EU cohesion policy, time for reform

While cohesion policy to support economic development across Europe has not fully lived up to expectations, new research suggests various reforms for how the EU can more efficiently support its poorest regions before the next budgetary cycle

Over the past few years, the European Union’s cohesion policy has come under criticism for failing to support its fundamental goal of “reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions”. These difficulties have also sparked conversation around how to reform the allocation of funds to meet this goal. 

The current cohesion policy is in the middle of the 2021-2027 funding period, totalling € 392 billion, almost a third of the EU budget. Funding is also delivered through four different funds, such as the European Regional Development Fund (ERDF), the Cohesion Fund (CF), the European Social Fund Plus (ESF+) and the Just Transition Fund (JTF).

While there certainly are problems with the EU cohesion fund allocation and implementation, EU regional funds do indeed spur growth. Researchers Lang, Redeker and Bischof find that on average, every euro the EU invests under the ERDF and the ESF lifts regional GDP by about 0.93 to 1.47 EUR, showing the positive impact of regional projects led by the EU.

However, further research shows that in some regions in Southern Europe, such as Spain, Portugal and Greece, economic convergence with that of richer European countries has stagnated or regressed. In other regions in Italy and Greece, real GDP growth was negative. Additionally, GDP, when compared to the EU average, is falling behind in many regions. This phenomenon has put several regions in the south, north-west and east at risk of a “development trap”, where “regions experience lengthy periods of low or negative growth, weak productivity increases, and low employment creation”.

Given this pattern of falling GDP amidst seemingly ineffective allocations of cohesion funds, researchers Lang, Redeker and Bischof recently published a brief which identifies two main distributional problems, where cohesion policy “often targets the wrong places and reaches the wrong people”.

As the analysis shows, cohesion policy actually targets the wrong areas, where income inequality within regions is extremely vast. While the EU provides guidelines and rules for the allocation of funds, it is up to the member states themselves to design and implement specific programs that provide results in line with the policy goals set out by the EU. Distribution of funding within the regions indicates that money tends to go toward more prosperous areas of the region. 

Additionally, the policy tends to reach the wrong people, where gains tend to be concentrated in relatively wealthy households within the region. Therefore, EU funds flow to regions that qualify, yet due to problems with implementation within regions themselves, the funds tend to flow to small, relatively wealthy groups, rather than those in need. 

To further highlight how ineffective the current system is becoming, a report conducted by the European Court of Auditors in July 2024 found that “€15 billion of the €317 billion in cohesion funds paid out over the 2014-2020 budget period were used in ways that did not comply with national or EU rules”.

Proposed reforms

The pitfalls of cohesion policy are important because, overtime, dissatisfaction with the EU’s ability to support development of its regions can result in social and political tension, especially when it leads to growing inequality, mistrust in the institutions and growing resentment due to the feeling of being “left behind” or ignored. In a report called for by the European Commission, “the EU’s cohesion policy must be urgently restructured to stem the rise of Eurosceptic parties that threaten the “survival” of the European project”.

This is the reason why reforms to the cohesion policy have now started to attract more and more attention. Negotiations will soon open for the funds to be allocated during the 2028-2034 funding cycle; in the meantime, think tanks, experts and stakeholders all across Europe are outlining their views and requests. 

For instance, the German think tank ZEW (Zentrum für Europäische Wirtschaftsforschung, Centre for European Economic Research) suggests GDP per capita may not be the best indicator of development, arguing that not every region must not follow the path of economic convergence. To this end, their report adds that cohesion policy shouldn’t be allocated to areas that are already performing well, such as in Member States with above average economic strength.

Similar suggestions are provided in the “Fixing cohesion” policy brief recently published by the Jacques Delors Centre, which also puts emphasis on brainstorming new ways to redirect cohesion funds to the regions that can benefit the most. Their analysis shows that some “regions are too large and economically diverse to effectively allocate funds to those areas truly in need of economic support.” They suggest distributing the funds to smaller geographical areas, so that larger regional hubs don’t absorb all the funding themselves. They also suggest redirecting more funds toward small businesses, rather than large, capital-intensive firms. 

Finally, a group of experts who were asked by the European Commission itself to outline the future of the cohesion policy maintains that whatever the reforms are, they must ensure effectiveness centred around tailoring cohesion packages specifically to regions themselves, where they can leverage local capabilities.