Wales, EU Structural Funds & Brexit

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Abstract

This paper examines how EU Structural Funds have been invested in Wales and how these receipts have affected the Welsh economy and economic growth over the last decade. Wales is definitely a particular region of the UK, as it can still be considered as a less developed area if we take into account the GDP per capita levels of other regions within our Union. This paper’s main research questions are then the following ones: how EU Funds have helped this area to develop and create more opportunities for businesses? Moreover, since Brexit happened, what comes for the future? Conclusions suggest that Wales is a net beneficiary of the EU Structural Funds, and that Brexit will bring a great deal of uncertainty for many businesses, investors and workers located there. A possible strategy to avoid more difficult situations in the future could be to negotiate a new balanced economic development scheme across the UK, with the UK Government.

Wales: problems and challenges of a less developed region.

Wales is a country which is part of the United Kingdom (UK), located in the South-West part of the island. Wales has 3.113.150 inhabitants, with a population density around 150.1 people per km2. Its capital city is Cardiff, with a population of around 360 thousand people, quite similar in terms of population to the Italian city of Florence, capital city of Tuscany, Italy. Even if the country has very ancient traditions, its democratic institutions are quite recent. The National Assembly for Wales was founded in 1999, while the physical Parliament was inaugurated only in Cardiff Bay in 2006. Wales has gone through the so-called devolution process, with 20 devolved areas. In other terms, the National Assembly for Wales is entitled to pass laws on all subjects in the devolved areas, without asking first an approval from UK national institutions such as the UK Parliament. The very first bill passed by the National Assembly became an act only in 2012.

In line with the decision to grant more powers to the country, the UK Government decided to establish, in accordance with the Welsh Government, a Wales Office Business Plan, as well as a permanent Wales Office. The Wales Office has the mandate to support the Secretary of State for Wales in promoting the best interests of Wales within the UK. The Office also supports the Secretary of State in ensuring the “smooth working of the devolution settlement in Wales”¹. For what concerns the analysis proposed in this paper, it is interesting to see that there are many institutional actors involved in managing economic growth in Wales, and not just local authorities or the UK Government.

The current economic situation in the country is not easy to be defined. However, it can be said that the country is still very far from reaching the innovation and technology standards achieved by other areas of the UK. Wales’ economy is mainly based on services, but manufacturing represents still one third of the gross value added. Agriculture and forestal businesses are another important asset for the region.

Poverty represents one of the major threads for the Welsh population. According to the official Welsh Government statistics², poverty rate is around 23%, however good policies have been implemented since 2013 to counteract the effects of the economic and financial crisis in terms of unemployment. While the unemployment rate was around 9.5% between July and September 2011, it is now set at 4.1 per cent, with a negative trend still present (down 0.3 percentage points on the year).

Taking into account these data, it is therefore understandable why the EU Funds have been invested since 2000³ mainly to support small and medium-sized enterprises (SMEs), agricultural programs to help protect and enhance the countryside, as well as rural development programmes and sustainable development within the fishing and aquaculture sectors.

Wales & EU Funds: The Welsh European Funding Office (WEFO).

However, in order to better understand how the EU Funds have contributed in supporting the Welsh economy during the last decade, and to identify problems and challenges, it is important to correctly define the framework in which the paper is doing this exercise. Why are EU Funds so important for this region? What EU Funds consist of? are the basic questions from which this second section starts.

First of all, it seems important to mention the legal framework. We know that the European Union (EU) promotes balanced economic development across all the EU Member States (MSs) through the so-called cohesion policy, also known as European Regional Policy. The legal framework for this EU competence lies on art. 174 of the Treaty on the Functioning of the European Union (TFEU), which states that the EU MSs shall promote “harmonious development” across the Union, as well as strengthen economic, social and territorial cohesion and reduce disparities in levels of regional development.

Cohesion Policy leans on three important European funds: (1) the European Regional Development Fund (ERDF); (2) the European Social Fund (ESF); and (3) the Cohesion Fund. For what concerns this analysis and the aim of this paper, only the first two funds will be taken into consideration, as Wales benefits mainly from these ones.

The European Regional Development Fund (ERDF) has — as its final aim — the goal to help redressing regional imbalances within the Union through “development and structural adjustment of regions whose development lags behind and the conversion of declining industrial regions”. On the other hand, the European Social Fund (ESF) aims to improve employment opportunities for workers, increase their geographical and occupational mobility and facilitate their adaptation to industrial and production changes.

The governance framework of these economic resources and financial strategies is defined in accordance to the EU laws, in particular by the laws agreed by the Council of the European Union (CoEU) — the body of the EU where the MSs’ governments have their seat — and the European Parliament (EP). Of course, other stakeholders and institutions join the discussions within this legislative process. For instance, Wales tries — or used — to participate to the talks through the European Economic and Social Committee and the more known Committee of Regions.

The management framework, instead, is quite more complex, as it is based on a system of shared management. If the European Commission (EC) has the responsibility for the EU budget, the MSs are in charge of managing the implementation phase. Consequently, between MSs there could be — and there are as a matter of fact — deep and critical differences in the ways through which EU Funds are spent and allocated. That is why, for example, Italy has always been criticised by other MSs, and in particular by the EC, for its lack of transparency and follow up procedures on the use of the Funds; while the UK used to be one of the best performing country in terms of management of the Funds. Only the 2% of the total benefits where spent each year for bureaucratic activities (control and follow up procedures, reports and management from central and local authorities)⁴.

For what concerns Wales, the implementation falls under the responsibility of the Welsh Ministers. That is why any ERDF and ESF programmes are managed, in Wales, by the Welsh European Funding Office (WEFO), a special agency created by the Welsh Government to fulfill its duties in terms of administration, management control and audit functions, as well as the creation of partnerships between public or private sources and entities.

Wales, a net beneficiary.

Considering all these aspect, it is interesting to note that the funding allocated to the UK for the period 2014–2020 is €11.8bn, of which €2.4bn (20% of the total) is destined to Wales. The region is one of the three net beneficiaries in the UK: out of 37 regions in Britain, 35 are net contributors to the structural funds. Wales definitely enjoys significantly higher levels of funding than other UK regions. Only between 2007 and 2020, Wales has been receiving about 5 billion euros. Some of the funded projects have been summarised in Table no.1, where it is possibile to see that these funds have covered many sectors, from technology to sport, from towns’ centres regeneration projects to new universities’ campuses.

However, in order to better understand what these numbers really mean in terms of effects for Welsh citizens, it is interesting to have a look at other two aspects. The first one is the economic dimension. As the report recently published by the Centre for European Reform (2014) shows, EU Funds have generated a net benefit of around €300 (£273) per person per year⁵.

This information tells us that without EU Funds, average income for Welsh people would be lower, and that there is a real and evident effect on the overall Welsh economy of these European Funds. Similar conclusions can be reached looking at Table no.2, where the impact of EU Funds has been assessed through some indicators such as the number of new enterprises created as well as the jobs created thanks to the ESF.

The second aspect which is interesting to analyse is geographical. As a matter of fact, having a look at Wales’ map⁶ can give us not just a better understanding of the variety of economies in the region (maritime economy by the coasts, mountains and big green areas for agriculture, etc.), but it can also help us to understand the level of need of Wales with respect to EU Funds. It has been shown that EU Funds contributed in generating more income for Welsh people, and that is probably also because of the fact that the majority of territories in Wales were classified as Objective 1 areas (see the darker parts of the map).

The Objective 1 Programme recalls the first objective of the EU Structural Funds, which is “to promote the development and structural adjustment of regions whose development is lagging behind”⁷. In this case, it is therefore important to underline this aspect: Wales has many undeveloped areas within its territory, which fundamentally need more funds to develop new businesses and ultimately reach higher economic development levels. Moreover, it is also important to stress the fact that Objective 1 territories have a lower GDP per capita, less that 75% with respect to the EU MSs’ average⁸.

However, another information can be obtained by looking at this map: the fact that Wales is divided in two main subdivisions: (1) West Wales and the Valleys and (2) East Wales. The former has been designated a ‘less developed’ (or Convergence/Objective 1) region, and the latter a ‘more developed’ (or Competitiveness/Objective 2) region. This also means that there are specific — and different — needs between the two areas, and that the level of EU Funds invested also vary according to this diversification.

European Structural Funds 2014–2020 and Brexit.

“Between 2014–2020, Wales will benefit from over £2bn European Structural Funds investment”. That is what the Welsh Government put as a slogan on its website, more specifically on the opening page of the section dedicated to EU Funds in Wales. And it is within this section that is possible to find the Operational Programmes (OPs)⁹ for the two regions of the country in relation to the period 2014–2020.

For what concerns the West Wales and the Valleys, these were the objectives set out by the Welsh Government:

  1. “To reduce poverty by increasing employment levels, particularly for underrepresented groups and those furthest from the labour market”;
  2. “To increase skills levels of the workforce, increasing the number of people qualified to intermediate level or above, reducing the number of people with no skills or basic skills only and increasing higher level skills in research and innovation”;
  3. “To increase youth employment and education attainment, thereby reducing poverty and disadvantage in our young people”;
  4. “To reduce inequalities in the labour market amongst women and recognised equality groups”.

Considering all the four objectives, it can be said that there are at least three cross cutting themes: equal opportunities; sustainable development and tackling poverty and social exclusion.

Looking at the Summary of the ERDF and ESF Structural Funds programmes in Wales report¹⁰, it is possible to have a better idea of how the Welsh Government has tried to set out a plan to achieve these objectives with the use of the ERDF and the ESF. In particular, it is interesting to notice that particular attention has been putting to venture capital; market failures in the availability of finance; start-ups; information and communication technology (ICT); renewable energy schemes, in particular marine energy production; infrastructure investments. It is clear that there is an unequivocal focus on supporting sustainable jobs and sustainable development, as well as a focus on retraining the current human capital to meet the future needs of businesses. This tendency towards favouring investments in new technologies and sustainable growth can also be found in the Operational Programme for the East Wales, even if it is an Objective 2 area.

Other authors and researchers have pointed out that Wales has “the higher allocation of structural funds in absolute terms which have been strongly targeted on training and skills to address poverty resulting from unemployment, economic inactivity and youth unemployment, but have also been used to improve public administration and partnership working through local service boards”¹¹. Good examples of these investments are Swansea University and the Swansea Bay Science Park. Thanks to Horizon 2020, Wales has obtained funding of £45 million for higher education institutions.

However, it is clear that these objectives will be hardly reached and entirely achieved if Brexit will imply also no longer eligibility for benefitting from EU Funds. Current articles on the newspapers suggest that this will be the case, so it would be important to understand how the priorities of the UK Government will change, when the Prime Minister will have to decide to continue, or not, with the strategy of balanced economic development, within the UK and no longer at the EU level. Moreover, it will be crucial for Wales to identify (but not only for Wales) the sectors that will be considered as strategic. For example, the EU is now supporting Wales also through a rural development programme: England has not the same priorities and needs with respect to this programme. Will it be readopted? Will it be replaced with a broader action plan? What will be the amount of money allocated? These questions, partly define the great deal of uncertainty which remains regarding who will have the policy making authority after Brexit.

The majority of Welsh citizens voted for Brexit, even if it is clear that Wales is a net beneficiary in terms of EU investments in the country. More than the 53% of the voters voted for Leave.

It would be then interesting to analyse the reasons for which we had this outcome, in spite of the fact that the Welsh Government officials tried to explain to the population that Brexit will bring less money for economic development¹². However, it must be said that a Remain majority was registered in the eastern part of the country, the one which most benefitted from EU Funds in terms of net receipts. Understanding what went wrong in terms of communication could be an interesting research question to possibly avoid future similar situations. Situations which could be generated in other parts of the EU by the independence movement in Catalonia, for example, or by the far right forces in Poland.

Conclusion

It has been said throughout this paper that EU Funds are a crucial component for the development of the country. Wales is a special region of the EU, and as any other territory, there are specific opportunities that could be exploited and better used to guarantee higher economic standards for its citizens. However, Brexit will definitely have a major impact on Welsh people; not just because many were the expectations of businesses in terms of net receipts until 2020 thanks to EU Funds, but also because it is difficult to imagine that the UK Government will be able to guarantee the same amount of money for the development of Wales. In this respect, as many authors and academics have pointed out, it is crucial for Wales to have a special seat during the Brexit negotiations and implementation procedures to safeguard its national interests and the interests of its citizens and businesses.

With Brexit, the 2019 and 2020 allocations could be lost for Wales, which would amount to at least €723 million of EU receipts. This scenario suggests that the Welsh Government will have to reconsider its economic focus and strategy, looking for new opportunities that this country might offer. After Brexit, Wales will be a strategic connection between the UK and Ireland in terms of maritime economy and trading. Together with its education institutions, it might be possibile to create new partnerships between private and public actors to achieve higher levels of Research & Development in terms of maritime transportation of goods and more technology for cargo ships. Moreover, thanks to the big investments which have been made for education, if an agreement similar to the one reached with Canada is to be signed between the UK and the EU, Erasmus+ projects will become possible also for Welsh citizens, favouring in this sense retraining programs and more training and job opportunities for many young people.

However, it is clear that any success in this respect will be possible only if Welsh and UK institutions, at all levels, will collaborate to reach the best possible agreement with the EU and the remaining 27 Member States.


This paper was originally written for Prof. Stefania Nanetti’s university course in Policy of EU Structural Funds, taught at LUISS University, in November 2017.


¹ Wales Office (2012) Wales Office Business Plan 2012–15, UK Government. See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/214846/Wales-Office-Business-Plan.pdf (last accessed 09.12.2017).

² Welsh Government (2017), Key economic statistics — Release date: November 2017, Statistics & Research. See: http://gov.wales/statistics-and-research/key-economic-statistics/?lang=en (last accessed 09.12.2017).

³ Guilford G., Jones H. C., Richards G. (2016), Europe Matters to Wales: EU Policy and Funding Opportunities for Wales 2014–2020, Final Report and Recommendations to the Minister for Finance and Government Business, Welsh Government. See: http://gov.wales/docs/wefo/publications/160317-ambassadors-report.pdf.

⁴ Administrative costs across the whole of the UK for the funds were £28 million/year, the 2% of the £1.2 billion/year worth of receipts. For more information, it is possible to get access to a document published by the UK Parliament on the matter. See: http://www.publications.parliament.uk/pa/ld200708/ldselect/ldeucom/141/14107.htm (last accessed 07.12.2017).

⁵ Centre for European Reform (2014), The economic consequences of leaving the EU, See: http://www.cer.org.uk/sites/default/files/smc_final_report_june2014.pdf (last accessed 07.12.2017).

⁶ Note that darker areas on the map represent Objective 1 areas. Source: DG for Regional and Urban Policy (2014), United Kingdom Structural Funds (ERDF and ESF) eligibility 2014–2020, European Commission. See: http://ec.europa.eu/regional_policy/sources/images/map/eligible2014/uk.pdf.

⁷ More information are available on the EUR-Lex website. See: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=LEGISSUM:g24203.

⁸ Note that between 2007–2013, the EC used the term “Convergence region” instead of Objective 1. In order to have a look at the older map, see: http://ec.europa.eu/regional_policy/sources/images/map/eligible2007/conv_comp_0713_uk.pdf.

⁹ For the West Wales and the Valleys OP, see: http://gov.wales/docs/wefo/publications/150603westwalesesfoperationalprogramme.pdf. For the East Wales OP, see: http://gov.wales/docs/wefo/publications/150603esfeastwalesoperationalprogramme.pdf.

¹⁰ For the Summary of the ERDF and ESF Structural Funds programmes in Wales, see: http://gov.wales/docs/wefo/publications/160927-summary-esf-erdf.pdf.

¹¹ Birrell D., Gray A. M. (2017), Devolution: The Social, Political and Policy Implications of Brexit for Scotland, Wales and Northern Ireland, Jnl Soc. Pol. (2017), 46, 4, 765–782. Cambridge University Press.

¹² Many documents have been published by the Welsh Government on their website to inform the citizens about the impact of EU Funds on the country. For example, see: http://gov.wales/docs/wefo/publications/160524-infographics-july.pdf.