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Topic - Regional Policy

Boosting the regional economy

Introduction

All regions are different – both in terms of their economic structure and the environment for growth they offer. The objective within regional policy is to find ways of compensating for the economic disadvantages that some regions are having to cope with and to ultimately create a situation whereby living conditions are equally high across all of Germany’s regions.

Regional policy is about promoting individual regions and attracting business to them. It helps ensure that regions that face similar challenges and economic deficits are treated equally. A coordinated and targeted regional policy serves to foster balanced development within a country.

In the spotlight: regions that are structurally weak

German and European regional policy is about supporting regions that are structurally weak. It is about finding ways to make up for the disadvantages that are holding these regions back, thus allowing them to catch up economically. This is good for overall economic growth, helps with structural change, and results in the creation of attractive jobs.

Promoting the regional economy - in figures

47
Symbolicon für Geldscheine

billion euros
Amount of funding for business investments that was approved under the coordination framework for the GRW between 1991 and 2016

392
Symbolicon für Fabrik

million euros
Amount of GRW and ERDF funding granted to the manufacturing sector in 2016

181
Symbolicon für Schreibtisch

million euros
Amount of GRW and ERDF funding granted to the services sector in 2016

36
Symbolicon für Bürogebäude

per cent share of infrastructure funding
(GRW and ERDF funding) approved for developing land for use by the industrial sector and/or trade between 1991 and 2016 – that’s around 8.8 billion euros

Funding instruments

Improving regional economic structures

The most important instrument Germany uses as part of its national regional policy is the Joint Federal Government/Länder Scheme for the Improvement of Regional Economic Structures (GRW). Since 1969, the GRW has helped Germany foster balanced regional development.

GRW funding is dedicated to those regions that are structurally weak. The idea behind it is to strengthen regional investments, which in turn will generate attractive local jobs for the long term. This means that regions that are structurally weak are encouraged to play an active part in their development, rather than remain in a passive role.

A broad range of funding instruments is available

For regional policy to be effective, it needs to take account of the differences that exist between different types of regions. The GRW puts at regions’ disposal a large toolbox of funding instruments and strategies that they can use in line with their specific needs.

GRW funds are used to support investments by trade and industry, investments in local commerce-related infrastructure, measures designed to encourage networking and cooperation between local players, and measures designed to improve SMEs’ competitiveness.

  • The idea behind supporting investments by trade and industry is to provide incentives for companies to invest in regions that are structurally weak. This helps with the structural change that is needed for growth, employment and local income.
  • Building a strong commerce-related infrastructure is essential for weaker regions to be able to attract companies and thus become more competitive.
  • Greater networking and cooperation between local players (e.g. by means of development strategies or within regional management bodies and innovation clusters) helps improve the local business environment.

The basic guidelines for the GRW, the map of Assisted Areas, the instruments available and the rules and maximum funding rates that apply are all set out in the coordination framework which is agreed between the Federation and the Länder. The coordination framework transposes the European rules on national regional aid (subsidies) into national law.

There is no legal entitlement to funding under the GRW. Funding is provided in the form of grants or low-interest loans and is financed half and half by the Federation and the Länder.

The map of Assisted Areas shows which regions are eligible for support

The exact terms and maximum rates of funding that apply under the GRW vary depending on the level of structural weakness/needs of the region.

The level of structural weakness for each region is assessed on the basis of a national procedure. A complex system of mixed regional indicators (which is based upon the respective sizes of the labour market, income levels, and the quality of infrastructure) is used to rank regions according to their overall performance, starting with the region that is structurally the weakest (structurally and in terms of economic performance) to the one that is the strongest. The resulting list is used to determine the degree of support each region is to receive (map of Assisted Areas PDF: 2 MB; in German). The outcomes of the procedure are reviewed at regular intervals.

The current map of Assisted Areas, which applies from 1 July 2014 through to 30 December 2020, was approved by the GRW Coordination Committee of the Federation and the Länder on 7 April 2014. On 11 March 2014, the decision was approved by the European Commission as compliant with state-aid rules.

  • All of the New Länder as well as Berlin continue to have a lot of catching up to do, which is why all of their territory is designated part of the GRW Assisted Areas.
  • There are also some Assisted Areas located within selected regions that are structurally weak and situated within the Old Länder.

Depending on the class of Assisted Area a region belongs to (which itself depends on its level of economic development) and on the size of the company receiving the funding, different maximum funding rates apply when it comes to aiding investments by trade and industry. Small and medium-sized companies are eligible to receive higher rates of funding than large corporations. For details, please refer to the coordination framework (PDF: 706 KB).

The Länder are in charge of allocating GRW funding

Notwithstanding the national framework that has been agreed between the Federation and the Länder, Article 30 of the German Basic Law applies, which stipulates that responsibility for fostering regional economic development lies primarily with the Länder. As a result, the task of administering and managing GRW funding is reserved to the Länder. Within the bounds of the legal framework established by the Federation and the Länder, each Land is free to target funding at certain areas or at meeting certain objectives. The Land or the region in question decides for itself which projects are to receive what amount of funding, issues letters of approval, and verifies that beneficiaries adhere to the terms under which the funding has been approved.

The GRW as a living system

The GRW is a dynamic instrument that is continuously being honed and developed. The Coordination Committee of the Federation and the Länder approved a new coordination framework on 27 June 2014, which took effect on 1 July 2014 and applies throughout the 2014-2020 funding period. Under this new framework, the rules according to which funding is made available have been adapted and amended, the Federal funds made available to the GRW have been reallocated, and a new map of Assisted Areas (PDF: 2 MB; in German) drawn up.

On 10 June 2015, the Coordination Committee made several additional adjustments to the coordination framework (PDF: 706 KB). Most of these adjustments were made in response to a need for clarification and modification of the rules according to which investments are funded, in order to bring them into line with EU state-aid rules as clarified by the European Commission.

More information on regional policy and the GRW

For more detailed information and clarification, please see the First Report on Regional Policy (in German). The report provides in-depth information about the GRW, its conceptual and legal basis and its political priorities. In 2015, the Federation tabled some initial key points on how a post-2020 scheme providing funding to regions in Germany that are structurally weak could be designed. Unlike the current system, the new scheme is to include regions from the whole of Germany, rather than being limited to the regions that used to be GDP territory up until 1990. In its progress report on the development of a post-2020 pan-German funding scheme for regions that are structurally weak (in german), which was adopted by the Federal Cabinet on 13 September 2017, the Federal Government has confirmed its commitment to supporting regions that are structurally weak, including for the time after the Solidarity Pact II expires at the end of 2019. The report sets out the underlying concept for German post-2020 regional policy and provides information on measures that have already been taken.

Each EU Member State is free to side which of its regions are to benefit from support under its national regional policy. However, Member States must comply with a rule set out by the European Commission imposing a ceiling on the share of the overall population must be covered by the funding, meaning that regions must be chosen accordingly. The Federal Ministry for Economic Affairs and Energy has commissioned a study to see how this requirement can be met.

Regional policy – facts and figures

The amount of funding for investments by trade and industry approved under the GRW (PDF: 692,4 KB; in German) between 1991 and 2015 was worth more than 46 billion euros. It helped leverage an overall investment volume of 250 billion euros, created more than 1.1 million permanent jobs, and helped safeguard more than 2.4 million existing jobs. Over the same period, GRW funds worth more than 23 billion euros were approved (PDF: 19 KB; in German) to support investments in commerce-related infrastructure worth a total of 35 billion euros.

Further facts and figures about the GRW are available from the website of the Federal Office for Economic Affairs and Export Control (BAFA) (in German). Learn more about it (in German).

The GRW funding scheme is reviewed by external experts at regular intervals. A study entitled “Lehren aus dem Strukturwandel im Ruhrgebiet für die Regionalpolitik (Structural change in the Ruhr area - lessons to be learned for regional policy)” (in German) was commissioned by the Federal Ministry for Economic Affairs and Energy and published in September 2015 by Prognos AG.

Rebuilding Eastern Germany (Aufbau Ost)

Economic development within the New Länder

Since German reunification, the New Länder have made major headway towards building a competitive economy. Much has already been achieved, particular in the industrial and logistics sectors.

These results are extremely important in order for economic development in the New Länder to become self-sustaining in the future. One particular challenge that remains is unemployment, which is still much higher in the New Länder compared to the Old Länder. Furthermore, the New Länder need to attract competitive companies in order to diversity their economies.

The Federal Government Commissioner for the New Federal States

Federal Government Commissioner for the New Federal States Ms Iris Gleicke, who is also Parliamentary State Secretary at the Federal Ministry for Economic Affairs and Energy, is in charge of coordinating the various policies that affect the area of former East Germany.

Major policy objectives in this work include the task of promoting research and education to learn more about the SED dictatorship, creating living conditions that are equally high across the whole of Germany, and finding ways of securing funding for the ‘Aufbau Ost’ (the rebuilding of Eastern Germany). Demographic change and a loss of financial scope for public-sector budgets in Eastern Germany are key challenges that need to be addressed in the coming years.

Since reunification, the Federation has been supporting the New Länder (including Berlin) in their efforts to pay off extra costs that have accrued as a result of the division of Germany and to close the infrastructure gap that exists between Eastern and Western Germany. As the current fiscal equalisation system between the Federation and Länder, including the so-called Solidarity Pact II, will however expire in 2019, putting in place a new system is a key priority for Eastern Germany during this parliament.

Annual Report on the Status of German Unity

On 21 September 2016, State Secretary Iris Gleicke presented the Federal Government’s Annual Report on the Status of German Unity. The report shows that eastern Germany will need much stronger growth if it is to catch up with the western German states. The real economy in the eastern German states (except Berlin) grew by 1.5 per cent in 2015, which is less than the average for western Germany, which stood at 1.7 per cent. As eastern Germany is experiencing a decline in its population, its real economy is also losing track. Other reasons given by the Annual Report include the piecemeal economic structures that can be found in eastern Germany, and the lack of large companies and HQs of large corporations, which also has a negative impact on the region's capacity to innovate.

Construction workerssymbolizes Social Market Economy; Quelle: Getty Images/Helen King

© Getty Images/Helen King

Accomplishing structural change

Fresh prospects for coal-mining regions

Phasing out coal comes with major challenges. The people in Germany’s mining regions need realistic and viable prospects. This requires investments that will create local jobs, income and prosperity.

In November 2016, the Federal Cabinet adopted the 2050 Climate Action Plan (PDF: 1,9 MB; in German), which calls upon the energy industry to halve its carbon emissions by 2030. Lignite and hard-coal-fired power plants emit large amounts of carbon emissions. Phasing out these technologies, however, presents Germany’s coal-mining regions – Lusatia, Central Germany, the Helmstedt region and parts of the Rhineland – with major structural challenges. The Federal Ministry for Economic Affairs and Energy wants to give the local population realistic and viable prospects and therefore aims at finding solutions that help mitigate climate change whilst also making sense in terms of industry policy.

Regional funding for projects in coal-mining areas

Germany’s coal-mining regions can already draw on support from the federation and the länder. This support takes the form of innovation programmes and funding from the European Structural Funds. As most of the lignite-mining regions in Germany are also classed as being structurally weak, they are also entitled to receiving funding under the Joint Federal/Länder Scheme for the Improvement of Regional Economic Structures (GRW). This scheme provides support for commercial investments and investments in local commerce-related infrastructure, and has also been used to fund projects that promote cross-border and cross-district work structures in lignite-mining regions.

Bringing policy-makers and the business community together

As of 2018, the federal ministries, the länder, various trade unions, municipalities, businesses and regional stakeholders will come together to form a new committee for “growth, structural change and regional development” tasked with drawing up proposals for steering structural change in a way that is proactive and socially acceptable.

In preparation for the establishment of this new body, the Federal Ministry for Economic Affairs and Energy has established a task force charged with shaping and monitoring structural change in the lignite-mining region. This task force is currently mapping out the status quo and the economic potential of the four relevant regions. This work is being conducted in cooperation with other federal ministries, science and academia, with the länder in which the relevant regions are situated, i.e. Brandenburg, Lower Saxony, North Rhine-Westphalia, Saxony, and Saxony-Anhalt, and with representatives of the regions themselves. Various scientific institutions are also involved in the process.

Construction of track rails symbolizes Investment Strategy; Source: Getty Images/Thomas Trutschel

© Getty Images/Thomas Trutschel

European Regional Policy

A structural policy for Europe

Regional policy is one the European agenda as well: Social, economic and territorial cohesion within the Union is a central objective in EU policy. Around a third of the EU budget is used to level out differences in development between the various countries and regions. Under its Regional and Structural Policy, the EU promotes growth and employment in regions that are lagging behind in terms of development. Funding is allocated via the two structural funds of the EU: the European Regional Development Fund (ERDF) and the European Social Fund (ESF).

Both operate according to the co-financing principle: whenever a project is to receive funding from the structural funds, the member state in question must also provide funding from its own budget. Another principle that applies is the following: EU regional funding is always granted in addition to funding provided by the member states themselves (so-called principle of additionality). It can never be used to replace national funding.

Supporting sustainable growth in Europe

The EU’s structural policy is very much guided by the objectives of the Europe 2020 Strategy, which sets out a framework for the funding that is needed for Europe to be able to reach its strategic objectives of ensuring smart, sustainable and inclusive growth. Coordination of EU Structural Policy and of matters relating to the European Regional Development Fund (ERDF) in Germany falls within the remit of the Federal Ministry for Economic Affairs and Energy.

For further information about the European investment and structural funds, please click here.

Further information

  • 12/09/2016 - Press release - The New Länder

    Press release: Gleicke in U.S. promoting venture capital for eastern German start-ups

    Open detail view
  • 13/04/2016 - Press release - Economic Policy

    Press release: Federal Government adopts 2016 National Reform Programme

    Open detail view
Construction of a building symbolises regional policy; Source: mauritius images / Maximilian Weinzierl / Alamy