and a developed civil society feeding astrong source of legitimacy. These resources producemobilisation strategies that differ markedly from thosein countries such as the UK and Spain. Thesestrategies, despite the German affinity withsubsidiarity and the much-vaunted system offederalism, have resulted in the Länder maintaining adominant position over other subnational actors. Thisis a trait which can be traced back to the introductionof the Gemeinschaftsaufgabe in which the Länder,‘paradoxically ... gave up considerable policyindependence to the joint federal arrangements and atthe same time found their autonomy and control vis-a-vis subregional and local actors enhanced’(Anderson, 1995: 30). This is further underlined by theargument that ‘the ability of each Land government toshape interests with subregional and local interestgroups increased, even though its overall autonomy inthis policy area decreased with the creation of the GAregime’ (Anderson, 1996: 168).

Germany clearly has a national context highlyreceptive to subnational mobilization andpartnership formation. One of the primary reasons forthis being the constitutional guarantees that theLänder have in the basic Law. This picture masks acontradiction however, in that below the regionallevel subnational mobilisation is not as extensive.Despite a strong empathy with the principles ofsubsidiarity and partnership, municipal authoritiesoften feel isolated and face a Land government whichis not as responsive to their demands as the federalgovernment is to the demands of the Länder.

The dominance of Land governments, forexample, their ability to determine subnationalstructures individually, to dictate the range of actors

participating in the policy process, and theirconstitutionally entrenched domestic position, is incontrast to the position of subnational authorities inthe UK. The Länder form a further tier of governmentthat both subnational government and non-governmental actors have to factor into theirstrategies. Yet despite this complex ofinterrelationships, the evidence from the regionsexamined here suggests that even the constitutionallyguarded intergovernmental mechanisms in Germanyhave not in effect provided the Länder with theEuropean policy influence they desire. They havethough, used the same constitutional guarantees toexert domestic influence over policy implementationbut in doing so have run counter to the Commission’sunderstanding of partnership below the regional level.

Spain

In terms of Structural Fund policy in Spain, thekey point of interest is how the centre still retains animportant role as the paymaster, particularly inrelation to regional and statewide bodies. Usually,there is no direct link between the EU institutions andlocal agencies, such as local authorities, businesses,universities or trades unions. Implementation of thestructural funds programmes is carried out within theregions in the same way that they implement theirown regional porogrammes i.e. the money from thefunds is largely integrated into regional budgets. Assuch, the regional government becomes a key playerfor other subnational actors. And in terms of workingwith other actors, the regional parliaments tend totake the same line as the national government i.e. if ithas control of the budget then it also has the final say.So in terms of governance, what we see in Spain is arather restricted picture with the regional parliamentsseeking the opinions of social partners on policy butthat policy has largely already been drawn up anddecisions made. Widespread participation is notundertaken and the requirements for partnershipworking which the Commission favours have beenlargely ignored. In particular, in regional andeconomic development policy in Spain, the localauthorities are largely ignored in the formulation andimplementation of Structural Fund projects. Thus the

ADRIAN REILLY

46

key role which local level bodies should play in aregional development strategy is not developed.

There is no doubt that the Funds are an importantfactor in strengthening the autonomousresponsibilities of the ACs. This applies to the amountof the financial resources that have been mobilised,for the preparation and implementation ofprogrammes and projects and for the breadth ofaction at the regional level. Policy-making within theframework of the Funds has opened up and/orstrengthened new relations between the national, EUand regional levels. But there are still limitations onsubnational activity that are shown by comparisonwith the German federal system. Overall, the systemof negotiations between government actors has beenbilateral i.e. the ACs have negotiated with the centralgovernment and have not taken into considerationthe opinions of other regions. There is thus a pictureemerging in which social partners and localauthorities are cut off from the decision-makingprocess. Nor does a sense of solidarity exist amongstthe regions as is the case in Germany.

In terms of interaction at the supranational level,the central government in Spain is in overall chargeof the negotiations in Brussels, and representatives ofthe regions are included on a case by case basis. Interms of the relative influence of the different levelsof government in the Funds policy process, it cannotbe assumed that defining and making policy are inreality the work of regional and national planners. Itis as likely that budgetary considerations – and in thecase of Spain this means the national budget system– form the starting point and predefine the field thatis to be covered by the EU structural funds andregional operational programmes.

What the research here shows is that Spain has anational context that can be seen as largely conduciveto subnational participation in intergovernmentalrelations. Throughout the period 1989 to 1999 theAutonomous Communities had consolidated theirconstitutional position. The regions had secured legalrights to act in certain fields, and for some, e.g.Catalonia, these fields were more comprehensive as aresult of the regions historical past. However, even inCatalonia the national government maintained a

reasonably strong grasp on the EU policy process,largely denying the region the right to act independently,and offering only restricted formal participation in theEU policy process domestically. Admittedly, the relianceof the latter Felipe Gonzalez and Aznar governments onCatalonia for political support afforded the regionextensive informal influence in bargaining over EUpolicy decision. Added to this was the strong sense oflegitimacy the Catalan government maintained.Historical sentiments of Catalanism gave the region apolitical potency that cannot be ignored. So, given thefavourable national context in which Catalonia operatesit should be expected that subnational mobilisation waswell developed.

The overall picture is less clear though.Opportunities for subnational participation inintergovernmental relations in Spain are verylimited. There are very few structuresaccommodating, or investing in, subregionalparticipation in the policy process. The mainstructural organisations are predominantly at theregional level, and even here, municipal authoritiesare largely absent. The regional governments placedgreat store on participation in the Funds andmaintained a number of partnerships, both formaland informal. The inability of the regions toundertake action outside the framework of thenational context necessitated such informalchannels being utilised.

TThhee SSttrruuccttuurraall ffuunnddss aanndd mmuullttiilleevveell ggoovveerrnnaannccee

As it has been argued (Benz and Eberlein, 1999),in developing intergovernmental relations regionalactors have to adapt on two fronts: horizontally withpublic and private actors and other politico-administrative units; and vertically with other tiers ofgovernment. Since 1988, the main element of bothhorizontal and vertical adaptation championed by theCommission has been the principle of partnership.The centrality and importance of this principle is oftenoverlooked in debates on multilevel governance andits daily usage seems to have diluted the possibilitiesof reform to intergovernmental relations that wasintended. Indeed, for the Commission, ‘partnership


47

did not just have a managerial meaning, it waspresented by the Commission as the guiding principleof the whole reform undertaking – not least because itwas meant to apply to all stages of the policy-makingprocess’ (Bauer, M., 2002: 772). And in eachsubsequent revision to the Funds since 1988,partnership has been strengthened as the core guidingprinciple of EU funding, and have arguably enhancedthe position of the Commission as an actor in policy-making. However, Member State governmentsretained the ability to define those partners able toparticipate in the policy process. The consequences ofthis became apparent in those countries without‘strong’ and entrenched regional governments e.g. inthe UK the government originally defined partnershiprestrictively to provide local authorities with aminimal role in decision-making. With devolution thisapproach has changed – albeit in an informal sense.As the original Concordat on the Co-ordination of EUPolicy Issues between the UK Government and theScottish Executive highlights, agreements onintergovernmental relations are not legallyenforceable and the main responsibility still rests withthe Department of Trade and Industry or the Treasury.

Further, whilst the UK government has had toredefine vertical partnership as a result of devolutionto Scotland and Wales, the same is not true inGermany. The ability of the Länder to maintain tightrelations with the federal government is unchangedwith some commentators suggesting that ‘pressuresseem to have been converted into improvements ofthe traditional pattern’ (Bauer, 2002: 337) ofrelationships between levels of government with ‘thestrong pressure of European requirements not leading,as one might expect, to a substantial reform of thejoint decision-making structures’ (Bauer, 2002: 336).And in terms of the Structural Funds, equally, in Spainit is considered that ‘Madrid is very centralized, withwhatever we do being passed on to the EU by them,they still have the central role [in Structural Fundpolicy-making]’ (interview source, Extremadura,2003). In this sense the ‘EU is still a system of MemberStates and they [Madrid] won’t let us participate(interview source, Catalonia, 2003). Despite somedevelopments in the powers accorded the ACs, it

would appear that the Spanish central governmentretains the key position of defining partnership,despite the Commission’ s desire for the principle toextend to national, regional, local and other levels.

Within debates on MLG, the connectionbetween subnational governments and horizontalpartnerships as a means of mobilization alongsidethe Commission, and possibly forcing nationalgovernments to adapt policy practices, has at timesignored the wider implications and ideologicalapplication of the principle i.e. the verticalpartnership between national and regional actors isalso essential in policy-making and implementation.The lack of such vertical partnership in manyMember States indicates, firstly the unchanged role ofcentral governments in deciding how decisions aremade, ‘ member states’ unwillingness to cede muchdecision-making power to the partnershiparrangements and growing governmental resistanceto the Commission’s strategy to include ever moresocietal actors ensured that the effects ofmobilization remained largely under the membersstate control’ (Bauer, 2002: 775). The examples hereshow that, in the emerging new governance of theEuropean Union, both German and Spanish centralgovernments have been able to retain traditionalrelationships with regional governments. However,despite the lack of formal participatory channels inthe UK, relationships between Whitehall and thedevolved administrations reflect a more truly‘partnership’ oriented approach.

Part of the reason for this lies in differingconceptions of governance between member stategovernments (see Reilly, 2003). It has been arguedthat ‘It is not one single form but rather a balancedmixture of different modes of governance whichhelps to manage the tensions produced by themultilevel framework’ (Benz and Eberlein, 1999:343). And as there is something of a schism betweenunderstandings of governance in mainland Europeand the UK, especially in terms of societal andsubnational government participation, MLG needs tobroaden its conceptual toolkit to encompass a ‘multi-governance’ understanding of the new Europeangovernance.

ADRIAN REILLY

48

But this research also shows that there are issues tobe resolved in the ‘multi-level’ element of MLG. If, asMarks argues (Marks, 1992), the Funds have creatednew arenas for bargaining and new issues ofgovernance in which multiple actors negotiate, thenthese arenas and governance must include thoseaspects of ‘partnership’ operating domesticallybetween national and regional levels. Focusing onhorizontal partnership formation as an outcome of thedispersion of central government authority has tendedto gloss over the multi-level element of MLG. As Jefferyargues, MLG ‘has emerged in a particular context . . .which neglects the intra-state environment in whichSNAs are embedded’ (Jeffery, 2000: 3) Regardless ofnational and regional institutional variation betweenMember States, the need for a common understandingand application of ‘partnership’ that is compatible witha ‘governance’ oriented EU is essential. Verticalpartnership formation between national and regionalgovernments, or the lack of it, may be seen as oneunderlying reason why ‘strong’ regional actors still feelthe full potential of the Structural Funds policy processhas not been achieved. What the current system ofintergovernmental relations in the Structural Fundsrepresents is a system of disjointed reciprocity ratherthan consensual bargaining between nested actors.

And here lies the crux of the issue. Verticaladaptation of intergovernmental relations in the UKhas followed a typically informal route, with thedevolved administrations accorded participatoryopportunities and flexibility that ostensibly appear lessthan those offered the German or Spanish regions.However, the lack of constitutional restrictions and thedeeper understanding of ‘partnership’ have providedfor effective implementation of the Funds in the UK.And interaction between central and devolvedauthorities in the UK operates on a basis that is lessconstrained by competing regional demands than inGermany or Spain

CCoonncclluussiioonnss

As it has been argued elsewhere, relationshipsbetween actors involved in implementing theStructural and Cohesion Funds can only beunderstood within the context of restrictions and

opportunities for participation in the policy processoffered by domestic participatory possibilities (Reilly,2000). Despite the federal characteristics of some ofthe European countries examined here, whenconsidered within particular policy fields, theconstant reference to formal methods of coordinationand policy-making can actually be seen as somethingof a hindrance. The legalistic nature of these formalchannels, their clear perception of hierarchy and theworking boundaries they set all serve to weaken asense of ‘governance.’

Yet partnership has embedded itself in thelexicon and realism of the Structural Funds to theextent that ‘governance,’ devolved management andnon-formal intergovernmental relations have largelybeen the norm in policy delivery since the reforms tothe Structural Funds in 1988. Policy delivery andmaking has been based on partnership and co-operation from a range of actors. However, not allmember states, or all regions, fully enhanceprinciples such as partnership and subsidiarity, buttheir requirement for the delivery of EU policy has,over time had a deep effect. The Structural Funds intheir current form have been operating for nearlyfifteen years and actors have had the opportunity toadjust their policy-styles and processes accordingly.Yet the inability of the Funds to reduce the gapbetween rich and poor regions would suggest thatefforts at subnational mobilization have actually hadlittle effect on overall policy outcomes. And thisrelates directly to the inability of some nationalcontexts to comprehend the importance of wide-ranging partnerships not only to access fundingprogrammes but also to serve as the basis for futuresustainable development within regions andlocalities.

This brief snap-shot of European Funding alsoprovides a final insight. For the accession states thehistorical development of the Funds may not berepeating itself. This refers primarily to the entrynegotiations and the method of using the Funds as a‘side-payment’ for different Member States. After theentry of the UK and Ireland the ERDF was largelyreformed. After the entry of Spain the Cohesion Fundwas implemented. After the entry of Sweden and


49

Finland Objective 6 was added to the eligibleprogramme list. Seeing these developments as a‘side-payment’ may be contentious, but itnevertheless raises the question of what reforms theaccession states have been offered to ease their entry?There is thus a realpolitik outlook within the currentbudget negotiations that sees the 15 maintaining astrong hold over the EU purse-strings in a mannerthat does not favour the new entrants as it has donein previous enlargements.

Whilst it should not be overstated, these twoarguments suggest that the accession states should

not look to the Funds as a panacea. For many ofEurope’s least developed regions the gap betweenthemselves and the richest regions has changed littleover the past fifteen years. But where the Funds havebeen successful is in those regions and countrieswhere there is an expansive and inclusive workingdefinition of partnership, partnerships that canprovide the basis for investment long after EU fundedprogrammes have been implemented and whichallow local and regional actors a less formallystructured governance arena to secure local andregional agreement on what is best for their futures.

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50

RReeffeerreenncceess

Bailey, D. and De Propis, L. (2002) ‘The 1988 Reform of the European Structural Funds: Entitlement orEmpowerment?’ Journal of European Public Policy, 9:3, pp.408-428

Bauer, M. (2002) ‘The EU ‘Partnership Principle’: Still a Sustainable Governance Device Across MultipleAdministrative Arenas’ Public Administration, 80:4, pp.769-789

Benz, A. and Eberlein, B (1999) ‘The Europeanization of Regional Policies: Patterns of Multi-levelGovernance,’ Journal of European Public Policy, 6:2, pp.329-348

Burch, M., Bulmer, S. and Gomez, R. (2002) European Governance: Response from the Project Team onDevolution and European Policy-making in the UK, Manchester, 28.03.02

CEC (2001 a) European Governance: a White Paper, Com (2001) 428 final, BrusselsCEC (2001 b) Consultations Conducted for the Preparation of the White Paper on Democratic European

Governance: Report to the Commission of the Governance Team, SG/8533/01-ENCEC (2002) Report from the Commission on European Governance, COM (2002) 705 Final, Brussels,

11.12.2002Committee of the Regions (a) (2002) Opinion of the CoR on ‘the White Paper on European governance

and the Communication on a New Framework for Co-operation on Activities Concerning the Information andCommunication Policy of the EU, Const/001, 13.03.02

Committee of the Regions (b) (2001) Opinion of the Committee of the Regions on ‘The Participation ofRegional Government Representatives in the Work of the Council of the European Union, and the CoR inInformal Council Meetings,’ COM-Inst.Aff./017, 14.11.01

Dardanelli, R. (1999) ‘Implementing Subsidiarity: Regional Policy from a British Perspective,’ in Regionaland Federal Studies, vol.9: 2, pp.69-88.

European Parliament (2001) ‘Resolution on the Commission White Paper on European Governance, A5-0399.2001, 29.11.01

European Council (2001) Presidency Conclusion: European Council meeting in Laeken, 14th and 15thDecember, 2001, SN300/1/01/REV 1

Hix, S. and Goetz, K. (2000) ‘European Integration and National Political Systems,’ West European Politics,vol.23: 4

Hooghe, L. and Marks, G. (2001) ‘Types of Multilevel Governance,’ European Integration Online Papers,vol5: 11, http://eiop.or.at/texte/2001-011a.htm

House of Commons (2001) White Paper on European Governance, European Scrutiny Select Committee,6th Report, 11574/01, 02.10.01

Jeffery, C. (2000) ‘Sub-National Mobilization and European Integration: Does it Make Any Difference?’Journal of Common Market Studies, 38:1, pp.1-23

Kohler-Koch, B., (1996) ‘The Strength of Weakness: the Transformation of Governance in the EU,’ inGustavsson, S. And Lewin, L. (eds.) 1996, The Future of the Nation State: Essays on Cultural Pluralism andPolitical Integration, London, Routledge, pp.169-210.

Kohler-Koch, B. (2001) ‘The Commission White Paper and the Improvement of Governance,’ contributionto the Jean Monnet Working Paper Symposium, no.6/01, New York University School of Law, New York

McAleavy, P. and De Rynck, S. (1997) ‘Regional or Local? The EUs Future Partners in Cohesion Policy’European University Institute, Florence, Working Paper RSC No. 97/555

Marks, G., Hooghe, L., and Blank, K. (1996) ‘European Integration from the 1980s: State-centric v. Multi-Level Governance,’ Journal of Common Market Studies, 34:3, pp.341-78


51

Martin, S. and Pearce, G. (1999) ‘Differentiated Multi-level Governance? The Response of BritishSubnational Governments to European Integration’ Regional and Federal Studies, 9:2, pp.32-52

Mawson, J. (1996) ‘The English Regional Debate: Towards Regional Governance or Government,’ in BritishRegionalism and Devolution: the Challenges of State Reform and European Integration, Mawson, J. andBradbury, J. (eds.), Jessica Kinglsey, London, pp.180-211

Peterson, J. and Bomberg, E. (1999) Decision-making in the European Union, Macmillan, LondonProdi, R. (2002) The Role of the Regions in Building the Europe of Tomorrow: Governance and the

Convention, speech given at Bellagio, 15th July.Reilly, A. (2003) ‘European and National Governance: Agreement and Divergence in Responses to the EUs

White Paper’ Regional and Federal Studies (forthcoming)Rhodes, R.A.W. (1997) Understanding Governance: policy Networks, Governance, Reflexivity and

Accountability, Buckingham, Open University PressSbragia, A. (2002) The Dilemma of Governance with Government, New York, NYU School of Law, Jean

Monnet Working Paper 3/02 Stoker, G. (ed.) (1999) The New Management of British Local Governance, Basingstoke, MacmillanSutcliffe, J. (2000) ‘The 199 Reform of the Structural Fund Regulations: Multi-level Governance or

Renationalization?’ Journal of European Public Policy, 7:2, pp.290-309Taylor, P. (1996) The European Union in the 1990s, OUP, OxfordThielemann, E. (1999) ‘Institutional Limits of a ‘Europe with the Regions’: EC State-aid Control Meets

German Federalism’ Journal of European Public Policy, 6:3, pp.399-418Thielemann, E. (2002) ‘The Price of Europeanization: Why European Regional Policies Are a Mixed

Blessing’ Regional and Federal Studies, 12:1, pp.43-65Wilson, J. (1980) The Politics of Regulation, Basic Books, New York

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Country Employment Labour Market Demography

GDP/Head

EUR 15=100

Employment by

Sector (% of

total) 2002

Unemployment rate (%) 1000

inhabitants,

2003

Pop.

Density

(2001)

19

94

20

01

Ag

ricu

ltu

re

Ind

ust

ry

Serv

ices

To

tal

,20

02

Lo

ng

Term

20

02

(%

of

Fem

ale

(20

02

)

Yo

uth

(20

02

)

EU 15 100 100 4.1 25.0 71.0 7.7 3.0 8.7 15.1 37898.1 119.4

EU + ACC

Belgium 108.5 107.0 2.2 21.5 76.4 6.7 3.5 8.2 18.5 10 355.8 337.1

Denmark 112.6 115.4 3.3 22.5 74.1 4.3 0.9 4.7 7.9 5 383.5 124.3

Germany 108.5 100.5 2.4 27.8 69.7 7.8 4.0 8.4 9.7 82 542.0 230.6

Greece 66.5 67.2 16.1 23.8 60.0 10.4 5.1 15.0 26.4 11 018.4 83.1

Spain 78.6 84.3 5.9 29.4 64.6 10.6 3.9 16.4 22.2 40 683.0 79.8

France 104.8 104.8 3.9 22.0 74.1 8.5 2.8 10.0 19.6 59 625.9 108.8

Ireland 84.1 117.7 6.9 28.1 65.0 3.9 1.3 4.0 8.0 3 961.3 54.6

Italy 103.5 100.2 4.7 29.2 66.1 9.4 5.3 12.2 27.2 57 071.7 192.2

Luxembourg 164.8 194.3 1.2 22.5 76.3 2.1 0.8 3.9 8.3 448.3 170.9

Netherlands 108.2 113.3 3.3 19.5 77.2 2.5 0.7 3.0 5.1 16 192.8 473.7

Austria 115.2 112.0 13.2 24.0 62.8 3.6 0.8 4.5 6.8 8 058.2 97.0

Portugal 64.9 70.6 12.4 33.8 53.8 4.1 1.8 6.1 11.5 10 412.7 112.1

Finland 94.6 104.2 5.4 26.9 67.8 9.1 2.3 9.1 21.0 5 206.3 17.0

Sweden 105.4 106.2 2.5 22.6 74.8 4.9 1.0 4.6 11.9 8 940.8 21.6

UK 99.4 105.1 0.9 19.0 80.0 5.0 1.1 4.5 12.1 59 086.3 241.3

Cyprus 77.0 78.4 5.4 24.1 70.5 3.9 0.8 5.1 9.7 804.7 112.7

Czech

Republic

: 60.6 4.7 39.5 55.8 7.3 3.7 9.8 16.9 10 203.3 130.4

Estonia 30.8 38.6 6.9 31.1 62.0 9.5 4.8 10.0 19.3 1 356.0 33.2

Hungary 46.3 51.5 6.2 34.1 59.7 5.6 2.4 5.5 11.8 10 152.0 108.2

Lithuania 27.8 37.2 17.1 27.4 55.5 13.6 7.0 13.3 23.9 3 462.6 56.7

Latvia 26.6 33.4 14.4 26.8 58.7 12.6 5.8 10.7 23.9 2 331.5 37.7

Malta : 69.5 2.1 32.6 65.3 7.4 3.2 10.5 17.4 397.3 1165.0

Poland : 41.9 19.3 28.6 52.0 19.8 10.9 20.0 41.8 38 214.0 123.6

Slovenia 62.5 67.9 9.5 38.2 52.3 6.1 3.3 7.1 15.3 1 995.0 98.0

Slovakia 45.4 44.7 6.4 33.8 59.8 18.7 12.1 17.4 37.9 5 379.2 110.0

Source: http://europa.eu.int/comm/eurostat/newcronos/queen/display-

do?screen=detail&language=eng&product=YES&root=YES_copy_5390195 (accessed on

18.02.04)


53

Long

Ter

m20

02 (%

of

tota

l act

iv)

Fem

ale,

200

2

Yout

h, 2

002

TTaabbllee 11

GDP in PPS (EU = 100) Unemployment (%)

1985 1992 2000 Change

between

1992 – 2000

Change

1985 -

2000

1992 2000 Change

1992-1998

Belgium

Flanders 102 110 106 - 4 + 4 7.4 4.0 - 3.4

Wallonia 84 88 78 - 10 - 6 10.7 10.7 0

Germany

Bayern 113 126 124 - 2 + 11 4.8 4.5 - 0.3

Sachsen

Anhalt

: 43 68 + 25 : 18.5 18.0 - 0.5

Spain

Catalonia 82 95 99 + 4 + 17 22.3 9.0 - 13.3

Extremadura 50 51 53 + 2 + 2 32.3 24.8 - 7.5

Austria

Salzburg : 127 131 + 5 : : 3.0 :

Burgenland : 73 73 0 : : 4.5 :

Portugal

Lisboa e Vale

do Tejo

65 93 91 - 2 + 26 8.3 5.4 - 2.9

Alentejo 41 41 54 + 13 + 13 11.6 5.7 - 5.9

UK

West Midlands 86 90 92 + 2 + 6 9.9 6.1 - 3.8

Greater

London

106 143 147

(241)

+ 4 + 41 13.2 7.0 - 6.2

Source: compiled from Eurostat, ‘Statistics in Focus’ for 1986, 1984 and 2001, CEC,

Luxembourg

ADRIAN REILLY

54

1985-2000

TTaabbllee 22

55

FFoouunnddiinngg PPrriinncciipplleess

In March 2003, the Scottish Parliament will havecompleted its first four-year session. Preceding itsestablishment in 1999 the Scottish ConstitutionalConvention and the Consultative Steering Groupagonised for years over the shape the Parliament wasgoing to take. A considerable role in the deliberationsof political parties and a wide range ofrepresentatives of Scottish civil society was played bythe examination of best practice from other devolvedor federal sub-state parliaments and assemblies, aswell as from small states like Denmark, Finland or theNetherlands.

The Consultative Steering Group, in its Report ofDecember 1998,iii laid down four key principles forthe operation of the future Parliament:

• Power-sharing: between the Scottish people,the legislators and the Executive;• Accountability: of the Executive to theParliament, and of Executive and Parliament tothe Scottish people;

• Access and participation: an open, accessibleParliament enabling a participative approach topolicy-making and the legislative process;• Equal Opportunities: gender balance and equalopportunities for all in the Parliament’s operationand appointments.These principles, widely endorsed by the

supporters of the Constitutional Convention as wellas by all political parties in Scotland, have guided theestablishment and early years of the Parliament.iv Butthe Scottish Parliament is still a very younginstitution, and in all our discussions we need to beaware that what we see is "the evolution ofdevolution" v or, in a phrase coined by the formerSecretary of State for Wales, Ron Davies, which hasby now become somewhat of a cliché, thatdevolution is "a process, not an event".vi

In the Parliament's committees one can see at workwhat might be called 'new politics' – the workingtogether of MSPs who seem fully concentrated on thematter in hand rather than focusing solely on their partyline. In the monocameral Scottish Parliament, the


* Eberhard Bort is the Academic Co-ordinator of the Edinburgh Institute of Governance and a Lecturer in Politics at the University of Edinburgh. Heteaches courses on Scottish Society and Culture, Contemporary Irish Politics and British Studies. Recent publications include (ed., with MalcolmAnderson), The Frontiers of Europe (Pinter, 1998), and The Irish Border: History, Politics, Culture (Liverpool University Press, 1999); (ed., with RussellKeat), The Boundaries of Understanding (ISSI, 1999); (ed., with Neil Evans)., Networking Europe: Essays on Regionalism and Social Democracy (LiverpoolUniversity Press, 2000); with Malcolm Anderson, The Frontiers of the European Union, Basingstoke and London: Palgrave, 2001. He has also editedbooks on Irish Drama and published articles in learned journals on Irish and Scottish politics and culture and on devolution.** This article was written in 2003.

EEbbeerrhhaarrdd BBoorrtt**

AABBSSTTRRAACCTT****.. Scotland, it is sometimes said, is more Euro-friendly than the rest of Britain. And,yes, some opinion polls would support that. Scotland is slightly more favourably disposed towardsthe Euro. And outright Euro-scepticism is not as thick on the ground as in the southern parts ofEngland. But the differences are pretty marginal. Scotland's love for Europe might be more fictionthan fact. And yet, as is often the case with myths, it is an important factor in Scottish politics.ii Butthe real issue for Scotland and Europe in the immediate future is its representation and participationin the governance of the European Union. With devolution in the UK, Scotland – with its ownParliament and Executive – has been firmly put on the political map of Europe. Together withsimilarly powered 'regions',iiii Scotland's Parliament and Executive are making their case for aninput of the 'third level' into a multi-level system of European governance. Is there room at the topfor Scotland and the 'constitutional regions' of Europe? The answer to this question may play asignificant role in determining Scotland's future: either as an integrated part of both the UK andEurope, or as an 'independent' state in the European Union.

SSCCOOTTLLAANNDD AANNDD EEUURROOPPEE,, OORR:: RROOOOMM AATT TTHHEE TTOOPP FFOORR''CCOONNSSTTIITTUUTTIIOONNAALL RREEGGIIOONNSS''??

committees, “the real success story…. the engine roomof a new politics”,vii have six important functions:viii

• to consider and report on the policy andadministration of the Scottish Administration;• to conduct inquiries into such matters or issuesas the Parliament may require;• to scrutinise primary and secondary legislationand proposed European Union legislation;• to initiate legislation;• to scrutinise financial proposals andadministration of the Scottish Executive (…), and• to scrutinise procedures relating to theParliament with recommendations. It is important that the committees can generate

bills, or adopt private Members' bills, and thus initiatelegislation. It makes them a proactive force of thelegislature. It is therefore not surprising that committeework takes up substantial Parliamentary time.ix By thebeginning of 2003, over 1600 committee meetings hadtaken place, fifty of them outside Edinburgh,x creatinga sense of parliamentary presence beyond the CentralBelt. The committees are, thus, an essential linkbetween the parliament and civil society, reassuring theelectorate that the Parliament is working in partnershipwith them and for their interests. The Parliament'spowerful committee structure, and the impressivenumber of 49 cross-party groups, emphasises theinvolvement of civic society in its work, offering andfacilitating contact and dialogue between thelegislature and the people it represents. The Parliament,in 2001, adapted its committee structure to ensure thatMSPs have the ability to participate fully in thisimportant and time-consuming consultative, legislativeand scrutinising role of the committees.

TThhee EEuurrooppeeaann CCoommmmiitttteeee

Despite the fact that the Scotland Act of 1998defines foreign relations and 'Europe' as a reservedmatter, i.e. firmly within the responsibility of the('sovereign') Westminster Parliament, both the ScottishExecutive (with external relations as a ministerialportfolio) and the Parliament have engaged in EUaffairs. After all, about three quarters of legislationemanating from the EU is being implemented atregional or local level.xi The committee structure of the

Scottish Parliament includes a European Committee.xiiSince March 2003, its new name – European andExternal Relations Committee – reflects the growingremit of the Committee even beyond the EU:

• proposals for European Communitieslegislation• the implementation of European Communitieslegislation• any European Communities or EuropeanUnion issue• the development and implementation of theScottish Administration's links with countries andterritories outside Scotland, the EuropeanCommunities (and their institutions) and otherinternational organisations; and• co-ordination of the international activities ofthe Scottish Administration.Of particular importance for Scotland are

fisheries and agriculture policies and structural funds.But the Committee has also taken a very active rolein dealing with issues like EU enlargement andinternal EU reform. And it played an active part inestablishing links across and beyond the EuropeanUnion between the Scottish Parliament and otherassemblies and parliaments.

SSccoottllaanndd''ss RReepprreesseennttaattiioonn iinn tthhee EEUU

In April 2002 the European Committee agreed toconduct an 'Inquiry into Scotland's Representation inthe European Union'. During the summer, theCommittee received written responses to this inquiry, inSeptember and October the Committee took oralevidence from relevant bodies,xiii and on 29 October2002 the Committee's reporters – Helen Eadie MSP(Labour) and Ben Wallace MSP (Conservative) – visitedBrussels to take part in a series of meetings with Scottishorganisations and representatives, as well asrepresentatives from the German Länder and the UK'sPermanent Representation to the EU (UKRep), basedthere. The Report was published at the end ofNovember 2002. Its main findings were:

There is an extensive range of organisations andindividuals representing Scotland in the EU, fromgovernment bodies to industry, trade unions and

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academia, networking, gathering information,analysing and interpreting emerging policies, lookingfor partners and commercial opportunities,promoting goods and services.

• The favoured approach seems to be 'TeamScotland': the endeavour to present a commonand co-ordinated voice of Scotland in the EU.• The main formal instrument for co-ordinatingelected representatives' views on European affairsis EMILE, consisting of the Deputy First Minister (asMinister with responsibility for external relations),members of the European Committee, members ofthe Committee of the Regions, Scottish MEPs,members of the Economic and Social Committee,members of CoSLA and Scotland's representativeson the Conference of Peripheral and MaritimeRegions. The principle of EMILE is worthy ofsupport, but its workings need reform to make itmore efficient. Neil MacCormick MEP (SNP) isquoted: "The EMILE Committee does not seem tohave been very effective recently. To work properly,it requires much longer-term planning ofMeetings."xiv It should meet at least twice a year,preferably coinciding with the changes in the EUpresidency.xv• Another important instrument is CALRE(Conference of the European Regional LegislativeParliaments), consisting of the chairs, speakers,presiding officers of the legislative 'federal state' ordevolved parliaments of the European Union – all inall 74 'constitutional regions' from eight countries.xviScotland at present has eight representatives (four

full and four alternate members) in the Committee ofthe Regions (CoR), established as a consultative body ofthe EU in the Maastricht Treaty of 1991, andinaugurated in 1994. Apart from the fact that the CoR ismerely consultative, there is the great diversity ofregions and localities represented in it.xvii In aprevious Report,xviii the Committee had come out infavour of an increased role for COR in EC/EU decision-making, including access to the European Courts.xix

In addition to the many representations Scotlandalready has in the EU (Executive, social partners, etc),the final recommendation is that the Scottish Parliamentacquires a distinct presence of its own in Brussels.

RReeggiioonnaall PPaarrttnneerrsshhiippss

Both the European and Externals RelationsCommittee and the Scottish Executive have beenactive in building new 'regional' links betweenScotland and other 'constitutional regions' in theEU and small states inside and outside of thepresent EU. One of the first steps the devolvedExecutive took in 1999 was the establishment ofEuropa House in Brussels, a public-privateclearing house both representing Scottish interestsin Brussels and gathering and disseminatinginformation about European initiatives and pre-legislative processes.xx In December 2000, afteran initial phase of information gathering and"learning to walk", the then Minister withresponsibility for Europe, Jack McConnell MSP(Labour), announced a "step change" in Scotland'sengagement with Europe.xxi

The first visible sign of that step change camewhen First Minister Henry McLeish signed, on 28May 2001, the Flanders Declaration, a documentexpressing the intent of seven self-governing‘constitutional’ regions’ in the EU to coordinate theirapproach to the 2004 Intergovernmental Conferenceand Berlin summit, where the input of sub-member-state legislatives into the system of Europeangovernance will be on the agenda.

On 2 May 2002 the Scottish Executive signed aProtocol of Co-operation with the Government ofCatalonia, which was substantiated in November2002 in an Action Plan signed by Deputy FirstMinister Jim Wallace and Catalan Prime MinisterArtur Mas at the Palau de la Generalitat in Barcelona.The range of co-operation envisaged reaches from e-Government through financial and economicinterchanges, education and training, combating ofdrug abuse, culture, sport, the environment, to foodand agriculture, youth and employment.xxii

On a broader level, Scotland, like the UK’s otherdevolved administrations and other European regionalgovernments, have come together to discuss matters ofmutual interest and to maximise their influence withinthe EU in the “REGLEG” group of Regions withLegislative Powers. The Scottish Executive and theWelsh Assembly Government play an active role in this

SCOTLAND AND EUROPE, OR: ROOM AT THE TOP FOR 'CONSTITUTIONAL REGIONS'?

57

group and, once devolution is restored, the NorthernIreland Executive would be likely to do so too.

During a REGLEG conference in Tuscany on 15November, the First Minister met Claudio Martini,the President of the regional government ofTuscany and signed another co-operationagreement, taking forward co-operation withTuscany, as part of the Executive strategy ofdeveloping links with regional governments.xxiiiIn February 2003, Enterprise Minister Iain Graysigned a third regional partnership agreement, thistime with North Rhine-Westphalia, focusing onbiotechnology and 'green' technology, but also onEU policies of common interest – like structuralaid and the discussions on the Future ofEurope.xxiv In addition, the Executive has, over thepast four years, established friendly contacts andexchange with the Czech Republic, the Balticstates and Scotland's Scandinavian neighboursacross the North Sea.

The Scottish Parliament and the EuropeanCommittee have reinforced and complemented these'regional' links. According to the most recent Reportof the European Committee, recent initiatives withinthe UK and across the EU include:

• The establishment of the EC-UK group(European Chairs – United Kingdom), agrouping of the European Committees of thedevolved assemblies and parliaments andWestminster which has met on four occasionsso far, discussing common interests.• Working on an agreement with the EuropeanAffairs Committee in the German StateParliament of Saxony-Anhalt with a view oncloser inter-regional co-operation, particularlyin the area of regional development funds.xxvOn 7 September 2002, after a series of successful

video conferences, the Network of RegionalParliamentary European Committees (NORPEC) wasestablished at its first meeting in Edinburgh, a nascentnetwork including, at present, the Scottish, Catalanand Flemish Parliaments' European Committees. Theyagreed to expand the activities, and to broaden itsmembership to other committees of similarly powered'regional' parliaments in the EU.xxvi

CCoonnvveennttiioonn oonn tthhee FFuuttuurree ooff EEuurrooppee

The Laeken Summit in December 2001established the 105-member Convention on the Futureof Europexxvii under the Presidency of former FrenchPresident Valéry Giscard d'Estaing. It had its inauguralsession in Brussels on 28 February 2002. TheConvention's remit was to look into four major areas:

• a better division and definition of‘competence’ in the EU: clarifying and definingwhere the EU should act, where Member Statesshould act, and where they should act together;• how to simplify the way in which EU policiesand legislation are implemented;• democracy, transparency, and efficiency in theEU;• the drafting of a Constitution for EuropeanCitizens.Its task is, in other words, to formulate solutions in

order to ensure the effectiveness of an expandingUnion in a globalised world. But it is also aboutreconnecting the citizens of Europe with theinstitutions of the EU, about enhancing the democraticlegitimacy and the transparency of the Union and itsinstitutions. It has been working on a EuropeanConstitution and produced a report in June 2003. Itsresults should, to a large extent, determine the successof the subsequent Intergovernmental Conference.

The Scottish Executive has contributed in threeways to the Convention's deliberations:

First Minister Jack McConnell delivered a speechto the European Policy Centre in Brussels on June 6,2002, entitled 'The Future of Europe Debate: AScottish Perspective'.xxviii

In Florence, on 14 November 2002, theExecutive signed a Declaration by 40 Regions withLegislative Power on the Future of Europe;

Through the work of the Committee of the Regions(CoR), including the adoption of a CoR Opinionprepared by the First Minister on 'More Democracy,Transparency and Efficiency in the EU'.xxix

At the beginning of February 2003, a paper on'Europe and the Regions' was submitted to theEuropean Convention by the UK Minister of Europe,Peter Hain, in his capacity as the UK Government'srepresentative on the EU Convention. This was a joint

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submission on behalf of the Scottish Executive, theNorthern Ireland Office, the Welsh AssemblyGovernment and the UK Government.

It concurs with the Scottish Parliament's demandfor full institutional status of "a new" Committee ofthe Regions, perhaps under a new name,xxx butemphasises the EU as a "Union of Member States,each responsible for its own internal constitutionalarrangements."xxxi It urged greater pre-legislativescrutiny, more contact between the Commission andregional administrations and a more formalinvolvement of devolved parliaments and assembliesin the UK's internal procedures under the proposed'early warning system' to monitor subsidiarity.xxxii

On 16 September 2002, the European Committeehad invited the general public to a full-day event inthe Scottish Parliament Debating Chamber. Over 120delegates met and had their say on the future ofEurope. Along with the contributions the Committeereceived on its interactive internet forum, the viewsexpressed at this 'Scottish Parliament Convention onthe Future of Europe' were incorporated into theCommittee's December 2002 Report.

The Parliament's position goes further than theExecutive's. It advocates a twenty-first century EU asa "Union of its nations, regions and its people."xxxiiiNot surprisingly, it holds that the founding principlesof the Scottish Parliament should be "used as atemplate for a new European union": power-sharingbetween citizens, legislators and executive;accountability (EU executive accountable toEuropean Parliament; Parliament and Executiveaccountable to the EU's citizens); an accessible,open and responsive EU with a participativeapproach to the development, consideration andscrutiny of policy and legislation; and equalopportunities.xxxiv

It demands a "new relationship between theCommission and the 'regions' which would see'constitutional regions' acquire the status of "partnersof the Union", as an "integral part of the EU'sstructures", "recognised as such in the Treaties andworking procedures." It also calls for the creation ofa "Regional Affairs Council" involving ministers fromthe regions with legislative powers and working

alongside the Council of Ministers. Crucially, it wants"direct access" for the legislative regions and the CoRto the European Court of Justicexxxv (while theScottish Executive, even having signed up to thatdemand in the Flanders Declaration, has repeatedlystated "that it not fully endorse the calls for the rightof access to the ECJ"xxxvi).

Giscard d'Estaing's first draft of a EuropeanConstitution did not explicitly mention theregions.xxxvii Neither did the cornerstone speecheson the future of Europe by German Foreign MinisterJoschka Fischerxxxviii and French President JacquesChiracxxxix in Berlin or Tony Blair in Warsaw.xl Thiswas particularly puzzling in Joschka Fischer's case;had the German Greens not been champions of a'patchwork Europe', a 'Europe of the Regions'? At thebeginning of the twenty-first century we findourselves a long way from the rhetoric of a 'Europe ofthe Regions' as demanded, among others, by theGerman Länder until the early 1990s.xli

The German Länder managed, during theratification of the Maastricht and Amsterdam Treaties,to secure participation and veto rights within theconstitutional framework of the Federal Republicthrough their role in the second chamber, theBundesrat.xlii There is no equivalent for Scotland.Lacking a written constitution, and given the wordingof the Scotland Act of 1998, Scotland's influence inEuropean affairs on the UK level depends on goodwill and convention.

That is one of the major differences between theearly deliberations of the Constitutional Conventionand the terms of devolution as laid down in theScotland Act. While its 1990 document demands the"statutory entitlement for Scotland's Parliament and/orExecutive to be represented in UK Ministerialdelegations to the Council of Ministers",xliii this was,in its final document, watered down to representation"in UK Ministerial delegations to the Council ofMinisters where appropriate."xliv In the White Paper of1997 the definition was clear: "Relations with Europeare the responsibility of the United KingdomParliament and Government." And: "The ScottishParliament will have an important role in those aspectsof European Union business which affect devolved


59

areas."xlv The Scotland Act confirms this "subsidiaryposition for the Scottish Parliament in Europe."xlvi

In 1999, a concordat was agreed betweenWhitehall and the Scottish Executive outlining co-operation and partnership in this section. Up to now,with a Labour-led government in power both inLondon and in Edinburgh, this seems to have worked,despite criticisms concerning the handling of theScottish fishing crisis. But the real litmus test wouldcome, if different parties formed governments inScotland and the UK – a possibility still not verylikely after the 1 May 2003 elections in Scotland, butat least thinkable under the shadow of Tony Blair'sand George W Bush's war against Iraq.xlvii

IInnddeeppeennddeennccee iinn EEuurrooppee??

The 74 self-governing regions in the EU represent56.3 % of the EU's population.xlviii As mentionedbefore, about 75 % of EU policy is delivered at regionalor local level. But there is more to it. Regions offerspecific development potentials, because they are closeto the problems which have to be solved, can musterreserves, resources and active participation.xlix Thenation state, Kenichi Ohmae has famously argued, hasbecome "an unnatural, even dysfunctional, unit fororganising human activity and managing economicendeavor in a borderless world."l He might haveslightly overstated his case. The role of the nation stateis certainly changing. Nation states are, in the phrase ofMichael Mann, "diversifying, developing, not dying."liWhat is indubitable is that regions have grown inimportance because of "their greater flexibility andcapacity to react rapidly to new economiccircumstances."lii Bernd Groß and Peter Schmitt-Egnerhave summarised the regionalist agenda succinctly:

• historically developed identities andcultural diversity can be preserved and developed;• political action becomes morecomprehensible, transparent, and democratic;• acceptance of the overarching Europeanlevel of governance is made easier; a strongerregional consciousness supports the identificationwith Europe;• regional economic fine-engineering as aregulative to economic centres can contribute to

a more equal economic development in Europe;• the so-called "third level", i.e. the regionsbesides the member states and the EUinstitutions, guarantees a vertical division ofpower, thus contributing to a harmonisation ofthe distribution of power in Europe.liiiIf reconnecting citizens with the policy-making

institutions of the EU is a priority of the Conventionand the next Intergovernmental Conference, then theaccommodation of regional aspirations towardsgaining their share in the EU's policy-making mustnot be ignored, otherwise a majority of EU citizenscould feel, at least partially, disenfranchised.

There are, basically, three routes or scenarios thatthis can be achieved by:

• By giving self-governing regions direct accessto the decision-making institutions of the EU,either by transforming the Committee of theRegions or by creating a Council of the Regionswhich would tie in the 'constitutional regions;into the governance of the EU, in an integratedmulti-level governance system.• By giving self-governing regions a share inEuropean policy-making on the member statelevel, in an EU which, then, would in alllikelihood be retaining a greater degree ofintergovernmentality, because the regions'participation in policy-making would be largelyrestricted to the member states' governance.• By transforming legislative regions into memberstates of a more or less integrated orintergovernmental EU. In Scotland's case, these options will be among

the factors which will determine whether devolutionwill turn into a settlement or whether the politicalroadmap will lead towards independence and the'break-up of Britain'.liv

Clearly, the European Committee and themajority of the Scottish Parliament are pushing for thefirst scenario, with the second as a potential fall-backoption. The Scottish Executive seems to favour a mixof the first two scenarios, with a preference for thesecond, arguing that being part of an influential bigmember state might become even more important forScotland in view of EU enlargement. At present, so

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the argument goes, Scotland enjoys the best of bothworlds. It may participate in the formulation ofEuropean policies at the UK level, but is also freeincrease its foothold in Europe and to forge strategicpartnerships in Europe in order to increase its directinfluence (as long as these endeavours to not runcounter to UK European policies).

It is noteworthy at this point that multi-levelgovernance must mean shared responsibility and fullintegration between the different levels ofgovernance – supranational, member state, regionand local. It is, as Amanda Sloat has pointed out, oneof the weaknesses of the multi-level governancediscourse that it fails to acknowledge the extent towhich member-states' governments will continue tocontrol access to the EU's political theatre, playing a'gatekeeper' role. Multi-level governance must notconfuse influence with participation.lv

While it supports any strengthening of Scotland'sprofile in Europe, the Scottish National Party's policyaims at an independent Scotland as part of theEuropean Union, and thus clearly pursues routethree. Whether this would mean a nineteenth-century-type of nation state, or a state within anintegrated, federal EU, is not absolutely clear. Thereare conflicting tendencies within the party.lvi Themajority SNP position is that an election victory ofthe party would trigger a consultative referendum on‘independence in Europe’. If the referendum werewon, this would be seen as a mandate fornegotiations with the UK Government. Anindependent Scotland would then seek a closeassociation with the other parts of the UK andIreland, but be a 'sovereign' EU member state.

The next few years will be pivotal for Scotland.There is the question of internal reform of the EU andthe debate about an EU constitution. If a satisfactory,participative role for self-governing regions inEuropean governance could be found, this wouldsupport the devolution side of the argument. If such ascenario were absent, and at the same time a dozennew member states were to join the EU as'independent' states, most of which are smaller thanScotland, then that would add ammunition to thearsenal of the independence camp.

If constitutional change in the UK progressed,creating regional assemblies in England,lvii thatwould certainly stabilise devolution and reduce someof the glaring asymmetries in the political geographyof the UK. Moreover, if House of Lords reform wouldcreate a second chamber with regionalrepresentation,lviii a quasi-federal UK could well fitinto a quasi-federal European Union.

But if these developments were stalled, and at thesame time – as looks likely – the Convention and theIGC took the stance that accommodating regionalparticipation in European policy-making was tohappen strictly within the boundaries andconstitutions of member states, while at the same timethe new EU members planted their flag at Brussels andtook their seats in the EU institutions, then the SNPwould have a persuasive case to argue, with a view ofgaining popular backing for its independence plans inthe 2007 Scottish Parliament election.

The Galician Government put it in a nutshell: "Globalisation obliges the Autonomous

Communities to become involved with foreign affairsin order to ensure their own development and tosatisfy their particular interests, so that their foreignpolicy should take into account the greater economicinterdependence between countries, the wider scopeand greater interconnection of the markets and theincreased mobility of production factors."lix

Like the autonomous regions of Spain, Scotlandwill have to play its role in European and global affairs.In the absence of real perspectives of direct access tothe European institutions, the question could be, asNoreen Burrows has put it, less about Scotland inEurope than about 'Scotland in the UK in Europe'.lxBest of both worlds, as the promoters of devolutionargue, or double blockage, as the Nationalists contend?Will Scotland have a guaranteed say in the formulationof the UK position in European policy-making? Willthere be room at the top in Europe for Scotland as a'constitutional region'? The answer to these questionswill no doubt play a decisive part in determiningwhether or not the 'Break-up of Britain' is on the cards.


61

NNootteess

i Brian Taylor, Scotland's Parliament: Triumphand Disaster, Edinburgh: Edinburgh University Press,2003, pp.267-68.

ii "regional" is not a preferred term in the Scottishpolitical discourse, as Scotland is a nation; yet, inEuropean discourse, 'region' seems to fit the bill for aself-governing, legislative or 'constitutional' sub-stateterritory.

iii Consultative Steering Group (CSG), ShapingScotland's Parliament, Edinburgh: The ScottishOffice, 1998, p.3.

iv See Alice Brown, 'Designing the ScottishParliament', Parliamentary Affairs, 53, 3 (July 2000),p.549.

v A phrase first used by the then First MinisterHenry McLeish in September 2001.

vi Ron Davies, Devolution: A Process Not anEvent, Cardiff: Institute of Welsh Affairs, 1999.

vii Mark Irvine, 'Triumph of consensus, notcombat', New Statesman, 5 June 2000.

viii CSG, Shaping Scotland's Parliament,1998,p.26.

ix Mike Watson, Year Zero: An Inside View of theScottish Parliament, Edinburgh: Polygon, 2001, p.165.

x Fewer than initially anticipated, but financialconstraints apparently did not allow for a greaterspread of sessions across the country. Yet, thecommittees made good use of video conferencing tolink up to even the remotest parts of Scotland.

xi Scottish Parliament European Committee, 5thReport 2002: An Inquiry into Scotland'sRepresentation in the European Union' , 21November 2002, p.13.

xii Under the convenership of Irene OldfatherMSP (Labour), it has the following 8 members: SarahBoyack (Lab), Colin Campbell (SNP), DennisCanavan (Ind), Helen Eadie (Lab), John HomeRobertson (Deputy Convener, Lab), Lloyd Quinan(SNP), Nora Radcliffe (Lib Dem) and Ben Wallace(Con, plus two substitute members: Winnie Ewing(SNP) and Tavish scott (Lib Dem).

xiii Among them, the Scottish Council forDevelopment and Industry (SCDI), Scotland Europa,the Council of Scottish Local Authorities (CoSLA),

and the Scottish Executive's European Union Office.xiv Scottish Parliament European Committee, 5th

Report 2002, p.12.xv Ibid., p.18. Time-tabling of EMILE was

changed in 2002 to coincide with the start of EUpresidencies.

xvi Apart from the Scottish Parliament (asobserver), the National Assembly for Wales and theNorthern Ireland Assembly, the parliaments of theSpanish autonomous communities, the Italianregional councils, the assemblies of the Belgianregions and communities, the parliaments of theAustrian Länder and of the German Länder, theautonmous parliament of Åland (Finland) and theregional assemblies of the Azores and Madeira(Portugal).

xvii The range of the present 222 membersreaches from 18 mill-strong Northrhine-Westphaliato the smallest of Greek local councils – the 74 self-governing regions are far outnumbered by localauthorities.

xviii Scottish Parliament European Committee,9th Report 2001: Report on the Governance of theEuropean Union and the Future of Europe: What Rolefor Scotland? Volume 1 - Main Report, 11 Dec 2001.

xix Ibid., p.28.xx See Peter Lynch, Scottish Government and

Politics, Edinburgh: Edinburgh University Press,2001, pp.159-61.

xxi Jack McConnell, 'Tide turns for Europe',Scotland on Sunday, 3 December 2000.

xxii www.scotland.gov.uk/pages/news/2002/11/p_SEJD141.aspx

xxiii www.scotland.gov.uk/pages/news/weekly/000255.aspx

xxiv www.scotland.gov.uk/pages/news/2003/02/SEet272.aspx

xxv Scottish Parliament European Committee,5th Report, p.7.

xxvi Ibid., p.19.xxvii The Convention comprises representatives

from each of the national governments andparliaments, the European Commission, theEuropean Parliament, the 13 candidate countries,and from non-governmental organisations and

EBERHARD BORT

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academia. Former French President Valery Giscardd'Estaing is the chairman, flanked by two formerprime ministers – Giuliano Amato of Italy andBelgium's Jean-Luc Dehaene – as his deputies.

xxviii www.scotland.gov.uk/about/FCSD/ExtRel1/00014768/page1239857280.aspx

xxix www.scotland.gov.uk/pages/news/2003/01/p_SEjd200a.aspx

xxx Names mentioned are 'Congress of EuropeanRegions', 'Convention of European Regions', or'European Assembly of Regions'. Scottish ParliamentEuropean Committee Briefing Paper, 'ExecutiveResponse to the Committee's Future of EuropeReport, 19 February 2003, p.7.

xxxi Ibid., p.4.xxxii Scottish Parliament European Committee,

Convener's Report:Annex A 'Meeting with Rt. HonPeter Hain MP', 20 February 2002, p.2.

xxxiii Scottish Parliament European Committee,6th Report, p.10.

xxxiv Ibid., p.11.xxxv Ibid., pp.11-12.xxxvi Scottish Parliament European Committee

Briefing Paper, 'Executive Response to theCommittee's Future of Europe Report, 19 February2003, p.3.

xxxvii Stephen Castle, '"We, the people ofEurope…": The document that will shape our futures',The Independent, 7 February 2003.

xxxviii Joschka Fischer, 'From Confederacy toFederation: Thoughts on the finality of Europeanintegration', Speech by Joschka Fischer at the HumboldtUniversity in Berlin, 12 May 2000, www.europa-digital.de/aktuell/dossier/reden/ fischer.shtml

xxxix Jacques Chirac, 'Notre Europe',www.elysee.fr/cgi-bin/auracom/aurweb/search/file?aur_file=discours/2000/RFA0006D.html

xl Tony Blair's Warsaw speech ' 'A superpower,but not a superstate', see The Guardian, 7 October2000. Full text: www.scotlandeuropa.com/DOWNLOAD/SPEECH%20PM.doc

xli See Alfred Geisel, 'The Future of Europe:Federalism – Regionalism – Centralism', in EberhardBort and Neil Evans (eds), Networking Europe: Essayson Regionalism and Social Democracy, Liverpool:

Liverpool University Press, 2000, pp.39-52.xlii See Roland Sturm, Föderalismus in

Deutschland, Berlin: Landeszentrale für politischeBildungsarbeit, 2001, pp.pp.117-37.

xliii Constitutional Convention, TowardsScotland's Parliament, Edinburgh, November 1990.

xliv Constitutional Convention, Scotland'sParliament, Scotland's Right, Edinburgh:Constitutional Convention, November 1995, p.16.

xlv UK Government White Paper, Scotland'sParliament, The Scottish Office, July 1997.

xlvi Brian Taylor, Scotland's Parliament, p.272.xlvii See Iain Macwhirter, 'War schemes could

leave Scottish Labour the loser', The Herald, 26February 2003; also Jason Allardyce and MurdoMacLeod, '"Don't mention the War"', Scotland onSunday, 23 February 2003.

xlviii 'The Role of Regions with legislative powerin the EU', Contribution from Mr Kimmo Kiljunen MP(Finland) and 14 other signatories for the EuropeanConvention, 4 and 7 October 2002, CONV 321/02Annex, p.2.

xlix Bernd Groß and Peter Schmitt-Egner, Europaskooperierende Regionen: Rahmenbedingungen undPraxis transnationaler Zusammenarbeit deutscherGrenzregionen in Europa, Baden-Baden: Nomos,1994, pp.19-20.

l Kenichi Ohmae, 'The Rise of the Region State',in Foreign Affairs, 72, 2 (1993), pp.78-87; p.78.

li Michael Mann, 'Nation-States in Europe andother Continents: Diversifying, Developing, notDying', in Daedalus, 122, 3 (1993), pp.115-40.

lii James Scott, Alan Sweedler, Paul Ganster andWolf-Dieter Eberwein, 'Dynamics of TransboundaryInteraction in Comparative Perspective', in JamesScott et al (eds), Borders and Border Regions inEurope and North America, San Diego: San DiegoState University Press, 1997, pp.3-23; p.5.

liii Groß and Schmitt-Egner, p.27.liv See Tom Nairn's seminal The Break-up of

Britain, London: New Left Books, 1977.lv See Amanda Sloat, Scotland in Europe,

Frankfurt: Peter Lang, 2002, especially Ch.2.lvi See Jo Eric Murkens with Peter Jones and

Michael Keating, Scottish Independence: A Practical


63

Guide, Edinburgh: Edinburgh University Press, 2002,pp.1-3.

lvii The first regional assemblies are expected tobe elected perhaps as early as 2005 or 2006, but notall regions in England favour self-government. See JohnTomaney and Peter Hetherington, 'England Arisen?', inRobert Hazell (ed.), The State of the Nations 2003: The

Third Year of Devolution in the United Kingdom,Exeter: imprint Academic, 2003, pp.49-77.

lviii Re-introduced by Jack Cunningham MP intoa debate dominated by the dispute concerning theratio between elected and nominated members in areformed House of Lords. See Ben Russell, 'Plan forregions to elect upper house',

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65

IInnttrroodduuccttiioonn

As we know, neither the concept, nor the meaningof international competitiveness are unanimouslyaccepted. They are rather controversial issues.

In spite of disagreements, laying between denyingthe relevance of international competitiveness(Krugman, 1994) and the opinion of considering it ofcrucial importance to each country’s standard of livingand even to its future (Dunning, 1995; Porter, 1990),the international competitiveness issue is analyzed byinternational forums (see, Global economic forumreports on competitiveness), and is included inprojects on future economic development (see, five EUCompetitiveness Reports of 1998, 1999, 2000, 2001,2002). Views on the competitiveness concept and onits meaning are to be found in hundreds of articles,research studies etc., and the interest on thecompetitiveness issue seems to be rising. Moreover,the idea of competitiveness is not limited to the levelof states and companies anymore. Since the markets

are increasingly global, and their competition rules arealso global, competitiveness concerns even to naturalpersons who are employed by companies competingand operating on a global scale (Hirst and Thompson,2002, p.137). Therefore, competitiveness is currentlystrongly connected to globalization, which compelseconomies to shift from comparative advantages,based rather on natural factors endowment andspecialization of Hecksher-Ohlin type, to competitiveadvantages, based on new factors such as innovation,flexibility, location, institutional development etc. Theabove mentioned also explain, according to Hirst andThompson, the two different approaches of thecompetitiveness idea: the classical approach, whichtakes into account the relative unit of labor cost andthe ‘ability of selling’, being mainly based oncomparative advantages; and the new approach,which takes into account the local attractiveness forinvestors, being mainly based on competitiveadvantages.


EEUU PPOOLLIICCYY RREEGGAARRDDIINNGG TTHHEE CCOOMMPPEETTIITTIIVVEENNEESSSS IISSSSUUEE

* Maria Bârsan is a Professor at Babes-Bolyai University, Faculty of European Studies in Cluj-Napoca, where she currently delivers courseson European Economic Integration. She received a post-graduate degree in Advanced European Studies from the European College in Bruges,Belgium, and a PhD in Economics with the Faculty of Economic Sciences in Cluj-Napoca. Publications in the field of International EconomicRelations and European Economic Integration.

MMaarriiaa BBâârrssaann**

AABBSSTTRRAACCTT:: This article deals with one of the most important, but also challenging economicissues nowadays, which is economic competitiveness. The literature is not unanimous inrecognizing the importance of competitiveness, especially where it concerns the state level.However, the relevance of international competitiveness is increasingly brought into light bytheory, specific policy measures and by periodical evaluations made by internationalorganizations. Against this background, the EU is one of the main players whose position is stilllagging behind the USA, and, according to recent evaluations, behind the other OECD countries.The European Council in March 2000, held in Lisbon, had launched a very inciting challenge –that of transforming the EU economy into the most competitive and dynamic knowledge-basedeconomy in the world, by 2010. Such an ambitious target requires an evaluation of thecompetitiveness level and also new measures to be taken in order to accomplish this objective.

The article presents opinions on the EU competitiveness issue, and on the main weak andstrong points, concluding that even the target and especially the schedule seem to be unrealistic,the new direction of action, i.e. towards better business conditions for enterprises being correct.

KKEEYY WWOORRDDSS:: competitiveness, EU economy, Industrial policy, EU competitiveness policy,globalization

Models of competitiveness analyses have beendeveloped in order to stress upon factors that arerelevant to competitiveness. Naturally, as in anyexplicative models, the comparative and competitivefactors might act at the same time. The stress laid byone country on one or another of these factors issignificant for its economic evolution and degree ofopenness towards the integration into the globaleconomy. It is also a matter of understanding thechallenges of globalization.

What is widely accepted is firstly the idea thatcompetitiveness is not an aim per se, but rather a wayof creating more jobs and income; secondly, the ideathat two levels of competitiveness - national and ofcompanies, or the macro and micro levels – can beapproached; thirdly, a trade-off between the twolevels may be brought forth.

Undoubtedly, national competitiveness, expressedby various macroeconomic indicators such as theGDP/inhabitant or by national productivity levels suchas the GDP/employed person, the economic structureand the trade performance, is mainly based on thecompanies’ competitive advantages in relation withother companies. How to become competitive at themicro level – it is essentially a marketing andmanagement matter, and it is usually studied in thatcontext. The results at the macro level, and the mannerin which policy measures can contribute to betterresults obtained by companies are the other side of thecoin. The general economic context – the economicstructure, macroeconomic policies, sector strategies,performance incentives etc. – influences, sometimesdecisively, the companies’ external competitiveposition. Based on the above mentioned, comparisonsare made not only between national economies (see,European Commission, European Economy No 3/97;World Economic Forum, Global CompetitivenessReport 2002-2003), but between companies on theglobal market as well. What is strictly national in aworld becoming more and more interdependent is afrequently asked question.

All these facts clearly indicate that thecompetitiveness issue matters for all countries –developed or less developed, EU members orcandidate countries. For the new comers into the EU,

competitiveness is the way of efficient integrationinto a more and more competitive economy, the wayof making progress in catching-up or at least inreducing the development gap.

How does the picture of a competitive economygenerally look nowadays? Evaluations made by meansof the so-called “Growth competitiveness index” (seeGlobal economic forum, Report on 2002-2003) showthat a country is really competitive only if it wassuccessful in moving from the specialization ofHecksher-Ohlin type - which is based on comparativeadvantages in cheap labor, in rich but cheap naturalresources, therefore in primary goods, or based oncomparative advantages in exports supported by adepreciated currency -, to competitive advantageswhich should be based on the high quality of goods,innovative capacity, high salaries but also highproductivity, therefore on manufactured and complexgoods, or to competitive advantages based on a strongcurrency, but compensated through other advantagessuch as unit costs reduction. Competitive advantagesimply macroeconomic stability, strong competition,but an attractive business environment as well.

The Growth competitiveness index is evaluatedtaking into account three broad variables, which aregrowth drivers on medium and long term. They aretechnology, public institutions, and themacroeconomic environment. All these factors,according to Porter (Porter, 2003), increaseproductivity, which is the only solution for sustainingprosperity and a high standard of living. Actually, thelist of competitiveness factors and their action in agiven country clearly express the attractiveness of therespective country. Enterprises play an essential rolein providing innovation, quality of goods, inincreasing productivity etc. The level of nationalcompetitiveness indicators is nothing else than theresult of enterprise competitiveness. An active role ofthe Government cannot be denied, but this role refersespecially to support for education, training, supportfor research and innovation, to the improvement ofthe business environment through appropriatemeasures such as education, legal framework forconsumer protection, rules for setting up and runningbusinesses, environment protection etc.

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The competitiveness issue has usually beenapproached as part of what is called “industrialpolicy”. An overview of the long list of industrialpolicy meanings as it has been developed in theliterature can be found in Jovanovici (see Jovanovici,1997, pp.172-174). The industrial policy, as any othereconomic policy, cannot be conceived but as a director indirect intervention to achieve a certain objective.The most synthetic objective is the increase of theincome/inhabitant. To this expression we might addthe increased income in circumstances of sustainabledevelopment, a concept that is widely promotednowadays, and is also the core of the EU Lisbonstrategy. This is a generic definition only. What makesthe difference between industrial policies is thephilosophy on means of intervention – from the moststrict forms of direct protection of certain economicactivities, invoking the well-known arguments suchas jobs creation and maintaining or balancing theexternal trade etc., to the limitation of intervention tosetting up competition rules, releasing the marketforces to lead activities towards reaching theobjective. Hence, the various types of industrialpolicies were discussed as direct or indirectmeasures. The industrial policy has never beenpromoted in a “pure” type, but rather as acombination of two approaches, one of them beingdominant. The notion of “strategic industries” hasoften been used to designate what sectors should beprimarily developed. Such a notion is certainlyassociated to rather direct intervention in favor of“selected” strategic sectors. Which sectors are“strategic” in a country and in a certain developmentstage is something to be well defined according toeconomic evaluation and world development trends.The political philosophy regarding the economicpolicy is certainly the essential base in tailoringwhich should be the sectors to be promoted andwhich should be the most appropriate means to doso. However, as experience had clearly shown,intervention in favor of generally declining sectorsdiminishes the chances of supporting the “strategicsectors”. More and more, the meaning of industrialpolicy is that of measures oriented mainly onenterprises, on the business environment, and less if

not at all on “running and directing” the sectors andbranches from the center.

When an accession country enters a newbusiness environment, this raises the problem ofsurvival chances for already existing industries. Therewere voices in the candidate countries stating that akind of “de-industrialization” is massively takingplace in these countries. Indeed, the former industries,which had been created in very different conditions,are to be restructured. The candidate and accedingcountries are currently approximating andimplementing the “acquis”, which implies an internalreform according to this legislation. This is the point inwhich we must consider the role of a new industrialpolicy which, on the one hand, has to create fairconditions for the business environment – the onlyone capable to change things from the “bottom” and,on the other hand, must provide indirect supportthrough policies of macroeconomic stability, throughso-called “intangible investments” – education,research, infrastructure, including IT -, and provideequal opportunities to all those who wish to compete,instead of spending public funds in declining sectors.This means creating free and fair market conditions.

All the abovementioned clearly show that thecompetitiveness issue matters for all countries –developed or less developed. It matters very much tothe EU, and certainly to the ten acceding countries thatare about to conclude the accession formalities or tothe candidate countries such as Romania and Bulgaria,which have to continue their preparations foraccession hopefully in a few years. The degree ofefficiency of their integration into the EU economydepends, beyond any doubt, on their competitiveness.

Which is, in this context, the link between theindustrial policy and competitiveness? Attaining theobjective of industrial policy implies increasingcompetitiveness. The world economy is not a “noman’s land”, but rather an “occupied” room, a spacein which every participant tries to locate as well aspossible, to obtain economic growth at nationallevel, to reach profitability at the enterprise level. Thetwo sides can use different means to reach theobjectives, but they can beneficially inter-link or, onthe contrary, undermine one another.

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Keeping this general context in mind, this articleaims to analyze the EU policy on competitiveness:the evolution from industrial policy to enterprise andcompetitiveness policy, the main measures beingtaken or recommended to the member states and/orby the EU, the present EU concern regardingcompetitiveness at EU level in the context ofglobalization and increased competition.

The methodological approach consists in ageneral overview on main EU documents,declarations and measures regardingcompetitiveness, which have been promoted over thepast 10 years, i.e. from January 1993, the momentconsidered as the general completion of theInternal/Single market, to 2003, when the issue ofcompetitiveness became even more present in theofficial speeches and measures.

In the first part, the article includes a shortpresentation of the shift from the old industrial policyto a new industrial and competitiveness policy. Anoverview of the EU legal framework for thecompetitiveness policy is included in this part. Sincethe efficiency of the EU policy in the competitivenessfield can be evaluated only by comparing the EUcompetitiveness level with those of its competitors,the article pursues with the analyses of the EUposition in this field, and with the presentation of itsstrong and weak points. Concluding remarksunderline the main findings and also offer a possibleexplanation for such findings. The main directions offuture developments can easily be understood.

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The EU concern with competitiveness is not ofrecent date. It can be noticed in the framework ofindustrial policy during the 60s and 70s. What haschanged in time is the approach and the meansimplemented in order to promote thecompetitiveness of certain sectors or goods. Initially,the industrial policy was seeking to protect sectors indifficulty (see Sarfati, 1998), which involved thus thepromotion of an anti-competitive role. Along with the

world trade liberalization and, especially with thetrade liberalization and integration of markets in theprocess of setting-up the Internal Market, a newindustrial policy became necessary, and it has beendirected towards developing free competition. Theold protectionism, especially as the “infant industry”argument, could not be promoted anymore bydeveloped countries. Still, the “new industrial policy”didn’t give up the old approach completely from thevery beginning. Several branches, important foremployment in certain developed countries, werekept under protection for a while (steel, textiles,shipbuilding etc.). On the other hand, in theframework of WTO, openness has been widelyencouraged not only among developed countries,but towards world trade as well.

However, an important step forward was takenwith the establishment of a Community EnterprisePolicy by the 80s. A new Directorate General incharge of developing enterprise policy was set up in1989. This Directorate has worked closely with theDirectorate for Competition policy, in order tocontribute to the creation of conditions for faircompetition and to discourage the abuses ofdominant position. On the other hand, theDirectorate for Enterprise Policy promotedencouraging measures aiming to sustain the setting-up and functioning of SMEs. A real strategy in favorof growth, competitiveness and employment wastailored in the document entitled White Paper onGrowth, Competitiveness and Employment, in 1993,which was followed by an Integrated Program and aMulti-annual program for SMEs, for the period 1997-2000. It should be mentioned that Communityregulations provided for support as state aids forSMEs. Where the large companies are concerned, theidea of encouraging the setting-up of “national orEuropean champions” was widely promoted.

A real shift from the old approach of industrialpolicy to a new industrial and competitiveness policyhas been developed after 1994, with the evaluationsand proposals made in favor of a new industrialpolicy by the Bangemann Report (Commission,1994). This new industrial policy consisted inreorientation from promoting sectors supporting

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measures to policies supporting general conditionsfor development and competition that are also called“horizontal measures”. They are meant to secure anappropriate framework for business. The state aidshave been reconsidered, and more strict rules ofawarding this kind of support have been elaboratedand implemented. The enterprise policy focused onpursuing market liberalization inside the InternalMarket (telecommunication services, publicprocurement), which brought along more freecompetition. For the first time, the EU enterprisepolicy clearly put on the agenda the need ofenforcing the development of the R&D policy.Programs such as the European Strategic Program forResearch and Development in InformationTechnology (ESPRIT), the Research and DevelopmentProgram in Advanced Communications Technologiesand Services (ACTS), especially in the top fields ofinformation and biotechnology, were aimed atenforcing the international competitiveness ofEuropean enterprises between 1995 and 2000.Obviously, the research activity in these fields needsstrong, large companies, able to undertake researchactivities and to implement the research results inpractical actions. Measures in favor of SMEs – seen asan engine of growth and job creation – have alsobeen more strongly promoted.

The objectives of the EU industrial andcompetitiveness policy appeared as contradictory: onthe one hand, the need for so-called “Europeanchampions”, able to compete with the “giants” onthe world market, was evident; on the other hand, theneed to develop the SMEs, and their important role inthe economy was also pressing. Actually, the twotypes of companies might cooperate well on asubcontracting basis. Still, in the EU policy, theemphasis began to fall more on enterprise policy, onthe business environment for SMEs.

Evaluations made by the end of 90s on theprogress in developing the research activity and inimplementing it in the economic activity haveindicated shortcomings to be eliminated: lowexpenditure on R&D, and hence an insufficientnumber of researchers; limited funding sources fornew technologies in Europe; insufficient links

between university research and the businessenvironment; many barriers to setting-up newenterprises. Even if the situation has changed for thebetter, many of these shortcomings continue to existand to undermine the competitive power of Europeanenterprises. This can be seen in the state ofcompetitiveness resulting from the most recentevaluations.

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The EC Treaty clearly stipulates in Article 2 thatthe task of the European Community is to promote“…a harmonious, balanced and sustainabledevelopment …and a high degree ofcompetitiveness”. Economic development and highcompetitiveness were to be strongly connected to thepromotion of free competition and open marketeconomy. By regulating the meaning of freecompetition in the EU economy, the Treaty involvesimplicitly the enterprise policy. In the same context,the Treaty regulates the conditions of awarding stateaids – as derogation from the general prohibition ofstate aids. Conditions for enabling companies toobtain state aids concern aid for environmentprotection or for restructuring companies, regionalobjectives, but also for certain industries in difficulty.This provision, in spite of the stipulation that state aidis not to affect the trade between Member States, wasmeant to provide the basis for the industrial policy inthe very classical meaning of the concept. It alsoinvolved protection against non-members states.

More than thirty years after the Treaty of Rome orthe Treaty on the European Communities, the Treatyof Maastricht, also addresses to the competitivenessissue in several articles.

The European Commission was assigned theobligation of evaluating the EU competitiveness, andof initiating the appropriate measures at the EU andstate levels. Reports on competitiveness have beenissued since 1998, the sixth report being currentlycompleted. The last two reports were complementedby the Enterprise Policy Scoreboard, and the 2001report by an Innovation Scoreboard as well.


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The European Council in Lisbon from March2000 set forth a very high objective. It focuses onturning the European Union into “the mostcompetitive and dynamic knowledge-basedeconomy in the world by 2010, capable ofsustainable economic growth, with more and betterjobs and greater social cohesion”. Such an objectiverequired more specific targets, and measures to reachthese targets (see Lisbon Strategy: Dimension ofCompetitiveness, in the Lisbon Review 2002-2003).A roadmap for the implementation of the LisbonStrategy in 2001-2009 was also elaborated. The stepsto be taken are actually those of completing theInternal Market and making it more effective forbusiness – from simplifying the regulatory system,continuing liberalization in fields such as publicprocurement, electronic commerce, electricity andgas, postal services, all financial services, to thecreation of Single European Sky. It should be notedthat some of these targets were not reached in duetime and others were not fulfilled at all.

A Competitiveness Council (CC) has recentlybeen set up to replace the former Industry, InternalMarket and Research Councils. The CC aims atpromoting an integrated approach ofCompetitiveness to be developed by theCommission. Periodically, the CC shall providereviews of EU competitiveness policies especially onmicroeconomic reforms, it shall provide policyguidelines, and “push” policy makers into the bestdirections of competitiveness improvementmeasures. Obviously, the new body was created tocontribute to the speeding up of the rise of the EUcompetitiveness level in the world economy.

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The level of competitiveness cannot be evaluatedotherwise than by comparison with thecompetitiveness levels of the competitors in the worldeconomy. In order to have a picture of the EU positionon the global competitive scale, we took into

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CountryGCI

RankingTechnology

Index

Ranking PublicInstitution Ranking

MacroeconomicenvironmentIndex

Ranking

1. Finland 2 3 1 14

2. Sweden 5 4 15 34

3. Denmark 10 11 2 31

4. United Kingdom 11 15 6 16

5. Germany 14 12 14 22

6. Netherlands 15 15 10 19

7. Austria 18 23 11 23

8. Spain 22 24 26 15

9. Portugal 23 13 21 40

10. Ireland 24 31 18 9

11. Belgium 25 22 22 26

12. France 30 28 29 28

13. Greece 38 39 44 47

14. Italy 39 39 37 27

Table 1. Ranking the EU competitive positions on GCI in 2002

Note: Data on Luxembourg is not included.Source: Cornelius, P.K., Executive Summary, in Global Competitiveness Report 2002-2003.

consideration the two categories of indices that weremeasured and published by the Global EconomicForum in its latest report (see Global CompetitivenessReport 2002-2003). They are as follows: GCI (GrowthCompetitiveness Index), which takes into account thefactors that are considered growth drivers nowadays,i.e. technology, public institutions and themacroeconomic environment, and MICI(Microeconomic Competitiveness Index), which takesinto account company operations and strategy, andthe quality of the national business environment. Therepresentation of the EU countries looks as follows:

In the table included in the Report, the USA isplaced at the top of the list, followed by Finland for2002. First of all, the data indicates an important gapbetween the USA and the EU as a whole;unfortunately, a certain gap also exists between theEU countries: the best-placed are the Northerncountries, at a significant distance from the worstplaced in this group.

Which are the most dynamic and innovativesectors? According to the above-mentioned report,the information and communication technology –

hard and soft data- mainly explains this competitiveposition. Comparative data on the number ofresearchers in the total workforce also places Finland– 10,92/1000 - on the first rank in Europe (John deBoer, Glocom Platform, 2002).

One might notice that the EU countries are notfirst ranking neither in terms of the general GCI, norof the component indices, except for the Publicinstitutions in the case of Finland. Even in this lattercase, there was a decline as compared to theprevious year, when Finland ranked first according tothe GCI index. Since the level of this index is seen asthe perspective for growth on medium term, i.e. fiveto eight years, the above-mentioned statement is analarming one. It also implies that the competitive gapbetween the USA, which is the top country, and theEU will not disappear in the next five to eight years,unless drastic changes take place in the Europeaneconomies.

The macroeconomic competitiveness dependsessentially on microeconomic operations. The EUranking according to the microeconomic index andcomponents is shown in the following table.


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Table 2. EU ranking in microeconomic competitiveness in 2002Country MICI

Ranking

Company operations

and Strategy Ranking

Quality of the National

Business Environment

Ranking

1. Finland 2 4 1

2. United Kingdom 3 3 2

3. Germany 4 2 4

4. Sweden 6 5 8

5. Netherlands 7 8 10

6. Denmark 8 9 9

7. Austria 12 12 12

8. Belgium 13 11 15

9. France 15 10 21

10. Ireland 20 15 22

11. Italy 24 18 24

12. Spain 25 22 25

13. Portugal 36 41 32

14. Greece 43 47 41

Note: Luxembourg was not included in the Global report.

Source: Cornelius, P.K., Executive Summary, in Global Competitiveness Report 2002-2003.

The findings are very similar to those based onMCI: the USA ranks first, while the EU countries arenot placed on the very top positions, except, again,Finland, but for only one indicator, which is thequality of the national business environment.However, several EU countries are better placed andquite close to the top positions based on theMicroeconomic competitiveness index. This might bean encouraging sign concerning the improvement ofthe general business environment in the EUcountries, and also the expression of a new attituderegarding the “industrial policy”.

The Lisbon Council set out the EU economic andsocial areas requiring actions in order to reach theobjective of the EU becoming the most competitiveeconomy. These areas are the Information Society,Innovation, Research and Development;Liberalization (Completing the Single Market and theissue of State aids), Network industries(telecommunications, utilities and transportation),Efficient and Integrated Financial Services; Enterpriseenvironment (conditions for start-ups, regulatoryburden); social inclusion (life-long learning;modernizing social protection), Sustainabledevelopment (environment, climate change).Comparisons made on Lisbon Scores between theEU, the USA and the other OECD countries (seeLisbon Review 2002-2003) clearly show that the EUis lagging behind on all “indicators” exceptmodernizing social protection. Surprisingly, the EUhas a poor standing even concerning climate change- one of the two components of sustainabledevelopment that is seen as the core of the Lisbonprocess. Again, there are well-performing countriesinside the EU, which are the same countries as in theworld forum report, and less performing countries.Finland appears as the best performing country in allthe fields of the Lisbon Strategy, and Greece as theworst performing country in every respect.

It was not for the first time that such ratherpessimistic findings were revealed. In its report “Anindustrial competitiveness policy for EuropeanPolicy”(Bulletin of the European Union, Supplement3/94), the Commission identified a kind ofcontradiction in the EU situation: on the one hand,

the EU had made significant progress as compared tothe beginning of the period, and positive results doexist even by comparison with its competitors; on theother hand, the industry as a whole and themacroeconomic factors show the loss ofcompetitiveness in the EU. There were severalcountries in the EU which had performed better, andcountries which had performed worse. One“explanation” was that the comparisons were madeon a narrow number of indicators, and thatcompetitiveness is a very “complex” problem (see theabove mentioned report, p. 41), or that thecomparison was made in a recession year. Anotherremark was that there were countries and companiesin the EU which were performing at the internationallevel of competitiveness. Moreover, the reproach wasthat the analysis neglected the service sector in theEU economy, which stands for a considerableamount in the national product and is also aninnovative one. To put it differently, the EU wouldhave had many assets and conditions for being ableto compete successfully. The objective for the EUeconomy set out by that time was of becoming “morecompetitive” on the world economy stage.

The results obtained more than seven yearslater reported indeed a more competitive EUeconomy, in comparison with the initial year, butnot more competitive if we compare the EU with itscompetitors in the world economy. This lattercomparison reveals the real meaning ofcompetitiveness. Moreover, one might notice that,based on the most recent figures, the situation israther similar.

Certainly, no one would deny that the EUeconomy has a huge development potential. Still, it isquite obvious that the EU keeps having a problem inthe competitiveness field.

Based on the above findings, we went further andtried to pick up from EU official evaluations and othersources the strengths and weaknesses in the EU situationconcerning competitiveness, to put these findings in acomparative sheet, and then to formulate some remarks.We took only certain aspects that characterize the EUarea as a whole even if, as it was noticed, the situationof the indicators might substantially differ from the states

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at the top to those at the bottom in this ranking.Certainly, there are many factors explaining the lowercompetitiveness in the EU, and they are taken asweaknesses. Some other factors act in the rightdirection, namely of improving competitiveness, andthey are considered as the strengths.

The outcome of this exercise is shown in Table 3,and several remarks are made in the text followingthe table.

The evaluation carried out in the five EU

Competitiveness Reports between 1998-2002, andother comparative evaluations (see Global Economicforum, Glocom Platform etc.) reveal the weaknessesin the EU economies, which mainly explain the slowcomparative growth.

a) The productivity level is the main indicator ofnational competitiveness. From this point of view,there is a competitive gap between the EU and theUSA Thus, the GDP/capita of the EU was only 70%of the USA’s in 1990, and this gap has not dropped


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since, but quite the opposite. The GDP/capitadropped to 65% in 2001 (Lemonidis, 2002) or to69% (European competitiveness report 2002, p.19).According to the 2002 report, the gap increasedbecause the growth rate of the real GDP was only2.4% in the EU while in the USA it was 3.6% in1995-2001. The explanation consists in the higher rate ofproductivity and of employment in the USA than inthe EU. Lower productivity and lower employmentrate in the EU are alarming issues, according to theEU Commissioner Liikanen (see Liikanen, p.2, 3rdDecember 2002).

Why is productivity lower in the EU? Theexplanation can only be the lower use of factors that arefeeding productivity and the increase of employmentnowadays, i.e. the speed of technological progress –innovation, diffusion of knowledge and implementationof innovation. It is the “new economy” that has to bemore present in all EU countries, not only in a few ofthem. Much support seems to be needed to encourageinnovation. This factor is connected to the number ofresearchers that is much lower in the EU than in theUSA, but also with the lack of or too low amount ofventure capital in the EU countries (see EuropeanCommission, Competitiveness and benchmarking, p.7).Slow development in the quality of the businessenvironment, especially for SMEs - access to finance,open market, entrepreneurship, administrativeenvironment, business legislation (Lemonidis, 2002,p.3) – might also partially explain the situation.

b) The EU had always strongly connectedcompetitiveness with its commitment to create jobs.The Lisbon Council set out the target of creating about20 million new jobs or an increase from a 60%employment rate to 70% by 2010. Unemploymentwas caused by specific reasons in different periods (seethe European Commission, 5 December 1993). At thebeginning of the 90s, the high interest rate, monetaryinstability and budgetary unbalances were identifiedas the main causes. One expected that the creation ofthe Single/Internal Market as the widest market in theworld, based on free competition and harmonizedrules, should have been accompanied by the creationof new jobs, as a result of increased structural changeand higher economic growth. Usually, the jobs were

created in conditions of structural change and highgrowth. Now, the problem is that the new structuralchanges are not necessarily accompanied by anincrease in the total number of jobs (see Growth,1993, p.1), but rather by the creation of jobs in thenew non-classical sectors such as IT, replacing the lostjobs in classical sectors. What has really been noticedin the EU is the shortage of labor in the IT field,together with the unemployment generated by othersectors. Therefore, there is a “normal” structuralunemployment, generated by the mismatch of thesupply and demand of labor in the ICT sectors.Economic recession added extra pressure in the samerespect. The solution seems to be re-launchingeconomic expansion accompanied by more emphasison new directions of professional training. The labormarket rigidity is certainly another factor blocking newjob creation. A European flexible labor market couldabsorb unemployment, at least partially.

c) Macroeconomic equilibrium and stability arevery important conditions for economic growth. Theyinvolve the inflation rate and the interest rate,external balances and exchange rate fluctuations,budgetary equilibrium, and the public debt. TheMaastricht Treaty stipulates several convergencecriteria for participation to the monetary union. Inspite of obvious improvements of themacroeconomic stability in the euro area, someimbalances such as budget deficit and high publicdebt are still present in certain countries. Keeping theinflation rate at the limit of 2% in circumstances ofinflationary pressure required a higher interest rate,which discouraged investments. Therefore, muchinterest has been shown to ensuring more balancewhere it was missing. Macroeconomic equilibrium isa necessary support for a single monetary policy anda favorable macro environment for growth, but it isnot per se a factor of economic growth. Growth isgenerated by a combination of growth factors at theenterprise level. Therefore, more emphasis wouldhave also been needed on improving the conditionsfor enterprises.

d) The beneficial effect of market liberalizationon business is beyond any doubt. In the EU, the mainconcern focused primarily on the goods market

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liberalization, which has generally been achievedsuccessfully. The most and often excessivelyregulated were the service sectors. In this field, theprocess of harmonization and liberalization wasdelayed, and positive effects are still to produce moreevidence. Fragmented markets continue to exist inbusiness services such as legal counseling,consulting, computer services, employment law,advertising etc. (EU competitiveness report, 2002, p.72). Therefore, in spite of progress being made, theprocess of market integration is not completed, thusaffecting the competitiveness.

e) Undoubtedly, becoming the most competitiveknowledge-based economy, as the EU stipulated in theLisbon Council, depends mainly on the researchactivity, which “produces and exploits knowledge”.The number of researchers is the starting indicator.According to the EC evaluation (quoted in Boer de,2002), the number of researchers in the total workforceis only 5.3/1000 in the EU, whereas it is 9.0/1000 inJapan and 8.1/1000 in the USA. At the same time, theincrease rate of the number of researchers is higher inthe EU than in Japan and the USA. The number ofscience and technology PhDs is also higher, and thisshows the potential for future researchers.

The number of researchers and the quality of theresearch activity are closely connected with the levelof public and private investments in R&D, expressedby the share of R&D expenditure in the GDP. Thefigures in this field were 1.92% for the EU, 2.91% forJapan, and 2.61% for USA (Boer de, 2002, p. 2). TheEU has recorded the highest share of totalemployment in industries of high technology, whichis also a promising situation. Also strongly connectedto competitiveness is the market share of exports inhigh-tech. Thus, the EU high-tech’s share of exports isonly about 60% of the USA’s (Lemonidis, 2002, p.3).The situation is similar in what concerns thepercentage of the industry’s contribution to theresearch funding, and the share of governmentbudget allocated to R&D: only 1.99% of EUgovernment budget expenditure, but 3.86% in thecase of Japan, and 4.2% in the case of the USA. TheEU is lagging much behind the USA and Japan. Thecauses might be, as the latest competitiveness report

admitted (2002 report, p.26), more deeply rootedand they concern the comparative numbers ofschooling years and the level of education in thedevelopment of human capital.

There is a gap, as we have already mentioned,not only between the USA, Japan and the EU, butamong the EU countries as well. Based on theresearch indicators, the best placed are the twoNordic countries Finland and Sweden. This explainsthe progress made by these countries. Ireland is alsoa good example of progress coming from the wideexpansion of Information and CommunicationTechnology.

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There is a visible change of attitude from theCommunity institutions concerning the competitivenessissue. Nowadays, increasing competitiveness is seen asa challenge by the EU, especially in the circumstancesof globalization and of strong competition from the USAand Japan. The competitiveness gap is an alarming issue,and the measures being taken until now proved to beeither inefficient, or insufficient.

Therefore, a new debate on the industrial andcompetitiveness policy (see Conference-debate January2003) was launched. The debate is seen as necessarybecause the conditions for competitiveness are differentnow from those existing at the beginning of 90s, inmany respects (see Conference debate, January 21,2003). Such new conditions relate to the key role ofglobalization; increased integration of the EU financialmarket; changes in economic development induced byICT; special emphasis laid on the issue of sustainabledevelopment; and the enlargement process, which isexpected to have an impact on all EU components,including the industrial policy.

To overcome the situation, a “holistic” approachwas strongly recommended (Liiken, 2002), whichshould include all factors – technological (innovation),economic and the human dimension.

Competitiveness is approached mainly in theframework of enterprise policy, and it related toeconomic growth and employment. The companiesshall be the “target group” for policies aiming to


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increase the productivity level. Research projectsbeing promoted by certain countries focused on whatis important for those who want to increaseproductivity: innovation, flexibility in organizationand life-long learning.

The recent re-launch of debates has naturallyincluded the industry representatives that are thelargest companies in Europe. Their opinions on thecauses of slow progress in reaching the Lisbonobjective converge essentially indicated the lack of ortoo slow implementation of the measures required toreach this objective (see, The European Challenge;Message from the European Round Table ofIndustrialists to the Spring European Council, March2003). Thus, innovation and R&D, which are “cruciallylinked to competitiveness and in turn to creating jobs”(J. Ollila, Nokia), are suffering in Europe because of atoo limited level of expenditure in R&D (only 1.9% ofGDP, against more than 3% spent by competitorcountries, and against 3% stipulated by the EuropeanCouncil in Barcelona); moreover, there iscomparatively low expenditure in research in the topfields such as ICT, lack of skilled labour force, under-funded and under-motivated universities, lowcoordination in R&D among centres of excellence.There is an insufficient connection betweenuniversities and the economy, which actually meanslack of entrepreneurial culture. The performance gapbetween the EU and USA is widening, and manyEuropean companies opted to invest outside the EU.

The solutions proposed by industrialists arederived from the above findings, and they refer tostrong commitments and actions: increase in publicspending in R&D, investments in centres ofexcellence, improved legislation on intellectualproperty; ongoing simplification of the legislationand improving the other policies involved(competition, enterprise policy etc.), the industrialand competitiveness policy being actually a cross-policy matter.

If failing to change dramatically the situation in

the next few years, Europe is “condemned to playingan increasingly declining economic and politicalrole”, concluded the industrialists (The EuropeChallenge, March 2003, p. 4)

CCoonncclluuddiinngg rreemmaarrkkss

The achievements of the EU economy are neitheras they had been set out, nor as they could have beengiven the EU dimension or potential. The gap to beovercome is not only between the USA and the EU,but also between the two groups – high performersand low performers – of countries inside the EU.

The remark that must be made is actually rathera question, hopefully not a tabu one: might we reallytalk about one single EU economy? Has theeconomic integration process advanced so far to thepoint of completed integration of all the marketcomponents, and is it possible that not diversities, butdifferences are blocking factors? It is quite obviousthat important markets are not well integrated andthey are not functioning properly: labor market,financial services, e-economy etc. The legalframework provided by the EU Directives is notimplemented at the same range in the EU Memberstates, thus indirectly generating marketfragmentation. Therefore, waste of potential seems tocome from the uncompleted integration process.

In spite of the important number of initiatives atEU level, the reaction of the member states is ratherslow. This could be a signal that the European modelof running too many economic dimensions from thetop level might be less efficient. The principle ofeconomic subsidiarity has very good grounds ofimplementation in the European great variety anddiversity. The speed of changes depends essentiallyon the actors placed on three levels in the EUintegration process: the EU institutions, the Memberstates, the companies and the local authorities. Thepromoters of new initiatives have to behaveaccording to their position in this scheme.

MARIA BÂRSAN

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