The wider European market reinforces the polarisation of pre-existing economic activities and thus accelerates the agglomeration and concentration process. If measures were not taken at national and European level, the completion of the internal market would tend further to widen existing inequalities in the distribution of economic activities throughout the territory of the EU. That is why, the objective of economic and social cohesion, implying the desire to reduce disparities between the various regions of the Community, was introduced by the Single European Act [see section 2.1]. On top of the single market, the achievement of economic and monetary union promises enhanced prospects for the developed and the less favoured regions alike. The reduction of trans-frontier transaction costs and the elimination of exchange rate risk may promote regional specialisation and intra-European trade in goods and services. The weaker regions can benefit from this specialisation by exploiting more fully their comparative advantages. Furthermore, increased capital mobility in EMU, supported by the single currency and the tendency towards quasi-uniform inflation rates, tends to equalise interest rates for any given level of risk, which should favour the less developed regions where capital is often relatively scarce and capital costs, therefore, relatively high.
At the same time, however, Member States participating in the euro-zone lose certain fiscal and monetary policy options as well as the ability to adjust the exchange rate. Exchange rate flexibility is important in that, in principle, it enables a country, through devaluation, to offset a loss in international competitiveness in a relatively painless manner. As such, it facilitates short-term adjustment to general or country-specific economic shocks. The removal of the possibility of exchange rate adjustment, therefore, represents a more important loss to the least developed countries of the euro-zone, which are the ones that must carry out the most important structural changes. Those countries must invest most, while spending least so as to conform to the Maastricht criteria and to the requirements of the Stability and Growth Pact [see section 7.2.4 and 7.3.2].
In addition, those countries could lose the advantage of lower labour costs. As long as markets were protected by customs and other barriers, salaries in certain countries were much lower than in others, compensating for the lower productivity of a labour force that was not very qualified. But in a common market, and even more in an economic and monetary union, freedom of movement for workers, better information on respective situations, and trade union demands tend to align revenues towards the levels already attained in the more prosperous regions. This may be a positive outcome from a social point of view but it is one which engenders inflationist tendencies and creates difficulties for businesses in areas where productivity is low. If these businesses have to shut down, the workers lose their jobs and their revenue increase is merely an illusion.
From both an economic and social point of view, neither the weakest member countries nor the European Union can tolerate a substantial part of their patrimony being left to underdevelopment because of economic integration. The prosperity of certain areas of the union cannot be paid for by the decline or stagnation of other areas. Wide disparities are intolerable in a community, if the term is to have any meaning at all. Furthermore, disparities do not just imply a poorer quality of life for the disadvantaged regions, but indicate a failure to take advantage of economic opportunities that could benefit the Union as a whole.
For all these reasons, the Treaty on the European Union states that one of the objectives of the Union is to promote economic, social and territorial cohesion, and solidarity among Member States (Article 3 TEU). In order to promote its overall harmonious development, the Union shall develop and pursue its actions leading to the strengthening of its economic, social and territorial cohesion aiming at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions (Article 174 TFEU). The formulation and implementation of the Union's policies and actions and the implementation of the internal market shall take into account these objectives and shall contribute to their achievement. The Union shall also support the achievement of these objectives by the action it takes through the Structural Funds, the European Investment Bank (EIB) and the other existing Financial Instruments (Article 175 TFEU). A Cohesion Fund shall provide a financial contribution to projects in the fields of environment and trans-European networks in the area of transport infrastructure (Article 177 TFEU).
The Protocol on economic, social and territorial cohesion, annexed to the treaty of Lisbon, specifies that the Member States agree that the Cohesion Fund will provide Union financial contributions to projects in the fields of environment and trans-European networks in Member States with a per capita GNP of less than 90 % of the Union average which have a programme leading to the fulfilment of the conditions of economic convergence as set out in Article 126 (/TFEU). The Member States affirm their willingness to modulate the levels of Union participation in the context of programmes and projects of the Structural Funds, with a view to avoiding excessive increases in budgetary expenditure in the less prosperous Member States. They also declare their intention of taking greater account of the contributive capacity of individual Member States in the system of own resources, and of examining means of correcting, for the less prosperous Member States, regressive elements existing in this system (Protocol No 28).
Initially the "Structural Funds" included the European Regional Development Fund (ERDF), the European Social Fund (ESF), the European Agricultural Guidance and Guarantee Fund (EAGGF) - Guidance Section, and the Financial Instrument for Fisheries Guidance (FIFG). After the reforms of the common agricultural and the common fisheries policies, in 2005, the instrument providing aid for rural development, namely the European Agricultural Fund for Rural Development (EAFRD) [see section 21.5.1], and that of the fisheries sector, namely the European Fisheries Fund (EFF) [see section 22.4] have been integrated into the instruments under the common agricultural policy and the common fisheries policy. They must be coordinated with the instruments under the cohesion policy, but are not included in those instruments. The Structural Funds should take complementary action over and above that of the EAFRD and of the EFF to promote the economic diversification of rural areas and of areas dependent on fisheries. All these Funds were reformed, in December 2013, in order to uphold the new cohesion policy of the Union for the years 2014 to 2020.
Regulation 1303/2013 [last amended by Regulation 2015/1839 and Decision 2014/190] establishes common provisions for the European Structural and Investment Funds (ESI Funds), in order to ensure coordination and harmonise implementation of the Funds providing support under cohesion policy, namely the European Regional Development Fund (ERDF) [Regulation 1301/2013, see section 12.3.3], the European Social Fund (ESF) [Regulation 1304/2013, see section 13.3.3] and the Cohesion Fund [Regulation 1300/2013, see section 12.3], the European Agricultural Fund for Rural Development (EAFRD) [Regulation 1305/2013, last amended by Regulation 2015/791, see sections 21.3.3 and 21.5.1] and the European Maritime and Fisheries Fund (EMFF) [COM/2013/245, see section 22.4]. In addition this Regulation contains general provisions which apply to the Structural Funds, namely the ERDF and the ESF, which together with the Cohesion Fund are referred to as the 'Funds'. Specific provisions are provided for the support from the European Regional Development Fund to the ''European territorial cooperation goal'' [Regulation 1299/2013 and Decision 2014/366, last amended by Decision 2014/805] and ''Investment for growth and jobs goal'' [Regulation 1301/2013].
Inside the framework of Regulation 1303/2013 [last amended by Regulation 2015/1839 and Decision 2014/190], the Cohesion Fund established by Regulation 1300/2013 provides a financial contribution to projects in the fields of: (a) environment, namely energy efficiency and renewable energy; and (b) trans-European networks in the area of transport infrastructure. Trans-European transport network (TEN-T) projects supported by the Cohesion Fund are to comply with the guidelines established in Regulation 1315/2013. The Cohesion Fund supports those Member States whose GNI per capita, measured in purchasing power parities (PPS) and calculated on the basis of Union figures for the period 2008-2010, is less than 90% of the average GNI per capita of the EU-27 for the same reference period.
The unprecedented global financial crisis and economic downturn have seriously damaged economic growth and financial stability and provoked a strong deterioration in financial, economic and social conditions in certain Member States [see section 7.3.3]. As pressure on national financial resources was increasing, steps were taken urgently to alleviate that pressure through the maximal and optimal use of the funding from the Structural Funds and the Cohesion Fund. Thus Regulation 1311/2011 allowed the increase of interim payments from the Funds by an amount corresponding to ten percentage points above the actual co-financing rate for each priority axis for Member States which were facing serious difficulties with respect to their financial stability and had requested to benefit from this measure. The co-financing rate increased by 10 percentage points is to apply with regard to the 2014-2020 programming period until 30 June 2016, when the possibility of the increase is to be reviewed [Regulation 1297/2013].
It should be stressed that the objective of economic and social cohesion means a great deal more than the mere redistribution of funds to the poorest Member States and regions. It requires coherent action through a coordination of national and common economic policies. Therefore, the common regional policy has two wings. Firstly, it seeks to coordinate national regional policies by formulating guidelines and establishing certain principles in order to avoid distortion of competition between Member States through their regional aid schemes. Secondly, it coordinates the various policies and financial instruments of the EU to give them a "regional dimension" and thus more impact on regions most in need of care. These two wings of the common regional policy are examined in the rest of this chapter.