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European Commission

[Check Against Delivery]

Johannes HAHN

Commissioner for Regional Policy

Cohesion Policy and Economic Governance

Informal Meeting of Ministers responsible for Cohesion Policy

Milan, 10 October 2014

Let me first of all thank the Italian Presidency for organising this meeting. As you know, this will be my last intervention in this forum as a Commissioner for Regional Policy and I would like to express my gratitude for the excellent cooperation and the constructive discussions we have had over the years.

The topic of our meeting today – the link between cohesion policy and economic governance – shows the progress we have made over the last years.

I believe that one of the key results of the reform is that we have placed cohesion policy at the centre of the EU economic governance and European semester processes. The policy has become THE investment pillar of those processes.

This link comes with conditions attached – and some argue too harsh conditions – but I am convinced that it also offers a great opportunity. Let me explain why.

As evidenced by the 6th cohesion report, the crisis has halted the reduction in disparities observed between European regions until 2008. Many regions have lost many years of economic convergence, employment has fallen and unemployment has reached unacceptably high levels, while poverty and social exclusion have increased significantly.

While not the cause of the crisis, unsound fiscal and budgetary policies and the accumulation of major macroeconomic imbalances have intensified the impact of the crisis. The Member States most hit by the crisis are in general those which recorded the highest economic imbalances before the crisis such as high levels of public and/or private debt, significant losses in export market shares, or wages growing persistently more than labour productivity.

Their economies became increasingly dependent on consumption and investment financed by external sources while becoming less competitive. Once the crisis erupted, the size of economic imbalances led to a collapse of investment which reinforced the economic recession and the dramatic increase in unemployment.

Public investment in general and cohesion policy in particular, can only deploy their full impact under sound economic conditions. Investments in SMEs can only flourish if SMEs have access to credit. Maximizing the impact of investments on employment requires wages to be coherent with labour productivity. Policy interventions can only be fully effective if there is a sound regulatory and institutional environment in place, including efficient public administrations.

In a nutshell, cohesion policy and the EU economic governance process and the European Semester pursue the same objective: sustained and sustainable economic growth. This is why consistency and coordination between them is so crucial. Let me recall the most important provisions in this area:

First, cohesion policy must help address the economic, social and institutional challenges of the relevant country specific recommendations adopted in the context of the European semester.

More than 70 CSR have been issued linked to structural reforms, which are related to cohesion policy in areas such as administrative capacity, energy efficiency, research and innovation and the support to SMEs.

Therefore, Member States and the Commission together need to focus on setting the right priorities from the beginning in line with the recommendations adopted by the Council and guarantee a critical mass of funding to address those challenges. This is crucial to limit the need for reprogramming in the years following the adoption of the Partnership Agreements and programmes.

Second, the new policy framework establishes a close link between the implementation of cohesion policy and the respect of the EU economic governance procedures, namely the Stability and Growth Pact and the related Excessive Deficit Procedure; the Macroeconomic Imbalances Procedure; and the economic adjustment programmes providing financial assistance to some Member States.

Non-respect of recommendations issued within these governance procedures will in due course and after careful consideration by the Commission lead to a suspension of EU funding. I remain convinced that the system has all the margins necessary to allow Member States to take action. It remains therefore a last resort, an ultima ratio, when all other options have been exhausted.

I would like to mention two aspects, which – though strictly speaking not part of the economic governance – they are de facto central to it. One is co-financing, the other is additionality. Both have budgetary and macro-economic implications.

Additionality is linked to the effectiveness of the policy, but also to the way in which fiscal consolidation is pursued. This is why the Commission has been very vigilant in ensuring that credible, sustainable levels of investment are guaranteed at national level to maximise the impact of cohesion funding, rather than simply replacing national expenditures. This is also why in most Member States concerned public investment targets have been revised upwards during the negotiations. This has been, in particular, the case of those Member States where Country Specific Recommendations suggest avoiding cuts in growth enhancing expenditure.

Co-financing is equally important. The regulation establishes minimum national co-financing rates. This is not a target, only a floor and we expect that all the margins are used to maximise the leverage of the EU funding and the ownership of the programmes by modulating co-financing rates and mobilising public and in particular private resources at national level.

Finally, fiscal consolidation has not been as growth-friendly as recommended by the Commission in several reports. Member States often relied on increasing taxes, and the expenditure-cutting measures have often been concentrated on investment.

Thus, investment has collapsed in many Member States reaching historically low levels. We need to preserve productive investment in order to boost growth and jobs. Thereby, we need to make the best possible use of the flexibility that is built into the existing rules of the Stability and Growth Pact.

So, yes, the link with the EU economic governance and the European Semester establishes a more cogent framework within which Cohesion Policy should operate: coherence with national policies as defined in the National Reform Programmes; stronger link with the structural reforms discussed and agreed in the context of the European Semester; and coordination with the broader economic governance system.

Let's face it; this is what one would expect from a policy which is the main investment instrument at the EU level. It cannot operate in isolation; it cannot be at odds with other fiscal and investment choices made at national and European level; it cannot be undermined by unsound macro-economic choices.

And this is where the opportunity lies.

It is only by linking the policy to the economic governance system of the Union that its role can be (and is being) recognised as a key pillar of that economic construction and its profile be raised.

It is only by showing that the policy can support the key reforms regularly discussed by Heads of State and Government that regional policy can in turn participate and influence the debate on which structural reforms, which consolidation, and which investment are needed in Europe.

It is only by delivering on the ground the investment needed to re-launch growth and job creation that cohesion policy can have the political space that it deserves.

This is why I fully support the need to consolidate the debate on Cohesion Policy at the level of the General Affairs Council.

And this brings me, precisely, to the need to deliver the reform on the ground.

As of today, 17 Partnership Agreements have been adopted and we are very close to finalising the remaining ones. The vast majority of Operational Programmes have been submitted and we have provided our observations. Seven programmes have been adopted so far.

As I have said many times before, and as also the Commissioner designate indicated, business as usual is not an option. We will take all the time needed to ensure that the new programmes provide the right framework for investments over the next decade. You should not count on relaxed quality requirements for latecomers. On the contrary, those Partnership Agreements and Operational Programmes that have already been adopted will be the benchmark for the others in terms of quality.

By the end of the year, it will be clear who is still lagging behind, and this will not be kept a secret. I would like to urge you to focus all your efforts on getting the programmes off the ground, with a clear focus on delivering the necessary investments in growth and jobs. Failure to do this bears a high reputational and political risk for all of us. Let me remind you moreover that the decision to rebudget the credits requires unanimity.

As you know, preparatory work on the mid-term review of the MFF due in 2016 will start early and will kick off the broader debate on the post-2020 period. We have to ensure that Cohesion Policy gets a good start in these debates, as a policy that delivers.

But delivery also requires that the resources that we have committed to put at the disposal of the policy in successive MFF agreements are made available.

As you know, the EU budget situation is dramatic in many areas because of lacking payment appropriations. At the end of last year we had in Cohesion Policy a backlog of unpaid payment claims of 23.4 billion euros, that is estimated to increase by the end of this year.

There is a misperception that this situation is not so serious because Cohesion Policy payments are just a transfer of monies to the Member States. That is not true: Cohesion Policy is about investments in the real economy: support to SMEs, sustainable energy projects, ventures between enterprises and research centres, business start-ups, employment of young people, activation of job-seekers. Thousands of projects affecting millions of European citizens would not be financed if the budget is not available. Member States budgets are not in a position to pre/finance this expenditure.

The Treaty requires the Commission, the Council and the European Parliament to ensure the budget has the means to fulfil obligations with regard to third parties. This is a collective responsibility vis-à-vis the EU citizens and stakeholders.

As you know, the Commission has presented its budgetary proposals. The payment appropriations requested in draft amending budget 3/2014 and the draft budget 2015 are needed to slow down the "snowball effect" of unpaid bills at the end of the year and try to avoid systematic delays in payments to beneficiaries and in the implementation of the programmes.

By the way, if you want to have a chance of being paid by the end of the year, send your payment claims by the end of October.

The Commission counts on your support and the support of the European Parliament to provide now the resources to fulfill our obligations. It is time for a sustainable EU budget, not for undermining EU action.

Thank you.

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