Regional economic differences have always been a characteristic of international, national and regional economies, recognised as part of unavoidable reality. However, the interpretation of the phenomenon has changed over the last half-century. Many countries are now making systematic efforts to reduce the disparities but, so far, very few have been really successful. Globally, between 1950 and 1984, these differences were slowly shrinking. But after that, they continue rising again.

The world’s advanced regions have now about 70% higher GDP per capita than the less developed regions while in the 1950s the difference was 90%. As this is politically even more sensitive within integration groupings, not surprisingly, the European union addressed regional economic disparities since the 1970s, and gradually it became the key policy area in the integration process. For many years, cohesion is engaging the largest part of the EU budget (in the 2014-2020 period it was € 376 bn, out of € 908 bn - well over one third). However, the whole EU budget is only about 1% of the member countries combined GDP. Obviously, this is insufficient!

While the neoliberal doctrine interprets regional disparities as unavoidable, territorial differentiation of markets, socially more conscious economists insist that in the long run large differentiation such as dividing people into richer and poorer, depending largely on where they live, almost irrespective of their engagement and contribution, simply isn’t socially acceptable anymore.

Social development is incompatible with the position that some regions will simply remain poor, gradually experience depopulation, and will after some generations lose the capability to grow comparingly to richer regions. However, the latter will, sooner or later, face rising prices and living expenses, so the only real beneficiaries of such imbalanced regional development remain the successful big businesses who profit also from cheaper labour from neighbouring poor regions. So, it’s the same story again but this time on an inter-regional level.

Though in principle the benefits of balanced regional development sound reasonable to most people. As well as it does to many politicians when it comes to how this can be achieved in a democratic market environment. It’s far from simple and easily achievable, in spite of the general agreement, elaborate strategies and government programmes.

Actually, only a very limited number of countries around the globe have achieved a consistent, long-term reduction of regional differences. Even in the EU, with all the efforts, the differences in average GDP per capita among member states are shrinking, but when it comes to NUTS (Nomenclature of territorial units for statistics) 1, 2 and 3 regional levels, the majority of member states experience the opposite. However, things would be much worse in Europe without the EU Cohesion funding.

The European Cohesion Policy contributes to strengthening economic, social and territorial cohesion in the EU, reducing imbalances between countries and regions. It also contributes to the Union's political priorities, especially in the domains of the green and digital transition.

In doing so, EU regional policy is geared toward making regions more competitive, fostering economic growth and creating new jobs. The policy also has a role to play in wider challenges for the future, including climate change and globalisation.

For the period of 2021-2027, the EU cohesion policy has set a shorter and very modern menu of 5 policy objectives supporting growth through:

  1. a more competitive and smarter Europe;
  2. a greener, low carbon transitioning towards a net-zero carbon economy;
  3. a more connected Europe by enhancing mobility;
  4. a more social and inclusive Europe;
  5. Europe closer to citizens by fostering the sustainable and integrated development of all types of territories.

The Cohesion Policy has a strong impact in many fields. Its investments help to deliver many EU policy objectives and complement EU policies, such as those dealing with education, employment, energy, the environment, the single market, research and innovation.

The priorities of Cohesion support are financed through the following funds:

  1. The European Regional Development Fund (ERDF) supports investments in all 5 policy objectives, but 1 and 2 are the main priorities;
  2. The European Social Fund+ (ESF+) the main priority is 4;
  3. The Cohesion Fund (CF) invests in the environment and transport in the less prosperous EU countries to support policy objectives 2 and 3;
  4. The Just Transition Fund (JTF) provides support under dedicated specific objectives;
  5. The Interreg programmes have 2 additional policy objectives at their disposal: “A better cooperation governance” and “A safer and more secure Europe”.

The Cohesion Policy provides special care or investment tools to the following types of territories:

  1. Border regions and cross-border cooperation (Interreg)
  2. Urban areas
  3. Remote, islands, mountainous or sparsely populated areas
  4. Outermost regions.

The bulk of Cohesion Policy funding is of course concentrated on less developed European countries and regions.

The Just Transition Fund alleviates the socio-economic costs triggered by the climate transition, supporting the economic diversification and reconversion of the territories concerned, and helping people to adapt to a changing labour market. The effects of the coronavirus pandemic on the economic situation of EU regions are addressed by REACT-EU, the Recovery Assistance for Cohesion and the Territories of Europe.

The gaps are identifiable also at the micro-level, where the regional differences are not so often presented, though they are equally important as those at the macro level. According to a recent OECD survey, the regional differences in corporate dynamism are well illustrated by the share of new among all registered companies. This is 25% in highly developed regions, and only 5% in less developed regions of OECD countries (the national average is 9%, and for urban regions even 24%).

According to ILO statistics, in 82% of low-income countries and in 70% of lower-middle-income countries, the unemployment rate is higher for those with an advanced educational level than for those with only a basic educational level, while this is true in 31% of upper-middle-income countries and 16% of high-income countries. This indicates low efficiency in using the available human capital, which especially in less developed regions results in migration – leaving the region with less qualified young people. It is hardly necessary to emphasize, how critically important it is for less developed regions to educate their young generations, and to provide them with employment opportunities.

Here are the three EU categories of regions

Less developed regions: receive by far the largest amount of regional policy funding dedicated to the regions designated as less developed. This covers Europe's poorest regions whose per capita GDP is less than 75% of the EU average. This includes nearly all the regions of the new member states, most of Southern Italy, Greece and Portugal, and some parts of the United Kingdom and Spain.

With the addition of the newest member countries in 2004 and 2007, the EU average GDP fell. As a result, some regions in the EU's "old" member states, which used to be eligible for funding under the Convergence objective, became above the 75% threshold. These regions received transitional, "phasing out" support during the previous funding period of 2007–13. Regions that used to be covered under the convergence criteria but got above the 75% threshold even within the EU-15 received "phasing-in" support through the regional competitiveness and employment objective.

Transition regions: are regions whose GDP per capita falls between 75% and 90% of the EU average. As such, they receive less funding than the less developed regions but more funding than the more developed regions.

More developed regions: cover all European regions that are not covered elsewhere, namely those which have a GDP per capita above 90% of the EU average. The main aim of funding for these regions is to create jobs by promoting competitiveness and making the regions concerned more attractive to businesses and investors. Possible projects include developing clean transport, supporting research centres, universities, small businesses and start-ups, providing training, and creating jobs. Funding is managed through either the ERDF or the ESF.

The objective of European territorial cooperation is to reduce the importance of borders within Europe, both between, and within countries, by improving regional cooperation. It allows for three different types of cooperation: cross-border, transnational and interregional cooperation. The objective is currently by far the least important in purely financial terms, accounting for only 2.5% of the EU's regional policy budget. It is funded exclusively through the ERDF.

The EU supports the achievement of these objectives through the use of the European Structural and Investment Funds (the ESF, ERDF, Cohesion Fund, European Agricultural Fund for Rural Development (EAFRD), European Maritime and Fisheries Fund /EMFF/) and from 2021, also from the Just Transition Fund (JTF).

The European Social Fund - from 2021, called European Social Fund Plus (EFS+) - is the Union’s main instrument supporting measures which aim to prevent and combat unemployment, develop human resources and foster social integration in the labour market. It finances initiatives that promote a high level of employment, equal opportunities for men and women, sustainable development and economic and social cohesion.

The European Regional Development Fund helps to redress the main regional imbalances in the EU. It supports regions whose development is lagging behind, along with the conversion of declining industrial regions.

The Cohesion Fund provides a financial contribution to projects relating to the environment and to trans-European networks in the area of transport infrastructure. This fund may only be accessed by those Member States whose gross national income per inhabitant is lower than 90% of the EU average.

The Just Transition Fund is a key tool for supporting the territories most affected by the transition towards climate neutrality and for preventing an increase in regional disparities. In order to achieve its objective, the JTF supports investments in areas such as digital connectivity, clean energy technologies, the reduction of emissions, the regeneration of industrial sites, the reskilling of workers and technical assistance.

To guarantee efficient use of the Structural Funds, the following principles have to be upheld:

  1. Organisation of the funds by objectives and regions;
  2. Partnership between the Commission, the Member States and regional authorities in planning, implementing and monitoring their use;
  3. Programming of assistance;
  4. Additionality of EU and national contributions.

The allocation of the Union’s financial resources devoted to cohesion policy is focused on two main goals:

  1. Investment for growth and jobs, aiming to strengthen the labour market and regional economies.
  2. European Territorial Cooperation, supporting EU cohesion through cooperation at cross-border, transnational, and interregional levels.

Closing Thoughts

Though the EU is doing quite a lot to reduce regional economic differences – particularly in the new member states – these gaps remain a major challenge, and even more so in other parts of the world.

The questions being raised in political debates, as well as in recent literature on cohesion are:

  1. Do we really understand the full scope and complexity of issues being responsible for the regional lags?
  2. If we do understand, what is preventing countries to adopt measures, which will gradually reduce and hopefully eliminate this undesirable phenomenon?

Firstly, though it took us a long time, whoever is sincerely interested in fully understanding the causes of economic differentiation has nowadays at hand all the analytical tools needed to understand and properly interpret the situation.

However, in many cases, the analysis is done under pressure of vested interests and the interpretation – being actually politically sensitive – remains often too general, without really identifying fundamental causes for the lack of cohesion.

Finally, what should the less developed regions do to reduce and finally close the gap? Besides introducing and consistently implementing adequate regional development strategies, well synchronized with the respective national strategy, which is hard enough, they need to exert sufficient pressure upon national authorities for introducing proper and effective cohesion policies. Which usually also isn’t that easy.

What matters a lot for representatives of cohesion regions to be effective in these two lines of effort are the following two issues. They gain credibility by demonstrating that they are doing their own part properly. And when requesting support from the country and its government, they have to demonstrate that resources will be used productively, as well as that closing the gap is not resolving only their own problems but bringing tangible benefits to the rest of the country as well.