European Union Committee: Multiannual Financial Framework

Lord Harrison Excerpts

Tuesday 19th June 2012 Grand Committee

[Lord Harrison]

My Lords, it is always a great pleasure to follow the noble Lord, Lord Bowness, and to do so here in the Moses Room as we plot a path to the promised land of growth, jobs and prosperity in the European Union through the agency of the reports before us today on the European Union financial framework 2014-20. I am very grateful to our new chairman for introducing it so expeditiously. We wish him well in his new tasks and duties.

The Sub-Committee on Economic and Financial Affairs, which I chair, focused in particular on the issues on cohesion policy set out in Chapter 3 of the report. To aid our scrutiny of the various cohesion fund proposals, and in addition to the work undertaken by the Select Committee as a whole, the sub-committee took evidence in December from the expert Professor John Bachtler, Professor of European Policy Studies at the University of Strathclyde. We are enormously grateful to him for his assistance.

Cohesion policy encompasses European Union action to address economic and social imbalances and to help less favoured regions to compete within the vital single market. Cohesion funds form a substantial proportion of the MFF proposals: €336 billion, or 36.7% of the total, compared to 35.7% in the current MFF. Spending on cohesion policy is currently supported through three structural funds. The European regional development fund—ERDF—finances direct aid for investment in companies, infrastructure, financial instruments and technical assistance measures. The European Social Fund finances projects in the labour market that improve skills, social integration and access to employment opportunities. Both these funds are allocated on a regional basis. The cohesion fund finances developments in transport networks, environmental projects and energy and transport projects with environmental benefits, and is allocated at a national level.

The overall scale is determined by two factors: objectives and eligibility. In terms of objectives, the new cohesion policy architecture retains the overarching objectives of convergence, competitiveness and European territorial co-operation. However, the Commission has proposed a change to eligibility to introduce transition regions as an intermediate category between more developed—competitiveness—regions and less developed—convergence—regions. The cohesion fund will continue to support member states with a gross national income of less than 90% of the EU 27 average. As originally drafted, the Commission proposal was that the ERDF would be available to all three categories, but transition and more developed regions would be required to focus 80% of their ERDF funds on certain areas such as renewable energy and small business competitiveness and innovation. The ESF would be available to all three categories of regions, and the Commission proposed that at least 25% of the overall cohesion funding must be committed to it, with more in more developed and transition regions. In each member state, the Commission proposed that at least 20% of the total ESF resources should be allocated to promoting social inclusion and combating poverty. I am well aware that there has been some progress in negotiations in relation to these requirements, so perhaps the Minister would be able to provide us with an update on these discussions.

There are two divergent views regarding cohesion policy’s aims. Some favour a pan-European development programme, while others see it as an explicitly redistributive tool. The transition regions proposal would allow regions in richer member states to remain eligible for structural funds including, in the UK, such regions as Cornwall, Devon, South Yorkshire and Merseyside. I have a past strong interest as Member of the European Parliament for the second largest authority in Merseyside and I invite colleagues to see the transformation that those European funds have effected in the Merseyside region.

The Government have argued that cohesion funding should be restricted to poorer member states after 2020. However, the Government accept that, for 2014-20, all regions should be receiving funding. The aim of EU cohesion policy is,

“reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions”.

The committee concluded that the new transition region should be supported, provided that it allowed for a more appropriate targeting of funding. Indeed, we found that there was a strong argument for cohesion policy being targeted at poorer member states and for it to operate at a pan-European level. Our conclusion was that, while the European Social Fund is of benefit throughout the Union, other funds, such as the European regional development fund, should be further targeted at poorer member states with a view to withdrawing it from better-off member states in the long term.

The Commission has been clear that it views cohesion policy as a primary vehicle for achieving the Europe 2020 objectives, although our previous report on the EU financial framework from 2014 noted the difficulty in turning cohesion policy into an all-purpose instrument for delivering Europe 2020. Professor Bachtler told us that there was a “tension” between treating cohesion policy as a “delivery agent” of Europe 2020 and its “traditional mission” of “reducing regional disparities”. However, the Government were of the view that targeting Europe 2020 would still mean progress in reducing regional disparities. The committee recognised the importance of Europe 2020 objectives, many of which dovetail with the traditional mission of cohesion policy. However, we stressed that cohesion policy is not merely a delivery tool for Europe 2020 and warned against its core aim being undermined by an unremitting focus on the Europe 2020 agenda. We concluded that the distinct identity and fundamental objective of cohesion, as enshrined in Article 158 of the Lisbon treaty, must be safeguarded. We also stressed that, as an expression of EU solidarity, cohesion policy is one of the most important elements of the MFF in improving public awareness of European Union action.

One of the key questions that we considered was whether, in the current economic climate, a reduction in cohesion funding would be justified, or whether spending on cohesion policy should be encouraged because of its potential to boost economic growth. Professor Bachtler emphasised the importance of cohesion policy at a time of austerity, when national budgets for regional development might be cut back. Although the Commission was keen to retain cohesion as a well funded policy area—albeit that funding had been held level in cash terms—the Government argued that the cohesion budget “should fall significantly” from the proposed levels.

The committee concluded that the economic context had strengthened its belief that cohesion policy should play a more defined role in helping member states in financial difficulties to address structural weaknesses and competitiveness challenges and that it can act as a necessary counterbalance to the effects of austerity measures. We supported the overall envelope proposed for cohesion policy, since it has an important role to play in improving growth and, in the context of a rigid seven-year framework, it is vital that funding remains available to meet changes in the economic climate.

Cohesion policy has been criticised over the effectiveness of spending and for the complexity of its management and implementation. The Commission has sought to address this through what Professor Bachtler described as,

“more concentration, more co-ordination and greater results orientation”.

The Commission has proposed a common strategic framework to improve synergies between the various funds through thematic concentration—the targeting of funds on specific chosen objectives. We agree that the Commission’s proposals represent a much needed attempt to improve the impact and effectiveness of European Union funds and to encourage a more strategic framework. We also support the proposed common strategic framework, although we are aware, from recent correspondence with the Government, of concerns over the precise form that it will take. It would be useful if the Minister provided an update on these discussions. We also recognise the case for thematic concentration on a smaller number of priorities, but remain to be convinced that the Commission’s proposals ensure sufficient flexibility for regions and local authorities to focus investment on their own development needs. I am aware that amendments have been made to the provisions on thematic concentration. Is the Minister content that these provide the necessary flexibility?

The Commission also proposes conditionalities that would place more restrictions on funding allocations. The Government have expressed support for ex ante conditionality, such as the need for compliance with EU regulations prior to funding. The committee endorsed the Commission’s proposals for conditionalities, although we had concerns about the appropriateness of macroeconomic conditionality tools, since withdrawing EU funding from an ailing economy might in some circumstances make matters worse. What is the Minister’s response to these concerns, particularly in the context of the continuing euro area crisis?

The Commission also proposes the introduction of a performance reserve, whereby 5% of the cohesion budget will be set aside and allocated to member states and regions whose programmes have met their targets in a mid-term review. The Government expressed concerns as to whether such a reserve would reward wealthier member states at the expense of poorer ones. To what extent does the Minister believe that the Commission has addressed the Government’s concerns? For our part, we expressed the view that a performance reserve could be beneficial if implemented correctly. However, we found that the proposed 2019 date for the allocation of funding would be too late to have any meaningful impact and we called for a final review and for the allocation of funds to be brought forward. In that respect, I also agree with colleagues who have already spoken about the proposed seven-year period and the five-year period that the committee has supported. Is it the Minister’s understanding that there will be any kind of break within the seven-year period to make a reassessment of the needs of the European Union—for instance, if we needed to instil more growth at that stage, as Europe comes out of its current doldrums?

The committee also heard from the Federal Trust director, Brendan Donnelly, about the wholesale examination of the budget and zero-based budgeting. I know that there has been some sympathy in the Government about this. Mr Donnelly suggested that that might not lead to an increase in the overall budget but might even lead to a decrease. I invite the Minister to talk about that. If you had such a budget, could you then concentrate better on ensuring European Union added value as an element of that?

I ask the Minister about something that has troubled the committee when we have been looking at the budgets so far provided, as we do on an annual basis, in the 2007-13 period. Repeatedly, the Government talk about their aspiration and ambition to make savings in those budgets as they develop. It would be good to have some evidence from 2010-11, for instance, of where savings were actually made in the European budget as a result of the Government pressing the other 26 member states and ensuring that they had allies to do so.

Finally, I invite the Minister to say a little more, within the context of this budget, about how we help small businesses. There are real opportunities to get growth again through small businesses. Will he understand that the essence of helping small businesses is the ambition, which has been expressed by this Government but not always carried out, of ensuring that the single market is developed, completed and made active for those smallest of businesses that wish to ply their wares and services within the European Union as a whole?