Cohesion in a time of transition

Source: Robertsrob/Depositphotos

Cohesion was one of the drivers of the creation of the European Investment Bank (EIB) in 1958, and remains one of the Bank’s top priorities today. The Bank supports cohesion in the European Union by financing projects in regions that have a lower-than-average gross domestic product per capita and by complementing EU grants with loans. To adapt to the challenges of climate change and the transition to a modern, digital and low-carbon economy in a fair way, the EIB adopted a new Cohesion Orientation in October 2021. Lilyana Pavlova is the Vice-President of the European Investment Bank responsible for overseeing the Bank’s support for cohesion. Below she explains how the EIB plans to expand and modernise its investment in EU cohesion regions over the period of the EU’s current long-term budget, 2021–2027.

By Lilyana Pavlova, Vice-President of the European Investment Bank

EU faced with a double bind

With the effects of climate change ever more apparent, and the need for immediate action even more urgent, the European Union has embraced a bold strategy to cut its carbon emissions by radically transforming its economies and embracing digitalisation. This transformation, supported by unprecedented financial backing from the NextGenerationEu recovery plan, will create opportunities and challenges for all of Europe, but the stakes are highest for those living in regions that are less developed or already struggling economically.

Many of Europe’s poorer regions, which the EU’s cohesion policies are designed to support, are highly exposed to the effects of climate change, or are economically dependent on fossil fuels that will have to be phased out on the road to decarbonisation. In the south, higher temperatures in already warm European countries such as Greece, Spain and Italy will affect agriculture and increase the frequency and intensity of natural disasters, like the devastating wildfires last summer. The shift away from coal, which is essential for reducing our emissions, will hit many coal-dependent regions in the East — communities and industries in countries like Poland, Slovakia and Bulgaria — particularly hard.

Faced with this double bind, we need to focus investment on building modern, competitive, innovative, and sustainable economies in these countries. Much of the investment in the EU’s poorer countries has historically been in infrastructure, such as highways and railways, and the intention has been to promote growth through easier trade. But our investment priorities need to evolve if we are to confront the existential threat of climate change, promote innovation, and transition to modern, digital, low-carbon economies in a fair way. We will not achieve our climate goals unless we help everyone deal with the costs and fallout of the green transition, and we must address the relative paucity of climate and sustainability investment in our economically weaker regions.

The EIB’s new Cohesion Orientation

Supporting the economic, social and territorial cohesion of the European Union is a core mission of the European Investment Bank (EIB), which was founded in 1958 to help foster European integration, support EU policies, and promote development at home and around the world. Over the last long-term EU budget period from 2014 to 2020, cohesion accounted for as much as 30 % of our lending (€124 billion). That investment has paid off handsomely. Our internal models show that the impact of our lending in cohesion regions has been particularly positive, boosting growth by an estimated 2 % and employment by as much as 1 % in some cases (see also page 128). We would not be able to achieve this without fruitful cooperation and constant dialogue with the European Commission, the European Parliament, the European Committee of Regions, and other partners.

In order to support the European Union in its bold climate vision, the EIB has adopted a new approach towards its lending in Europe’s economically weaker regions. Our new Cohesion Orientation, set out in a paper last October, includes a goal of raising the amount we lend in these regions to 45 % of total lending by 2025 (see Figure 1). At the same time, we are also expanding our support to include all regions whose economic development is below the EU average.

Figure 1 — The EIB’s realisation and orientation in cohesion lending 2014–2021

The EIB Group’s new orientation concentrates the Bank’s support in cohesion regions on five key objectives:

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

Under our new approach, less-developed regions, by which we mean those with a gross domestic product per inhabitant of less than 75 % of the EU average, will receive greater attention and up to 23 % of our total EU lending by 2025. Regions with an intermediate level of income (75 %-100 % of the EU average) struggling with economic challenges such as high unemployment or declining competitiveness (‘transition regions’) have been identified by the European Commission as a new vulnerable group (see Figures 2 and 3). Transition regions, which can be found even in the European Union’s richer Member States such as Finland and the Netherlands, need targeted support to deal with challenges such as dependence on low-tech manufacturing, rising unit labour costs, relatively low levels of education, and a decline in industrial employment.

Figure 2 — EU Cohesion Policy map 2014–2020 & Figure 3 — EU Cohesion Policy map 2021–2027

Green transition

The EIB is also the EU climate bank, and we see no contradictions between our new Cohesion Orientation and our ambitious climate goals — just synergies and opportunities. In our new Cohesion Orientation, we stress the role of climate action as a motor for economic development, and we therefore want our lending to less-developed and cohesion regions to be as ‘green’ as our lending to the more developed regions. We are confident that we can increase our lending to cohesion regions and raise the proportion we lend to climate action to 50 % by 2025, a target that we have been working towards since November 2019 (see Figure 3).

We can do this by carefully choosing the projects we support so as to ensure they advance EU climate goals, such as clean, safe and connected mobility; energy efficiency; renewable energy; water and wastewater; as well as industry, the circular economy, food and agriculture. Massive investments in renewable energy are needed to decarbonise power production, especially in Eastern and Southern Europe. Moreover, soaring energy prices have reminded us how critical the ‘renovation wave’ has become, not only to decarbonise the residential sector but also to keep housing affordable for all Europeans. Making buildings more energy-efficient will create many jobs in construction and related trades, but it will also require a huge amount of vocational training. Lastly, achieving energy savings in industry and services will help not only to achieve Europe’s 55 % reduction target by 2030, but also to boost the competitiveness of our companies.

The EIB’s advisory services have a major role to play in this effort. Member States have access to unprecedented financial support to recover from the COVID-19 crisis through the NextGenerationEu’s €723.8 billion Recovery and Resilience Facility. But ensuring that these funds are put to good use in less-developed and transition regions is often a challenge. Our advisory services can help raise awareness, assist promoters in the design and structure of their projects, and even help public authorities to develop the skills and processes needed to take full advantage of all the support the European Union has to offer.

Digital transition and innovation

The potential disruption to jobs and industries from the digital transition and from automation is sometimes overshadowed by the dramatic changes needed for decarbonisation. But structural gaps in digital and innovation activity and skills in cohesion regions are also significant, and have been exacerbated by the pandemic. Firms in cohesion regions generally innovate less, and they were more likely to cut back on innovation during the crisis. The EIB’s Investment Survey 2021 shows that fewer firms in cohesion regions are taking steps to transform digitally or to tackle climate change than in non-cohesion regions. New policies are needed to spur innovation in these regions, to raise their income levels and to help them adjust to the digital transition. Innovation is crucial for economic competitiveness and the fight against climate change. This is because much of the technology we need to reach our climate goals is either not yet mature or has yet to be invented.

Thus, the second driver of development stressed in our recent EIB Group Cohesion Orientation is boosting private-sector innovation. As part of our new approach to cohesion, we plan to tackle this by helping mid-cap companies in less-developed regions adopt proven technologies, and when their projects show clear economic spill-over impact at the local level. Mid-cap companies are particularly important, because research shows that their activity has a strong, positive ripple effect in their communities. We will also help improve mid-cap companies’ access to finance by lending to them directly, and through the funds we provide to other lenders.

A just transition

Decarbonisation, digitalisation and automation are particularly challenging for less-developed and transition regions. We will not succeed in transforming our economies if we leave a trail of disaffected communities in our wake. Investing in these regions to ensure a just transition is therefore vital to the European Union’s economic, social and territorial cohesion, as well as its climate goals.

The EIB Group is committed to cohesion, and is deeply involved in the European Commission’s Just Transition Mechanism, which will generate additional investment to benefit the most affected regions in three ways. First, we will co-finance investments under the €19.32 billion Just Transition Fund the same way we co-finance investment under EU structural funds. Second, as the main financing partner of the InvestEU programme, the EIB will be involved in implementing the programme’s Just Transition Scheme, by supporting private projects that contribute towards a just transition as defined by InvestEU’s different public policies. Third, the EIB will provide lending under the public-sector loan facility, which will be complemented by grants from the European Commission, to support national and regional investments in green energy, transport, energy efficiency, and social infrastructure projects.

The EIB has been supporting the just transition for many years. An example is the work we have done with the city of Katowice over the last 20 years. Our loans helped to transform Katowice from a stagnating coal-mining town in Poland into a vibrant urban centre, offering new business opportunities and a much healthier environment for residents. In Slovakia, the EIB and the European Commission are supporting the transition in the historically coal-dependent region of Upper Nitra. With the region’s Novaky coalmine closing, the EIB’s Joint Assistance to Support Projects in European Regions programme, known as JASPERS, is helping to find alternative sources of energy for district heating and to improve public transport.

Stimulating comparable development opportunities

We cannot change physical constants such as ‘distance to the capital’ or ‘population density’. This is why public policies and investors have to focus on the factors they can help to shape such as the availability of growth-enhancing and low-carbon infrastructure, and the skills of our young people, but also lifelong learning opportunities for our workforce and maintaining public and private R&D capabilities throughout Europe.

Public funds alone cannot hope to fulfil all these needs. Therefore, EU cohesion funds and EIB Group lending will have to crowd in more private-sector finance, for example by using financial instruments instead of grants.

Europe and the world face huge challenges. We are living in the make-or-break decade that will determine just how catastrophic climate change will be. The competition we face from other regions to innovate and exploit digital technologies is greater than ever before. Europe’s best chance to secure a bright future is for us to work together and stand united. This is what EU cohesion policy is all about, and why the European Investment Bank is sharpening its focus on this fundamental EU priority.

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.