Regional cohesion — survey evidence on the ability of local governments and firms to tackle post‑pandemic challenges
By Debora Revoltella, Emily Sinnott and Patricia Wruuck, European Investment Bank
A key condition for designing an appropriate policy response is to know what the core needs and problems to be addressed actually are. This also goes for cohesion support, requiring a proper identification of private and public investment gaps, needs and local abilities to realise convergence. Debora Revoltella is Director of the Economics Department of the European Investment Bank (EIB). Emily Sinnott works as Head of the Policy & Strategy Division in the same department and Patricia Wruuck works there as Economist. With the EIB’s financing of economic and social cohesion, also in the years to come (see page 32), the three EIB experts provides insights on the surveys — and some of their results — the EIB uses as instrument to identify the local needs and abilities with a view to convergence so that the EU’s bank can offer the best possible financing support on the ground.
Addressing transition challenges through cohesion policy
EU integration has been an engine for economic convergence, creating opportunities for people across its regions. Cohesion in the European Union has improved, with central and eastern European economies especially catching up over the last two decades. However, gaps remain and new challenges have emerged. Globalisation and digitalisation fuelled prosperity in some regions, but less in others, and in the aftermath of the global financial crisis, regional convergence had slowed (1). The COVID 19 crisis has exacerbated existing inequalities as its impact was felt unevenly across Europe, for example, with some regions particularly hard hit by job losses in sectors such as tourism (2). Currently, regions are rebounding at different speeds and the risks for a strong recovery have increased. At the same time, regions face the need for a transformation in the way their economies work to flourish in the post‑pandemic environment.
Cohesion policy funds, together with the NextGenerationEu (NGEU), aim to support the recovery and boost the ability of regions to deal with current challenges and longer‑term shifts. The green and digital transition underway in the EU economy will bring profound changes locally. These shifts now need to be managed in the context of major uncertainties linked to the global and EU security outlook. Cohesion policy plays a pivotal role here to enable structural transformation, while mitigating risks of widening disparities. Supports for investment can bring strengthened social and economic resilience at a local level and for the EU as a whole. Success in supporting deeper economic convergence will depend on whether funds can be channelled to investments that effectively address the existing gaps.
Effective cohesion support requires an understanding of the investment gaps
We analysed evidence from two surveys — the European Investment Bank’s Municipalities survey and the annual EIB investment survey (EIBIS) — to identify private and public investment gaps, needs and local abilities to advance on the transformation towards a smart and green economy (3). Our analysis classified EU regions at NUTS2 level based on the categories guiding current EU cohesion policy. We distinguished between regions with GDP per capita below 75 % the EU average (less developed), between 75 to 100 % (transition) and those with income levels above average (more developed or non‑cohesion) (4).
Preparedness of cohesion regions for digital and climate transitions
Cohesion regions report more often that they have infrastructure gaps. Non‑cohesion regions are one third less likely to state they have gaps compared to less developed regions. For the latter group, basic infrastructure gaps are most pronounced. These gaps are in urban transport, water and waste utilities and social infrastructure, i.e. including needs in health and housing (see Figure 1). Despite some convergence in incomes, this data shows that differences still exist in living conditions. Similarly, digital infrastructure tends to be more advanced in non‑cohesion regions, facilitating digitalization by firms and strengthening resilience in many regions when the pandemic shock hit (EIB 2022). In reaction to the pandemic, municipalities across the EU have put a stronger focus on investment in digital infrastructure. However, fewer cohesion regions include aspects like the introduction of digital payments, wireless internet or digital public administration in their infrastructure investment planning indicating more limited preparedness and digital capacities.
Figure 1 — Municipal Investment gaps in social infrastructure (% of municipalities reporting gaps)
On the climate challenge, about 75 % of municipalities in less developed regions reported investment gaps for climate adaptation and mitigation, including for energy efficiency. Municipalities in cohesion regions show an interest in stepping up investment, but more green projects will require assessment and planning, navigating regulatory requirements, and innovation. A lack of funding is a key barrier for many municipalities to realize green investments and municipalities in cohesion regions lag on green capacities5.
Firms’ responses show a similar picture. Corporates in cohesion regions reported higher investment gaps. Almost one in five firms in less developed regions stated that their investment over the last three years was below needs (see Figure 2). This coincides with lower investment rates, with 75 % of firms investing in less developed regions and 77 % in transition regions compared to 79 % in non‑cohesion regions6. Regarding these figures, it is important to keep in mind that these are structural measures and the gaps tend to compound over the years. We have observed the larger gaps repeatedly in cohesion, so differences of a few percentage points matter. While the pandemic has taken its toll on investment across all regions, cohesion regions face the challenge of continuing convergence in a changing environment against the background of structurally lower investment rates.
Figure 2 — Share of firms reporting investment gaps
Slower adaptation adds to challenges to position successfully in the emerging new normal
Firms clearly see that the pandemic worked to accelerate digitalisation. However, fewer corporates in cohesion regions have taken action to become more digital over as a reaction to the pandemic (7). Similarly, fewer have reacted to the changed circumstances through innovation, such as developing new products (see Figure 3). Firms in cohesion regions dedicate less of their investment to innovation‑related activities.
Figure 3 — Firms’ reactions to COVID‑19
Focusing on the green transition, EIBIS results show that many firms in cohesion regions already are experiencing the impact of climate change and extreme weather. At the same time, fewer have invested for climate action (32 % in less developed and 40 % in transition compared to 44 % in more developed regions) and in measures to increase energy efficiency. The lower share of firms undertaking climate‑related investment coincides with more corporates being sceptical about the impact of the climate transition on their company and seeing the transition more as a risk (34 % for less developed and 32 % for transition compared to 28 % in non‑cohesion).
Unlocking opportunities requires investment
Greater difficulties in accessing finance is one of the reasons behind lower investment. More firms in cohesion regions are finance constrained8. A higher share report access to finance as an investment obstacle. However, access to finance is not the only barrier firms in cohesion regions are facing. On average, more firms report obstacles, indicating a more difficult investment environment marked by higher levels of uncertainty (see Figure 4). Also, energy costs are a problem for many firms in cohesion regions indicating greater difficulties in dealing with the climate transition. For cohesion policy, this suggests that financing is needed to reduce investment gaps and realise opportunities from structural change, but it will not be enough alone.
Figure 4 — Share of firms reporting obstacles by region
Cohesion policy as key instrument to support regions’ resilience
Cohesion policy has contributed to reduce disparities and maintain investment following the global financial crisis (European Commission 2022)9. In addition, it has supported regions to address the EU‑wide crisis linked to the COVID‑19 pandemic, through reorientation of public spending programs and new funding measures.
Cohesion policy together with NextGenerationEu now is a key policy instrument to help regions navigate in an environment of high uncertainty marked by geopolitical tensions. A flexible deployment of tools can help local authorities to react to the immediate challenges. At the same time, it can provide the necessary capacity to undertake transformative investments, supporting longer‑term resilience, despite higher uncertainty.
To make the most of support, funds need to be well spent. This requires tackling finance and capacity gaps jointly to support sound planning and implementation of projects thereby maximising the impact of resources. Policy support should focus on maintaining public investment that leverages private investment, such as key network infrastructure. Gaps in basic infrastructure need to be tackled in a climate friendly way and the tackling of those in social infrastructure remains key to address vulnerabilities. Support for investment that helps firms in cohesion regions to move up the value chain are needed for sustainable economic catch‑up; the opportunity to maintain the lower production cost advantages that have been driving convergence may shrink. Less developed regions will need investment in education and training, research and innovation to propel future convergence. This needs to be complemented with improvements in the business environment, helping firms to grow and adapt to changes.
(1) European Investment Bank, Regional and Social Cohesion: Widening Gaps and how to close them. In: EIB Investment Report 2021/2022, EIB Luxembourg.
(2) European Commission, Eight Report on Economic, Social and territorial Cohesion: Cohesion in Europe towards 2050, Publications Office of the European Union, Luxembourg 2022.
(3) The EIB Municipalities Survey is a survey of 685 municipalities across the EU conducted in the summer of 2020. It collects information about local infrastructure investment, municipalities’ needs and gaps, their ability to secure funding and the effect of the pandemic on investment priorities. For further information, see EIB (2021). The EIBIS is an annual survey of some 13 500 firms, including all EU Member States and the UK as well as a sample of US firms that serve as a benchmark. It collects data on firms’ characteristics and performance, past investment activity and future investment plans, financing and other issues firms are facing. To analyse results with a view to regional cohesion, firms are classified depending on their location across cohesion region categories. Data are weighted by value added. For further information on the weighting, see (EIB 2021a).
(4) In this text, we refer to transition and less-developed regions together as ‘cohesion regions’.
(5) A municipality’s green capacity is approximated through having key instruments underpinning climate planning in place. These include green budgeting, land use planning and assessment of the municipal carbon footprint. See EIB 2021.
(6) Based on EIBIS 2021 results. EIB, Regional Cohesion in Europe 2021–2022 (forthcoming).
(7) EIB, The State of local infrastructure in Europe. EIB Municipalities Survey 2020, Luxembourg 2020.
(8) Finance constrained firms include corporates dissatisfied with the amount of finance received, firms that sought finance but did not receive it and those who did not seek external finance because they thought they would be turned down or costs would be too high.
This article was first published on the 1/2022 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.