Cohesion Policy of the European Union aims to reduce economic and social differences between the Member States of the Union by supporting and encouraging regional development. The Treaty of Rome and the Single European Act promote decreasing differences in the regional development while regional policy provides investments for necessary restructuring in the less developed regions and support for infrastructure development, increase of employment, and stimulation of industry. To finance projects that contribute to the regional development cohesion and structural funds are used, which account for a third of the common budget of the European Union (Chalmers & Dellmuth, 2014).
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The key objectives of regional development are regional competitiveness and employment, and european territorial cooperation (European Commission). The effort are focused on facilitating increased growth and convergence of the least developed member states and regions with the goal of increasing the regional competitiveness and thus improving cooperation with other European regions. In order to promote regional development, the European Union has secured additional financial assistance for member states through various funds. Cohesion Fund is intended for countries which need to meet the convergence criteria. The European Regional Development Fund, as one of the main financial instruments of the EUs cohesion policy, and European Social Fund, Europe’s main tool for promoting employment and social inclusion, are called structural funds and are aimed at strengthening economic and social cohesion in the European Union and at the reduction of differences in development between the regions.
Kyriacou and Rocca-Sagales (2011) found that the Structural Funds reduced regional disparities in the period from 1995 to 2006. Beugelsdijk and Eijffinger (2005) and Ederveen (2006) also confirmed positive impact of structural funds on consumption and growth of GDP per capita, but only in countries with developed institutions. Effect of the use of structural funds to decrease regional differences is potentially reversed if transfers are above a certain limit (about 1.6% of gross domestic product). This has implications on the desirable allocation of resources in future, especially since, in the last programming period (2007-20113), transmissions to all new member states except Cyprus and Malta exceeded the given threshold. Popa (2012) points out that although there are examples of good practice of the use of EU funds, they often represent more a financial burden then they truly serve as a mean of reducing regional disparities, which is their goal.
Reforms of funding in the new programming period 2014-2020 have the potential to improve the efficiency of the use of the funds, but significant effects of their use cannot be expected in the absence of structural reforms, given the constraints in monitoring the use of funds in different countries and the difficulties in establishing irregularities and potential illegal use of funds (Chalmers & Dellmuth, 2014).
Most authors agree that after 20 years of implementation of the EU Cohesion Policy its effectiveness remains questionable (Bachtler et al., 2015). In fact, in theory, the allocation of EU funds needs to be designed so to ensure that the poorer regions receive more funds. In practice, the allocation and the distribution of funds was under the influence of lobbying, the unwillingness of regional authorities to absorb funds, as well as of the lack of resources and incentives for the European Union to question the political motives for the selection of projects at the local level (Dellmuth & Stoffel, 2012).
1. REGIONAL DEVELOPMENT FUNDING
European Regional Policy was adopted by the European Commission in 1965, followed by the creation of the Directorate-General for Regional Policy in 1968. In 1972, Regional Policy was recognized as “an essential factor in strengthening the Community” (European Commission).Regional policy has focused from its very start on promoting balanced regional development. The resources from the cohesion and structural funds are to be used primarily to minimize the differences in development between regions of the European Union as well as differences in the standard of living of citizens of these regions.
Among the main objectives of the regional policy in the programming period from 2000 to 2006 were the development and structural adjustment of those regions whose GDP per capita was lower than 75% of the EU average, the economic and social conversion of areas facing structural difficulties and adjustment and modernization of the national policies and educational systems, as well as training and employment. For the financing of the regional development policy the European Commission established the European Regional Development Fund (ERDF), whose objective is the elimination of regional disparities and promotion of a stable and sustainable development, the European Social Fund (ESF), aimed at developing human resources and employment, financial instrument for Fisheries guidance (Financial instrument for Fisheries guidance – FIFG), whose goal is a balanced water resources management and development of the competitive infrastructure, and European Agricultural Guidance and Guarantee Fund (EAGGF), whose goal is to support the Common agricultural policy and the improvement of agricultural structures and rural development.
From 2007 to 2013, the number of funds was reduced to three (ERDF, ESF and the Cohesion Fund), and the emphasis was placed on the less developed regions, to achieve greater growth and higher employment rate. The European Regional Development Fund (ERDF) aims to strengthen economic and social cohesion in the European Union. European Social Fund (ESF) aims to increase employment and increase opportunities for finding a job in the European Union.
The Cohesion Fund is intended for Member States whose gross national product per capita is less than 90% of the Union’s and aims to support economic and social development, and helps to bring stability to the economic system of the less developed countries. Given that the three main objectives of EU regional policy are convergence, regional competitiveness and employment and European territorial cooperation, Cohesion Fund primarily supports convergence and, although it is the subject to the same rules of programming, management and monitoring as well as the structural funds and plays a similar role, the Fund has been primarily used to provide means for adjusting the national economies of the countries which had decided to introduce a common currency, and to relieve national budgets of the poorer member states. Investments in the areas of transport, environmental protection, achieving energy efficiency and use of renewable energy sources are usually financed from the Cohesion Fund.
For example, through the four national programs for Croatia, 10.74 billion Euro from the European structural and investment funds has been allocated in the period from 2014 to 2020. Croatia has a total budget of 12.67 billion Euro for investments into research and innovation, employment, education and training of employees, as well as for social inclusion projects, project in the public administration and civil society, as well as infrastructure projects and projects related to the protection of the environment Protection (http: / /ec.europa.eu, 2016).
The management of the Structural Funds and Cohesion Fund is based on the principles of programming, concentration, co-financing and partnership. Programming is the process of allocation of structural funds in accordance with the defined objectives and criteria over a certain period of time. Concentration involves directing funds to where they are most needed. Co-financing means that part of the investment has to be obtained from domestic sources, while partnership implies close cooperation between Member States and the European Commission.
Since the implementation of the Cohesion policy requires developed institutional framework, each state chooses one of three approaches for the implementation of the Cohesion policy – differential approach, which is characterized by the separating the structures for the implementation of cohesion policy from the regular government bodies (for example, The Netherlands, Sweden, United Kingdom), the unique approach, whereby the funds are directed through the national, or regional ministries and agencies (for example Austria, Spain, parts of Germany and most new Member States) and the combined approach, which represents a combination of the previous two approaches (for example Finland, France and Italy). The choice depends on the existing administrative arrangements and levels of funding.
2. INSTRUMENT FOR PRE-ACCESSION ASSISTANCE
Instrument for Pre-Accession Assistance ( IPA) is the program for the countries which are in the process of accession to the Union. Pre-accession funds are intended to facilitate the economic and social transformation, which are included in the conditions for the admission to the Union.
From 2000 to 2006, countries in the process of accession to the EU had access to financial instruments called PHARE (Pologne et Hongrie – Aide á Restructuration Economique), ISPA (Instrument for Structural Policies for pre-Accession), SAPARD (Special pre-accession assistance for Agriculture and Rural Development), and CARDS (Community assistance for Reconstruction, Development and Stabilisation). From 2007 to 2013 total IPA budget amounted to 11.468 billion Euro (narr.gov.rs). Instrument for Pre-Accession Assistance consists of five components (narr.gov.rs):
- Transition Assistance and Institution Building. The first component of the IPA aims to provide support in the process of accession to the European Union, especially in meeting the criteria and standards imposed by the accession, transposition of the legislation and, in particular, the strengthening of the institutional capacity.
- Cross-border cooperation. The objective of this component is to promote good neighborly relations and regional cooperation between traditionally less developed regions in the countries which engage in the joint cross border projects;
- Regional Development. The third IPA component aims to improve economic and social cohesion through the development of the transport infrastructure, particularly the development of national transport networks and trans-European networks, protection of the environment including policies such as waste management, management of water supply and waste water, as well as the monitoring of air quality, the rehabilitation of polluted areas, achievement of energy efficiency and renewable energy sources, and the development of regional competitiveness by fostering entrepreneurship and employment.
- The development of human resources. This component aims to contribute to economic and social cohesion and to achieving the priorities of the European Employment Strategy in the areas of employment, education, training and social inclusion.
- Rural Development. This component provides support for sustainable agricultural and rural development by improving market efficiency and facilitating the adoption of the EU standards, provides support for the establishment of producer groups and investments in the processing and marketing of agricultural and fishery products, as well as the implementation of best practices in the field of environmental protection and improvement in agriculture and development of rural infrastructure.
All five components of IPA can be used by the country with the status of candidate country and which has implemented decentralized system of management of EU funds (Decentralized Implementation System – DIS), while the potential candidate countries and those candidate countries which have not yet accredited DIS have access to funds from the first and second components of IPA (narr.gov.rs). Management of EU funds under Decentralized Implementation System is approved after meeting criteria and conditions defined by the European Commission.
The first component of the Instrument for Pre-accession assistance is related to the transition assistance and the development of institutions, and it decreases as the country’s economy develops and gets closer to the European standards, practices and the membership of the Union. The second component of the IPA is related to Cross-Border Cooperation. Third IPA Component is a predecessor of the Cohesion Fund, while the fourth and fifth IPA components are precursors of the today’s structural funds. IPA funds are not used exclusively for the implementation of institutional projects, but are also used for the preparation of the country for the accession through the implementation of prescribed objectives, principles.
IPA beneficiary countries are divided into two categories (ec.europa.eu):
- Candidate countries for EU (Turkey, Albania, Montenegro, Serbia and the former Yugoslav Republic of Macedonia) are eligible for all five components of IPA;
- Potential candidate countries in the Western Balkans (Bosnia and Herzegovina, Kosovo under UN Security Council Resolution 1244/99) are eligible only for the first two components.
Instrument for Pre-Accession Assistance – IPA II 2014-2020 was established by the European Parliament and the Council Regulation no. 231/2014 of 11 March 2014 and applied retroactively from January 1, 2014. IPA II is the successor of the IPA for the period 2014-2020 and has a budget of 11.7 billion. Users of IPA II are: Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Kosovo, Montenegro, Serbia and Turkey (http://ec.europa.eu).
IPA II Regulation determines that the European Commission and the beneficiary of IPA II are to conclude general agreements on the implementation of the aid, which defines the rules for the implementation of the Union’s financial assistance under the IPA II, primarily in relation to the management of IPA II, including the rules of programming, implementation, financial management, monitoring, control and audit, reporting and protection of financial interests.
One of the major changes in the structure of the IPA II, which, instead of the 5 components comprising the IPA I, is the introduction of the policy areas. Policy areas within the IPA II are (PejoviÄ‡ et al., 2014):
- Reforms as part of preparations for EU membership and institutional and capacity building;
- Socio-economic and regional development;
- Employment, social policy, education, promotion of gender equality and human resource development;
- Agriculture and rural development;
- Regional and territorial cooperation.
The most important innovation in the IPA II is its strategic focus. Each country should prepare a specific strategic planning document for the period of 7 years, which will enable faster integration, reform and development programs, and ensures a focus on the priorities in terms of regional cooperation.
IPA II aims to facilitate the reforms in the context of pre-defined sectors. These sectors include areas closely related to the enlargement strategy, as well as democracy and governance, the rule of law, growth and competitiveness. This approach promotes structural reforms that are expected to help the governments to transform the given sectors and to successfully conduct harmonization with EU standards. In this way, the European Commission wishes to ensure the efficiency of the fund, sustainability and their focus on results. IPA II focuses on measuring the effects and monitoring the realization of expected results.
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IPA II aims at achieve four specific objectives. The overall objective is to support the beneficiary countries in adopting and implementing the political, institutional, legal, administrative, social and economic reforms that are required from them in order to conform with the values of the European Union and to ensure gradual alignment with the rules, standards, policies and practices for achieving full membership in the EU.
The specific objectives of IPA II are (PejoviÄ‡ et al., 2014):
- Support for political reform: strengthening democracy and the rule of law, including an independent and efficient judiciary; promotion and protection of human rights and fundamental freedoms, respect for the rights of minorities, including LGBT people, promoting gender equality, prohibition of discrimination and fostering tolerance, and freedom of the media and cultural diversity; regional cooperation and good neighborly relations; the promotion of reconciliation and confidence building measures; the fight against corruption and organized crime; strengthening public administration and good governance at all levels; capacity building measures to improve law enforcement, border management and implementation of migration policies; the development of civil society; improving social dialogue and strengthening the capacity of the social partners.
- Support the economic, social and territorial development with focus on smart, sustainable and inclusive growth: reaching the EU standards in the economy, including a functioning market economy and fiscal and economic governance. Economic reforms are necessary in order to face competitive pressure and market forces within the EU, and which at the same time contribute to the achievement of objectives in the field of social rights and environmental protection; promotion of employment, mobility of workers and the development of human capital; improving social and economic inclusion, in particular of minorities and vulnerable groups, including people with disabilities, refugees and displaced persons; fostering an inclusive and integrated education system and the protection and restoration of cultural heritage; development of physical capital, including infrastructure improvements and connecting with the networks of the EU and the region; strengthening research, technological development and innovation capacity.
- Strengthening the capacity of recipient countries at all levels to fulfill the obligations arising from the membership in the EU by supporting progressive alignment with the EU acquis and their adoption and implementation, including preparation for managing structural and cohesion funds as well as funds intended for agriculture and rural development.
- Strengthening of regional and territorial cooperation to help beneficiary countries.
3. EFFECTS OF FINANCING
During the programming period 2007- 2013, over 80% of the budget of the Cohesion Fund was allocated in the 100 poorest regions, with about 170 million people – or one third of the EU population. The remaining 18.5% of the money is distributed to other regions in the Union (http://www.euractiv.com, 2012). According to the European Commission, in the next programming period 2014-2020 less than 70 regions will automatically qualify for the funds that are used to finance the convergence, as they have GDP per capita below 75% of the EU average. Regions in transition – those who have a GDP per capita between 75% and 90% of the EU average will get less funds, but still can count on continued support from the Structural Funds (http://www.euractiv.com, 2012 ).
Figure 1: Regions by the development level in the programming periods 2007-2013 and 2014-2020.
Source: Chalmers & Dellmuth, 2014
In the 2014-2020 programming period it is expected that 25% of structural funds will be allocated in less developed regions (red in Figure 1), 40% in regions in transition (yellow in Figure 1), and 52% in the developed regions (blue in Figure 1. ). As for the Cohesion Fund, the funds from it will continue to support the development of member countries with GDP per capita of less than 90% of the EU-27 average, but will primarily be allocated to support investments in projects related to environmental protection and the development of transport. Part of the funds from the Cohesion Fund will focus on the financing of transport networks in Europe.
Given that the capacity to absorb depends on the institutional factors, both in the EU and in the Member States (Georgescu, 2010; Voinea, et al, 2010), but also on the ability of regional authorities to co-finance projects and provide administrative support (Zaman and Georgescu, 2009), the possible effects of the use of structural funds are difficult to predict.
According to the research, structural funds can boost GDP growth in the countries of Central and Eastern Europe from 0.1. to 0.7% per annum (Zaman & Georgescu, 2009). Analyses of the effects of the use of the funds in the programming period 2000-2006 show that there has been some reduction in the differences between countries in GDP per capita, while in some regions growth was recorded. Zaman and Georgescu (2009) found that the structural funds boost export growth, and that in some cases, like in Romania, they led to economic growth, despite relatively low absorption capacity.
Positive impact was also made in Austria, Belgium and France. However, according to Becker (2012), countries with low levels of education, weak institutions and poor governance did not make equally successful use of the funds. Thus, receiving more support from the Structural Funds does not necessarily mean development. For example, Pisani-Ferry et al (2011) found that inadequate institutional framework in Greece to be a reason for the inability of its government to efficiently use the funds assigned to it.
Theoretically, objectives of the regional policy of the European Union necessitate the existence of the financial support for the less developed regions to achieve the desired growth. However, in practice, during the distribution and the use of the funds many problems were encountered. Access to funds for underdeveloped regions did not lead to the desired growth, primarily because of the inability of the governments to use the allocated funds due to weakness of the institutions and low capacity. In more developed regions, the effects of the funds were much more significant. Changes in the programming period 2014-2020 are expected to solve part of the problems identified in the previous periods. However, declining return on invested funds and high dependence of a large number of the regions from external funding sources continue to threaten the achievement of the basic objectives that these funds are meant to support.
Although raw data show that the Structural Funds have not always been successful in fighting the problems at all levels and in all countries. However, as many people are still unemployed in the EU, and there are full member countries whose GDP is still well below the EU average, the Structural Funds are necessary. The same goes for the Cohesion Fund, as it ensures faster accession of the candidate countries. These funds were designed to reduce the inequalities in the regional developments, and although they might not have been efficient in all cases, they certainly supported the growth in some regions, provide incentives for other regions to improve their capacity to access the funds and accelerate the growth.
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