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. However, the exclusion of the agricultural and fisheries instruments means that the Funds providing assistance under the cohesion policy are nowadays limited to the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Cohesion Fund. Hence, the Cohesion Fund is now fully integrated into the programming of structural assistance, a fact that should increase the coherence in the intervention of the various Funds.
The greater regional diversity of the Union [see section 12.1.1] and the expansion of its land and sea borders after the enlargements of 2004 and 2007 have increased the importance of transnational and interregional cooperation in the Union. Therefore, the cohesion policy of the EU was completely revised in 2006. Regulation 1083/2006], repealing Regulation 1260/1999, lays down the general rules governing the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Cohesion Fund [see also Regulation 1989/2006]. Regulation 1083/2006 defines the objectives to which the Structural Funds and the Cohesion Fund are to contribute, the criteria for Member States and regions to be eligible under those Funds, the financial resources available and the criteria for their allocation. It determines that the resources available for commitment from the Funds for the period 2007 to 2013 shall be EUR 308,041,000,000 at 2004 prices, indexed at 2% per year. It also defines the context for cohesion policy, including the method for establishing the European strategic guidelines on cohesion, the national strategic reference framework and the process for examination at European level. To this end, Regulation 1083/2006 lays down the principles and rules on partnership, programming, evaluation, management, including financial management, monitoring and control on the basis of responsibilities shared between the Member States and the Commission. The EU strategic guidelines on economic, social and territorial cohesion serve as an indicative framework for the Member States for the preparation of the national strategic reference frameworks and operational programmes for the period 2007 to 2013 [Decision 2006/702].
According to Regulation 1083/2006, cohesion policy should contribute to increasing growth, competitiveness and employment by incorporating the Union's priorities for sustainable development as defined at the Lisbon European Council of 23 and 24 March 2000 [see also Regulation 1989/2006 and section 13.3.2] and at the Göteborg European Council of 15 and 16 June 2001 [see section 16.2]. On the other hand, the improvement and simplification of cooperation along the external borders of the European Union entail the use of the instruments of the Union's external assistance, in particular a European Neighbourhood and Partnership Instrument and the Instrument for Pre-Accession Assistance established by Regulation 1085/2006. Therefore, these actions are closely aligned to Structural Fund and Rural Development practices.
According to Regulation 1084/2006, repealing Regulation 1164/94, assistance from the Cohesion Fund shall be given to actions in the following areas, according to the investment and infrastructure needs specific to each Member State receiving assistance: (a) trans-European transport networks, in particular priority projects of common interest [Decision 661/2010, see section 6.8]; and (b) the environment within the priorities assigned to the European environmental protection policy under the policy and action programme on the environment [see section 16.2]. Assistance from the Fund may be suspended if the Council has decided in accordance with Article 126 § 6 of the TFEU (ex Article 104 § 6 TEC) that excessive government deficit exists in a beneficiary Member State, and has established that the Member State concerned has not taken effective action in response to a Council recommendation. However, Regulation 1311/2011 facilitates financing from the structural funds for certain Member States experiencing or threatened with serious difficulties with respect to their financial stability.
With growing European integration, the Union increasingly shares responsibility with the Member States for the maintenance of the European model of society. This model reflects the values of the social market economy, which seeks to combine a system of economic organisation based on market forces, freedom of opportunity and enterprise with a commitment to the values of solidarity and access for all members of society to social protection and services of general interest. Therefore, the policies of economic and social cohesion, which are linked with the objectives of the European model of society, are considered to be a factor in strengthening the productivity of European society and contributing to economic and social wellbeing [see also section 13.2].
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.