Bernadett Petri: The Future of Cohesion: Bridging the Directly Managed EU Funding and Innovation Gap for Economic Success in Smaller and Poorer Member States

Executive summary

Funding provided in the frames of the directly managed programs of the European Union account for one third of the entire EU budget, almost 400 billion euros, in the current seven-year cycle (2021-2027). These programs of the European Union provide financial support primarily based on the rationale that given projects enable the implementation and methodological dissemination of policy objectives at the pan-European level. However, the evaluation of the projects is far from being so objective, and there are huge differences in the funding provided by the programs between member countries and regions. The goal of the European Union is innovation-based competitiveness, which presupposes much more balanced program funding. On this basis, competitiveness cannot be separated from the principles of cohesion, so it would be necessary to apply them to a certain extent in relation to these programs as well. Bridging the directly managed EU resources and innovation gap is essential for promoting economic equity and success across the European Union. By focusing on targeted interventions and regional specificities, the EU can pave the way for a more inclusive and prosperous future for all member states. This policy paper serves as a call to action for EU policymakers to prioritize and address these critical issues.

1. Introduction

The issue of regional disparities between European Union (EU) Member States has long been at the heart of European economic policy. From the very beginning, there were significant territorial and demographic disparities within the European Community (now the European Union). For this reason, the Treaty of Rome (1957) established solidarity mechanisms, the European Social Fund (ESF) and the European Agricultural Guidance and Guarantee Fund (EAGGF, Guidance Section).[1] These two instruments were complemented by the European Regional Development Fund (ERDF), which was set up in 1975 and which incorporated the territorial principle into the cohesion approach.[2] The enlargement to the south, with the accession of Greece and then Portugal and Spain, gave birth to the single policy framework.

In 1985, Jacques Delors, then President of the European Commission, already identified the widening of regional disparities within the European Community as one of the main challenges of European integration in his 1985 progress report.[3] Since the Single European Act of 1986, achieving economic and social cohesion has been both an objective and a task for the European Community. In 2008, the Lisbon Treaty introduced a third dimension of EU cohesion, territorial cohesion. The European Union supports these three aspects of cohesion primarily through cohesion policy and the Structural Funds. The policy aims to promote economic and social cohesion, which means reducing disparities between regions. To achieve this, the EU adopts a regional approach, based on taking into account the specific needs and potential of different regions.[4]

The Torremolinos Charter can be considered the first document to formally introduce the importance of a common European territorial planning approach and, consequently, of territorial cohesion. The document was approved in 1983 at the 6th European Conference of Ministers responsible for the Treaties of Torremos, held in the framework of the Spanish EU Presidency. The document defines the use of coordinated regional planning within Europe as a tool to promote harmonised territorial development in Europe.[5]

Territorial cohesion, however, only became much more prominent years later, in the late 1990s and early 2000s, and its concept was first mentioned at EU level in the European Spatial Development Perspective adopted in 1999. The document, which was drafted under the German Presidency and presented in Potsdam, was drawn up primarily in response to the concerns of the old Member States about the enlargement to the east, which would have a negative impact on growth following the accession of the new countries, due to territorial disparities and differences in economic performance within the EU. According to the concept’s motto, the aim of territorial development policies is to work towards a balanced and sustainable development of the European Union territory. The key is to ensure that the three basic objectives of European policy are achieved in all regions of the EU: economic and social cohesion; the conservation and management of natural resources and cultural heritage; and a more balanced competitiveness of the European territory.[6]

Subsequently, the Lisbon Treaty formally integrated territorial cohesion into the pro- visions of the European Union Treaties in 2007. Accordingly, Article 174 of the Treaty on the Functioning of the European Union (TFEU) emphasises the importance of economic, social and territorial cohesion, highlighting the need to address the disparities between countries.[7]

In the years following the Lisbon Treaty, the territorial principle has become increasingly important. In October 2008, the European Commission published a Green Paper on the future of territorial cohesion, entitled Transforming Territorial Cohesion.[8] The aim was to stimulate debate and gather feedback from stakeholders. The Green Paper acknowledged that territorial disparities remain a challenge within the European Union and stressed the need to put in place more effective policy solutions to address these disparities. The paper identified a number of key issues on which the Commission sought feedback, such as how territorial cohesion can complement economic and social cohesion policies, the role of cities and urban areas in promoting cohesion, how the EU can better support regions with specific geographical characteristics and how to measure the impact of territorial cohesion in closing regional gaps.

The difficulty of the principle of territorial cohesion is that it can be interpreted differently from country to country, with different ambitions, which results from the partly different territorial problems of the countries and the partly different territorial policies based on them, and from the reflection of the different territorial policy interests of the countries in the regional policy at EU level.

2. Hungarian EU Presidency 2011 from the policy point of view

In 2011, the Hungarian Presidency of the EU achieved a number of successes in the field of EU regional and cohesion policy. The Hungarian Presidency of the Council of the European Union has set the goal of a “Strong Europe”, building on the foundations and safeguarding the future. Cohesion Policy has been set as a goal and let us continue the debate on its future, as a more economically balanced European Union can be more competitive globally.[9]

Cohesion Policy has been given high priority in the overall strategy of the Hungarian Presidency and further stressing its importance, its continuation and discussions on its future has been established as a target. The aim was to create a more economically balanced European Union, more competitive on world markets.[10]

One highlight was the adoption of the Council Conclusions on the Fifth Cohesion Report. This was the first official high-level document in the field of Cohesion Policy to be endorsed by the General Affairs Council on 21 February 2011.[11] The aim of the document was to identify the issues on which there is consensus among Member States and at the same time to set out areas for further discussion. The Presidency has been successful in this area and has prepared the ground for further discussions. The Hungarian Presidency then organised a high-level meeting on the future of Cohesion Policy in Budapest. At the event, participants discussed thematic concentration, flexibility and a results-oriented approach. The Presidency prepared discussion papers to facilitate a substantive debate and a summary of the results was produced to help prepare the policy debate.[12]

The debate on the future of Cohesion Policy continued in the Council Working Group on Structural Actions. Here, the focus was on the issues identified in advance and the questions and concerns raised by Member States were also assessed. Four main themes were highlighted: strategic programming, the delivery system and simplification possibilities for Cohesion Policy, the integrated approach to Cohesion Policy and the results-based approach.

Ministers responsible for Cohesion Policy met on 20 May 2011 in Gödöllő to define the content of the legislative package on the future of Cohesion Policy and to set out strong political messages to safeguard the policy’s achievements. The meeting discussed the role of thematic concentration and a results-oriented approach. The Hungarian Presidency issued summary conclusions on the results achieved.[13]

3. State of play in the current challenges of the distribution of funds

Economic disparities within the European Union pose a significant challenge to its cohesive development. These disparities are particularly pronounced in the distribution of direct resources such as capital investments, research and development (R&D), and innovation, which are crucial for sustainable growth. The paper identifies the "gap" in these resources as a key barrier to economic success in smaller and poorer member states.

The relationship between innovation gap and direct EU funds distribution gap is underscored by the significant disparities in fund allocation and participation rates among EU member states, particularly between the newer EU13 (Eastern European countries) and the more established EU14 (Western European countries).

Innovation is a critical driver of economic development and prosperity, and the Horizon Fund is uniquely positioned to influence this area directly. The fund's structured programs and initiatives are tailored to encourage collaboration among researchers, businesses, and institutions across member states, thereby facilitating the cross-border exchange of knowledge, expertise, and innovative practices. This collaborative approach not only accelerates the pace of innovation but also ensures a more inclusive and widespread adoption of innovative solutions across the EU. Therefore, focusing on the Horizon Fund provides valuable insights into how direct EU funding can be leveraged to enhance innovation capacities, drive research excellence, and ultimately contribute to the economic and social advancement of the EU as a whole.

Despite the Horizon Program being the largest of the 38 direct EU funds with a budget of €95.5 billion, the distribution of these funds has been uneven, with the EU13 countries receiving only 7.89% of the net EU contribution since the start of the current framework program in 2021, on the basis of the data published on the Horizon Dashboard on 20 December 2023. This is in stark contrast to the 84% received by the EU14 countries, despite the EU13 countries submitting 16% of the eligible proposals. The data reveals a significant per capita and per researcher funding gap, with EU13 countries receiving considerably less than their EU14 counterparts.[14] For instance, the net EU contribution per total population in the EU13 is €20, compared to €70 in the EU14. Moreover, the allocation to "Widera Calls," which are specifically designed to include at least one participant from the EU13 or Portugal, represents a mere 3.5% of the total (€95.5 billion) Horizon Program budget.

There is a huge difference both in participation and funding between the EU13 and EU14 in the Horizon Program contrary to the 20-year-long membership of most of the EU13 members. Unfortunately, the EU13 states share similar problems and negative results in the other 37 direct EU funds. This funding imbalance is mirrored in the broader context of all direct EU funds, which together amount to €377.3 billion, a figure comparable to the Cohesion Fund and Common Agriculture Policy resources. The persistent low share of funding for EU13 countries over the last 20 years highlights the need for substantial actions to foster greater unity within the EU.

Disproportionality between countries and regions appears in relation to all directly managed EU programs. If we look at the distribution between countries, the example related to the Horizon program is not unique: Hungary has not yet won a single CEF Energy tender in the 2021-2027 cycle. Greece received nearly 40% of the €1.6 billion allocated so far. It is followed by Belgium and Tunisia in a tie with 9.3% and 9.3% respectively.

Addressing the innovation gap involves tackling the underutilization of funds in smaller states. This underutilization could be remedied through incentivization, capacity building, information dissemination, and regulatory revisions to encourage better engagement with EU funding opportunities. The European Commission's New European Innovation Agenda acknowledges this innovation gap and the disparities in direct EU resource allocation among member states, emphasizing the need for a strategic approach to harness these funds for growth and innovation.[15] Despite these efforts, the success rate of eligible proposals from Hungarian applicants in the Widening Calls stands at 24%, only slightly higher than the overall Horizon Program success rate of 22%. This marginal difference indicates that while initiatives like the Widening Calls are steps in the right direction, they may not be enough to significantly impact the participation rates of EU13 countries.

This situation reflects broader challenges in cohesion policy, emphasizing the need for a diverse network of actors, sound governance, and partnerships across EU policy domains to optimize the impact of cohesion policy in addressing challenges like the innovation gap and demographic shifts, and in supporting the transition towards digital and green technologies. The future trajectory of cohesion policy, as discussed by the European Commission's working group on the Future of Cohesion, aims to enhance regional prosperity and resilience through innovation support, education, and improved governance. Such advancements would bolster regional adaptability and resilience against unforeseen disturbances. Innovation support is a fundamental pillar of regional policy and is inextricably linked to it.

The programs of the European Union are primarily based on the rationale of enabling the implementation and methodological dissemination of policy objectives at the pan-European level. However, in the case of this level of differences in the funding provided by the programs, competitiveness cannot be separated from the principles of cohesion, so they must also be applied to a certain extent in relation to these programs.

In light of the potential phasing out of the Cohesion Fund and the existing disparities among the 27 EU members and 250 NUTS2 regions, there's a pressing need to emphasize the principles of cohesion in the allocation and decision-making processes of direct EU funds. The ongoing discourse on the future of cohesion policy, as discussed by the European Commission's expert working group, suggests that cohesion policy should play a more significant role in addressing the challenges of the innovation gap, demographic shifts, and the transition towards digital and green technologies. This includes leveraging a diverse network of actors, enhancing governance, and fostering partnerships across various EU policy domains to support regional resilience and prosperity.

On the basis of the data published on the Horizon Dashboard on 20 December 2023 significant regional divides in the allocation of direct EU funding can be observed. In the case of Hungary and Italy, the Dashboard highlights disparities in funding distribution, participation, and SME involvement across various regions.

The distribution of Horizon funding is also uneven across the EU's NUTS2 regions, with 20 regions securing 51% of the net EU contribution. This leaves the remaining 230 regions to share the other 49%, highlighting significant regional disparities within the Union. For instance, the Attiki (the NUTS2 region of Athen), emerges as the 8th largest beneficiary with €650 million, dwarfing the funds received by entire countries like Hungary, which receives only €128 million.

Moreover, disparities are not confined to the divide between EU13 and EU14 countries. Even within the EU14, regions such as Limburg, Hainaut, and Belgian Luxembourg in Belgium; Kärnten, Salzburg, and Burgenland in Austria; and several regions in France and Germany, find themselves at the lower end of Horizon funding recipients.[16] This underlines the complex landscape of funding distribution and the challenges of ensuring equitable support for research and innovation across the EU, suggesting a need for more nuanced and targeted approaches to address these disparities.

Hungary presents a different picture, with a more concentrated distribution of EU funds. Central-Hungary, which includes the capital city Budapest, received a significant portion of the funding, with 336 signed grants and a net EU contribution of approximately 100.4 million euros. Other regions like Alföld and Northern Transdanubia show lower levels of direct EU funding, with net contributions of 11.9 million euros and 4.5 million euros, respectively, indicating a centralized focus on the capital region.

These numbers reflect the regional disparities in accessing direct EU funds in both countries, with certain regions, especially capital or economically stronger areas, receiving a larger share of the funding. This disparity points to the need for targeted policies to ensure a more equitable distribution of EU funds, supporting regional development and reducing economic disparities within member states. If horizontal aspects and cohesion are enforced, fragmentation within the country can also be reduced, in line with European values. The regional and innovation disparities not only pose challenges at the local level or are specific to individual member states; they are fundamentally a matter of European unity, sovereignty, and competitiveness. The extent to which these regional and innovation divides fragment the European landscape is critical to the continent's collective ability to thrive and maintain a competitive stance on the global stage.

4. Hungary’s national interest in the policy field

Hungary’s national interest in the European Union’s regional policy, particularly with a focus on increasing directly managed funding access, strengthening its internal market, and prioritizing the Central and Eastern European (CEE) region, is driven by a combination of economic, political, and strategic factors. As the EU allocates a significant portion of its budget to directly managed programs, Hungary sees an opportunity to enhance its national competitiveness and reduce regional disparities through more equitable access to these funds.

Funding provided through directly managed EU programs represents a substantial portion of the EU’s overall budget, amounting to nearly one-third, or around €400 billion, for the 2021-2027 period. These programs are designed to foster innovation and cohesion by supporting projects that have the potential to advance EU-wide objectives, such as sustainable development, digital transformation, and competitiveness. However, Hungary, like many of its Central and Eastern European counterparts, has historically faced challenges in accessing these funds at the same level as wealthier, Western European member states.

The funding gap between EU member states is a critical issue for Hungary, which seeks to bridge this divide by advocating for a more balanced distribution of resources. This approach aligns with Hungary’s broader national interest in ensuring that EU cohesion policy addresses regional disparities, not just between countries, but also within them. Given Hungary’s geographical position and economic status, increasing the amount of dierctly managed EU resources would enable the country to invest in key areas such as research, innovation, and sustainable development, all of which are essential for long-term growth and prosperity.

Hungary's focus on strengthening its internal market is closely tied to its position within the EU's broader economic framework. A robust internal market is essential for Hungary to fully integrate into the EU's single market, which is one of the cornerstones of EU membership. By focusing on internal economic development, Hungary aims to increase its competitiveness in the wider European context. Furthermore, a strengthened internal market would help the EU to reduce its reliance on external economic forces, making the integration more resilient to global economic shocks.

Hungary’s national interest in prioritizing the CEE region within the framework of directly managed EU programmes reflects a broader regional strategy. The CEE region, which includes countries that joined the EU in the 2004 and subsequent enlargements, has historically lagged behind Western Europe in terms of economic development and integration.

The rationale behind prioritizing the CEE region is twofold. First, Hungary recognizes that regional cooperation can enhance the collective bargaining power of CEE countries within the EU. By working together, CEE countries can push for more favorable terms in areas such as funding allocations, regulatory frameworks, and economic governance. Second, Hungary sees the economic development of the CEE region as being inextricably linked to its own national prosperity. As such, Hungary is keen to ensure that EU cohesion policy reflects the unique challenges and opportunities facing the CEE region, including the need for targeted investments in infrastructure, innovation, and human capital.

Hungary's 2011 EU Presidency was a pivotal moment in its efforts to influence the future direction of EU cohesion policy. Throughout its Presidency, Hungary prioritized discussions on shaping a more territorially cohesive EU, capable of competing globally. It played a key role in fostering debates on adopting a more strategic and results-oriented approach to cohesion policy. These discussions laid the foundation for future policy advancements, to the extent that the 2024 Hungarian EU Presidency has made cohesion policy its top priority, focusing on upward convergence and the integration of social, economic, and territorial cohesion. In policymaking, Hungary employs both bottom-up and top-down approaches simultaneously.

Hungary’s advocacy for a more balanced directly managed EU funding system reflects its broader national interest in ensuring that EU funds are distributed in a way that promotes economic and social cohesion across the entire EU, rather than being concentrated in a few wealthier member states. This approach is particularly important for Hungary, which, like many CEE countries, faces significant regional disparities in terms of economic development, infrastructure, and innovation capacity.

5. Recommendations

1. The European Union should Launch Pilot Hop On Facility on topics relevant to Central and Eastern European countries, such as energy, agriculture, and defence policy. Currently, there is a minimum call for proposals (one-digit per year) for the Horizon Fund, the consortium leader of which must come from ‘Widening country’ only. Changing the 95-5 % ratio between EU14 and EU13 requires an increase in the number of calls for proposals in favour of the EU13, not only for the Horizon Fund, but also for other direct EU funds.

2. To enhance collaboration and ensure equitable participation across the European Union, it's proposed that consortium requirements mandate the inclusion of three distinct entities from at least three different countries. Crucially, at least one of these countries should be classified as a 'Widening Country,' such as Hungary. This criterion aims to guarantee representation from these nations in any successful consortium, fostering greater inclusivity and diversity in collaborative projects.

3. The evaluation process for consortia should be adjusted to favor those that demonstrate a strong commitment to inclusivity and innovation. Specifically, additional points should be awarded to consortia that meet one of the following conditions: firstly, those that include at least two partners from a Widening Country, promoting the integration of underrepresented regions; secondly, consortia that feature at least two partners from countries identified as moderate[17] or emerging[18] innovators according to the European Innovation Scoreboard. This approach encourages broader participation and leverages diverse capabilities, potentially leading to more innovative and inclusive outcomes. Additionally, promoting public-private partnerships could serve as a catalyst for increased investment in crucial sectors, leveraging private sector dynamism for public good.

4. Adopting a regional approach to policymaking that tailors strategies to the unique needs and potentials of each region can significantly reduce disparities. Enhancing regional cooperation within member states can ensure a more equitable distribution of resources and opportunities, fostering a sense of unity and shared progress. In the case of the European Urban Initiative, municipalities with a minimum of 50.000 people can apply, which excludes most of the rural population from applying. This entry barrier is recommended to be reduced by magnitude.

5. To bridge the innovation gap, targeted subsidies and tax incentives for research and development (R&D) should be implemented, specifically focusing on businesses within underdeveloped regions. Furthermore, supporting the establishment of innovation hubs and research centers in these regions could stimulate knowledge transfer and technological advancement, laying the groundwork for sustained economic growth. Additionally, promoting public-private partnerships could serve as a catalyst for increased investment in crucial sectors, leveraging private sector dynamism for public good.

6. Investing in education and training programs is crucial for building a skilled workforce that can drive innovation and support economic growth. These programs should be designed to equip individuals with the skills needed in a modern economy, thereby enhancing their employability and productivity. Encouraging cross-border educational and professional exchanges can also contribute to a more integrated and competitive European labor market, promoting knowledge sharing and cultural understanding.

7. Establishing a robust framework for monitoring and evaluating the effectiveness of policies aimed at closing the direct resource and innovation gaps is imperative. A transparent statistical analytic system has to be built that highlight regional disparities. This framework should include clear benchmarks and indicators to assess progress and identify areas for improvement. Regular assessments should be conducted to evaluate the impact of these policies on reducing regional disparities and enhancing the economic success of smaller and poorer member states, ensuring that European policies remain responsive to changing needs and circumstances.

Implementing these policy recommendations requires a concerted effort from EU institutions, member states, and relevant stakeholders. Through collaborative governance and a commitment to shared goals, the European Union can make significant strides towards reducing economic disparities, strengthen cohesion, fostering innovation, and ensuring a prosperous future for all its members.

References

European Commission (s. a.a): New Cohesion Policy.Online: https://ec.europa.eu/ regional_ policy/2021-2027_en

European Commission (s. a.b): The Future of Cohesion Policy. Online: https://ec.europa.eu/ regional_policy/policy/how/future-cohesion-policy_en

European Commission (2011): Territorial Agenda 2020. Towards an Inclusive, Smart and Sustainable Europe of Diverse Regions. Online: https://ec.europa.eu/regional_policy/en/information/ publications/communications/2011/territorial-agenda-of-the-european-union-2020

European Commission (2022): New European Innovation Agenda. eur-eurlex.europa.eu, Online: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022DC0332

European Commission (1999): Towards Balanced and Sustainable Development of the Territory of the European Union. Paper adopted at the Informal Council of Ministers responsible for Spatial Planning, Potsdam, May 1999. Online: https://op.europa.eu/en/publication-detail/-/publication/ a8abd557-e346-4531-a6ef-e81d3d95027f/language-en/format-PDF/source-287285340

European Parliament (2012): Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union. 26 October 2012. Online: https://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri= CELEX:12012E/TXT:en:PDF

European Parliament (2009): European Parliament resolution of 22 April 2009 on the Green Paper on the future TEN-T policy, 2008/2218(INI). Online: www.europarl.europa.eu/doceo/ document/TA-6-2009-0258_EN.html

Gazdag, Ferenc (2011): A 2011-es magyar EU-elnökség [The 2011 Hungarian EU Presidency]. Online: www.grotius.hu/doc/pub/QWFNHZ/2011_222_gazdag_ferenc_a_2011-es_mag- yar_eu-elnokseg.pdf

Manzella, Gian Paolo – Mendez, Carlos (2009): The Turning Points of EU Cohesion Policy. Glasgow: University of Strathclyde. Online: https://strathprints.strath.ac.uk/38743/1/8_ manzella_final_formatted.pdf

J. Nagy, Lászó (2005): Az európai integráció politikai története. Szeged. Online: https://publicatio. bibl.u-szeged.hu/3325/1/EUINTEGR.pdf

Nyikos, Györgyi ed. (2016): Kohéziós Politika 2014–2020. Az EU belső fejlesztéspolitikája a jelen programozási időszakban. Budapest, Nemzeti Közszolgálati Egyetem. Online: https://nkerepo. uni-nke.hu/xmlui/bitstream/handle/123456789/15941/Kohezios%20politika.pdf ?sequence=1

Schön, Karl Peter (2018): Europäische Raumentwicklungspolitik. In ARL – Akademie für Raumforschung und Landesplanung (eds.): Handwörterbuch der Stadt- und Raumentwicklung. Hannover. 577–587.

Reviewers:

· Csaba Fási PhD, academic researcher, University of Public Service;

· János Matuz, senior analyst, Hungarian Development Promotion Office;

· Tibor Navracsics PhD, minister, Ministry for Public Administration and Regional Development.

Policy paper presented on 15 November 2023.

The manuscript was closed on 30 November 2023.

[1] European Parliament s. a.a.

[2] European Parliament s. a.b.

[3] Manzella–Mendez 2009: 13.

[4] J. Nagy 2005

[5] Schön 2018

[6] European Commission 1999

[7] European Parliament 2012

[8] European Parliament 2009

[9] Gazdag 2011: 1–17.

[10] Gazdag 2011: 3.

[11] Nyikos 2016: 26.

[12] Nyikos 2016: 28.

[13] European Commission 2011

[14] This imbalance extends to the net EU contribution per researcher, with figures significantly lower in EU13 countries such as Hungary (€2,986), Poland (€3,042), Slovakia (€3,548), and Czechia (€6,769) compared to the average of €12,667 across the EU27.

[15] European Commission 2022

[16] Limburg (126), Hainaut (137), the Belgian Luxembourg (235) regions from Belgium, Kärnten (135), Salzburg (162) and Burgenland (213) from Austria, Picardie (155), Haute-Normandie (159) and Franche-Comté (167) from France, Oberfranken (166), Kassel (181), Niederbayern (191), Koblenz (203) and Trier (226)

[17] Estonia, Slovenia, Czech Republic, Italy, Spain, Malta, Portugal, Lithuania, Greece and Hungary

[18] Croatia, Slovakia, Poland, Latvia, Bulgaria and Romania

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