Introduction to European Economic Integration Lecture 8 Regional policy Competition policy

I. EU Cohesion and Regional Policy

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• Income distribution: very uneven across Europe – Luxembourg 257% EU 28 average GDP per head (2013) – Bulgaria 28% of EU28 average GDP per head • But income distributions even more uneven at regional level (within countries)

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Diversity in development levels: GDP per capita (PPS, EU-28=100, 2013)

Minimum: 28 Maximum: 257

source: Eurostat 4

Regional aspect –GDP per capita (PPS, 2011), EU28=100

Minimum: 20 Maximum: 321

Source: Eurostat 5

Where does the economic activity take place?

Source: brokings.edu

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Centralized economic structure in the EU Centrality of EU25 Regions Periphery Intermediate Core

Coreperiphery structure

Source: Baldwin &Wyplosz (Baldwin site) 7

Map of less favorised regions, European Community, 1964

Source: http://ec.europa.eu/regional_policy/ 8

Top NUTS2 regions

Region

Inner London Luxembourg Région de Bruxelles-Capitale Stockholm Hamburg Hovedstaden Île de France Groningen

GDP per capita, EU28=100

347 320 247 224 209 209 204 201

Source: Eurostat

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Least prosperous regions in the EU, 2011

Region BG31 - Severozapaden BG32 - Severen tsentralen BG42 - Yuzhen tsentralen RO21 - Nord-Est BG33 - Severoiztochen BG34 - Yugoiztochen RO41 - Sud-Vest Oltenia

GDP per capita, EU28=100 13 14 14 15 17 17 19

Source: Eurostat

PL: lubuskie = 26, mazowieckie 63

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Spatial polarization in the EU-28 countries • According to the European Commission, the socioeconomic disparities have doubled since the accession of new member states in 2004/2007. • At the one end of the spectrum, we find the regions in the European Pentagon (London, Paris, Milan, Munich and Hamburg) , which covers only 14% of EU territory, but accounts for 32% of the population and produces 46% of EU GDP. • At the other end we find 64 peripheral regions, representing a quarter of Europe's population, having a GDP of less than 75% of the EU average. 11

Labour productivity (GDP per person employed ) 2012, EU27=100

Source: Eurostat 12

Unemployment rate by NUTS2 regions,2013

Source: Eurostat 13

EU Cohesion and Regional Policy • Financial instruments and initiatives to address economics and social imbalances in the EU • Concern for Europe’s disadvantaged regions has always been part of EU priorities (Treaty of Rome preamble) • There have always been poor regions in the EU but CAP gained main attention

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History of regional policy (1) • The 1957 Treaty of Rome: little regional dimension • In 1973 Ireland joined (then poor), Its consequences: creation of “ERDF” (European Regional Development Fund), a specific instrument • in 1981 Greece joins the EU but there was no major reorientation of EU funding priorities • Pre-1986, most spending on regions was national (infrastructure: roads, electrification…) • Entry of Spain & Portugal (1986) created voting-bloc in Council (with Ireland and Greece) that induced a major shift in EU spending priorities towards poor-regions ( Structural Funds) 15

History of regional policy (2) • The 1992 Treaty on the European Union and the pillars of Community construction concerning economic and social cohesion • Since 1999 – preparation for enlargement and the entrance into the EU of countries (and regions) at considerably lower levels of economic development

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History of regional policy (2) 100%

Structural Funds

90%

Poor Vote-Share

80%

CAP

70% 60% 50% 40% 30% 20% 10% 0%

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

Source: Baldwin &Wyplosz (Baldwin site) 17

EU Cohesion and Regional Policy • For historical reasons, EU has five “Funds”, – four “Structural Funds” • Spent in any qualified region

– “Cohesion Fund”. • Spent only in poor-4 (Spain, Portugal, Greece and Ireland) and in New Member States

• 5 Funds work together under overall strategy • Many programs, initiatives, and objectives, BUT over 90% is spent on three priority “objectives” Source: Baldwin &Wyplosz (Baldwin site) 18

• ERDF: European Fund for Regional Development • ESF: European Social Fund 19

Who can apply –regional funds(1) • Funds from regional policy, under the objective „convergence” – EU regions (NUTS2) whose GDP (Gross Domestic Product) per inhabitant is less than 75% of the Community average are eligible for funding so-called convergence regions)

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Impact of last EU Enlargement on regional spending • Some regions that were pushed above 75% of average lost Objective 1 status • Some, like northern Finland and Sweden were unaffected – Low pop density criteria • All of 2004 (except Cyprus) entrants had less than 75% of EU25 average

Regions below 75% in EU25 Regions “statistically” above 75% Regions above 75% in EU15 Others

Source: Baldwin &Wyplosz (Baldwin site) 21

Solution • Phasing out regions: A phasing-out system is granted to those regions which would have been eligible for funding under the Convergence objective if the threshold of 75% of GDP had been calculated for the EU at 15 and not at 25 – – – – – – – –

Belgium: Province du Hainaut Germany: Brandenburg-Südwest, Lüneburg, Leipzig, Halle Greece: Kentriki Makedonia, Dytiki Makedonia, Attiki Spain: Ciudad Autónoma de Ceuta, Ciudad Autónoma de Melilla, Principado de Asturias, Región de Murcia Austria: Burgenland Portugal: Algarve Italy: Basilicata United Kingdom: Highlands and Islands 22

Who can apply –regional funds(2) • All regions which are not covered by the Convergence objective or by the transitional assistance (NUTS 1 or NUTS 2 regions depending on the Member States) are eligible for funding under the „competitiveness and employment” objective. • A phasing-in system is granted until 2013 to NUTS 2 regions which were covered by the former Objective 1 but whose GDP exceeds 75% of the average GDP of the EU15.

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2007-2013

Source: http://ec.europa.eu/regional_policy/ 24

Cross-regional cooperation funding • Cross-border cooperation addresses NUTS level 3 regions along all internal land borders and certain external land borders and all NUTS level 3 regions along maritime borders separated by a maximum distance of 150km. • +transnational cooperation (distant EU regions –oversees territories) • +interregional cooperation: all regions in Europe are eligible.

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Source: http://ec.europa.eu/regional_policy/ 26

Who can apply – cohesion fund • EU Member States whose GNI (Gross National Income) is lower than 90% of the EU average can benefit from cohesion fund: that is all the regions of the countries: Bulgaria, Czech Republic, Estonia, Greece, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Portugal, Romania, Slovenia, and Slovakia • A phasing-out system is granted to Member States which would have been eligible for the Cohesion Fund if the threshold had stayed at 90% of the GNI average of the EU at 15 and not at 25 (concerns Spain).

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Divison of funds by objetive • In the period 2007-2013, cohesion policy = 35.7% of the total EU budget or 347.41 billion euros (current prices).

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Additionality principle • The principle of additionality means that EU Structural Funds may not replace the national or equivalent expenditure by a Member State •  funds act only as an additional source of funding • The principle of additionality is verified at national level by the Commission, in cooperation with Member States, for the regions covered by the Convergence objective.

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Debate on the economic effectiveness of Regional Policy • Very high degree of persistance: poor regions remain poor, rich get richer • Do EU regional policy helps to change this scheme? • Questionable. No proved effect of EU funds on enhancing regional real convergence. • …but regional policy helps to redistribute funds, improve infrastructure and living conditions in poorer regions etc.

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Cohesion policy 2014-2020 1. Investing in all EU regions and adapting the level of support and the national contribution (co-financing rate) to their levels of development:  Less Developed regions (GDP < 75% of EU-27 average) – 67% of total  Transition regions (GDP 75% to 90% of EU-27 average) – 13% of total  More Developed regions (GDP > 90% of EU-27 average) – 20% of total 2. Targeting resources at key growth sectors: Investing in Growth (European Regional Development Fund):  innovation and research  information and communication technology  support for small and medium-sized businesses (SMEs)  low-carbon economy Investing in People (European Social Fund):  Employment and mobility  Better education  Social inclusion  Better public administration 31

3. Fixing clear, transparent, measurable aims and targets for accountability

and results 4. Introducing conditions before funds can be channelled 5. Common rules (for different initiative)

6. Simplification (e-cohesion) 7. Enhancing the urban dimension of the policy 8. Reinforcing cooperation across borders

9. Ensuring that Cohesion Policy is better linked to wider EU economic governance 10. Encouraging the increased use of financial instruments to give SMEs

more support and access to credit

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Structural funds eligibility (2014-2020)

Source: http://ec.europa.eu/regional_policy/ what/future/eligibility/index_en.cfm

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Cohesion fund eligibility (2014-2020)

Source: http://ec.europa.eu/regional_policy/what/future/eligibility/index_en.cfm 34

Financial allocations 2014-2020

Source: http://ec.europa.eu/regional_policy/what/future/eligibility/index_en.cfm 35

Financial allocations 2014-2020

Source: http://ec.europa.eu/regional_policy/what/future/eligibility/index_en.cfm 36

II. EU Competition Policy

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Effects of integration on the number and size of firms • Integration: no-trade-to-free-trade + open borders • Pro-competitive effect: markup falls • Industrial Restructuring – number of firms declines – firms enlarge market shares and output, – If economies of scale exist more efficient big firms survive • Result: bigger, fewer, more efficient firms facing more effective competition Source: Baldwin &Wyplosz (Baldwin site) 38

• 2 immediate questions – “As the number of firms falls, isn’t there a tendency for the remaining firms to collude in order to keep prices high?” – “Since industrial restructuring can be politically painful, isn’t there a danger that governments will try to keep money-losing firms in business via subsidies and other policies?” • The answer to both questions is “Yes”.  need for EU’s competition policy Source: Baldwin &Wyplosz (Baldwin site) 39

EU Competition Policy(1) To prevent anti-competitive behavior, EU policy focuses on two main axes: – Antitrust and cartels. The Commission tries: • to eliminate behaviors that restrict competition (e.g. price-fixing arrangements and cartels) • to eliminate abusive behavior by firms that have a dominant position – Merger control. The Commission seeks: • to block mergers that would create firms that would dominate the market. Source: Baldwin &Wyplosz (Baldwin site) 40

EU Competition Policy(2) • General rule: no discrimination of firms (all should be treated equally) - 1957 Treaty of Rome bans state aid that provides firms with an unfair advantage and thus distorts competition so in principle state aid is prohibited in the EU • However, State aid is possible - special regulations: – State aid is monitored and assessed in the European Union - every state aid must be reported to the European Commission in advance (“notification requirement”). – Exceptions: firms in regions with serious level of underdevelopment, selected sectors (transport, R&D, SMEs…) 41

Example: The Intel antitrust case • The Commission questioned abusing dominant position by Intel on the x86 central processing unit (CPU) market. – hidden rebates to computer manufacturers – Dell, HP, NEC, Lenovo on condition that they bought all, or almost all, their x86 CPUs from Intel. – Intel made direct payments to computer manufacturers – HP, Acer, Lenovo - to stop or delay the launch of specific products containing a competitor's x86 CPUs and to limit the sales channels available to these products.

• EC reply (13 May 2009) : a fine of EUR 1.06 billion and obliged Intel to cease the identified illegal practices

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Sources: • 6th Cohesion Report • http://ec.europa.eu/competition/ • http://ec.europa.eu/regional_policy/

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