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Article - 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 the standard of living is 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

4.9
Symbolicon für Geldscheine

billion
amount of funding for commercial investments that was approved under the coordination framework for the GRW between 2012 and 2017

3.6
Symbolicon für Fabrik

million
amount of GRW and ERDF funding approved for the manufacturing sector in 2017.

1.2
Symbolicon für Schreibtisch

million
amount of GRW funding approved for the services sector between 2012 and 2017

34
Symbolicon für Bürogebäude

per cent share of GRW funding for infrastructure
approved for business-related infrastructure in the field of tourism between 2012 and 2017 – a figure exceeding €698 million

Joint Federal-Länder Task

Improving regional economic structures

The most important instrument Germany uses as part of its national regional policy is the Joint Federal/Länder Task 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” (in German) (PDF, 1MB) which is agreed between the Federation and the Länder. The funding rules transpose the European rules on national regional aid (in German) into national law.

On 17 September 2018, the Coordination Committee made several additional adjustments to the coordination framework. In particular, the new rules improve the possibilities to fund infrastructure. For example, full use is made of the scope available under state aid rules to fund ports, and the funding available for industrial and commercial sites can now also be used to upgrade waste water treatment plants.

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. The outcomes of the procedure are reviewed at regular intervals.

The map of Assisted Areas (in German) (PDF, 579KB) shows the current area receiving funding between 1 July 2014 and 30 December 2020:

  • 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, 275KB).

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.

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. It also looks at the future challenges for regional policy at national level.

Preparation of the GRW funding period from 2021

The GRW is a dynamic instrument that is continuously being developed and honed. The current GRW funding period will end on 31 December 2020. The regions that will receive GRW funding in the period from 2021 will be defined anew. Preparations such as these are being undertaken by federal and Länder representatives in the GRW sub-committee.

In the EU, each Member State is free to decide which of its regions are to benefit from support under its national regional policy. The maximum overall area of the designated areas receiving assistance in a Member State (measured in terms of per capita) is specified according to EU regional guidelines. The Federal Government and the Länder commissioned a study (in German) looking at how possible changes to the method for calculating these areas to be implemented during next funding period (from 2021) would affect the expected share of the total population living in assisted areas and what impact this would have on the process of identifying such areas. The European Commission has not presented a draft of the EU regional guidelines for the next funding period

As part of preparations for the next funding period, the GRW looks at the economic performance of ‘labour market regions’. This serves to prevent any statistical distortions owing to differences between place of residence and location of employment. The Federation and the Länder have thus commissioned the RWI – Leibniz Institute for Economic Research to examine the delineation of the existing labour market regions and to develop proposals (in German) for defining new boundaries.

National funding system for structurally weak regions

The Coalition Agreement between the CDU, CSU and SPD provides for the development of a national support system for structurally weak regions. In 2015, the Federation tabled its Key Points (in German) (PDF, 287KB) on how such a scheme should be designed and, in 2017, published a research report on the continued development of a national support system for structurally weak areas from 2020 (in German) (PDF, 165KB) which presented initial steps towards implementation. The report underlines the Federal Government commitment to providing comprehensive support to regions that are structurally weak, even after the Solidarity Pact II expires at the end of 2019. Germany’s regional policy strategy post 2020 is to bundle the GRW and other measures for growth in order to better support structurally weak regions in both eastern and western Germany in catching up with the economically stronger regions.

Regional policy – figures and review system

The amount of funding for investments by trade and industry approved under the GRW between 2012 and 2017 was more than €4.9 billion. It helped leverage an overall investment volume of over €31 billion, created more than 86,000 permanent jobs, and helped safeguard more than 300,000 existing jobs. Over the same period, GRW funds worth more than €2.8 billion were approved to support investments in commerce-related infrastructure worth a total of €2 billion  (PDF, 298KB).

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 and InWIS, which is based at Ruhr University Bochum.

The next review of the GRW, to be compiled by looking at the success of individual companies, will be published before the end of the current funding period, no later than mid 2020.

Diagrams: Regional policy – facts and figures

Accomplishing structural change

Fresh prospects for lignite-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). .The Plan contains ambitious climate targets for individual sectors for 2030 – e.g. for the transport, industrial and energy sectors. The energy sector, for example, is to roughly halve its carbon emissions by 2030. Lignite 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 2050 Climate Action Plan set out plans to prepare the work to be taken up by a new Structural Change Commission. As part of these preparations, the Federal Ministry for Economic Affairs and Energy has commissioned three scientific studies on structural policy issues in coordination with the economic ministries of the Länder concerned:

The RWI – Leibniz Institute for Economic Research compared the four lignite regions on the basis of current socio-economic indicators, using this to compile regional profiles (in German) on the economic situation and prospects for development.

Prognos (economic research) is working on a metastudy (in German) looking at which fields of action are being discussed in the concepts, strategy papers and other plans for the regions when it comes to coping with structural change and developing the lignite regions.

Fraunhofer Center for International Management and Knowledge Economy IMW is analysing national and international experience with structural change and is using three case studies (in German) to show which processes and success factors have shaped structural change in the regions.

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 Task 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-Länder and cross-district work structures in lignite-mining regions.

In addition, the Federal Ministry for Economic Affairs and Energy has recently set up the new Mining Regions Enterprise project which fosters competitions for ideas on coping with structural change in lignite-mining regions.

Bringing policy-makers and the business community together – the Growth, Structural Change and Employment Commission

As an important part of its efforts to shape structural change in the lignite-mining regions, the Federal Government launched a Growth, Structural Change and Regional Development Commission (in German) on 6 June 2018. The Commission is made up of high-level experts. By the end of the year, it will present a programme of action comprising a range of structural measures for the lignite-mining regions, as well as setting out proposals for the gradual reduction and phasing-out of coal-based electricity generation. By using an effective mix of instruments, the aim is to bring together prospects for local employment with the Federal Government’s climate commitments in the best way possible. The federation, Länder, municipalities, economic actors as well as science and civil society are to produce a joint plan on how this can be achieved.

The Commission has four chairs and 24 members (in German). Meetings of the Commission are also attended by members of the Bundestag and representatives of the Länder.

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

© Getty Images/Helen King

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.

Major policy objectives in this work include the task of promoting research and education to allow for better education about the dictatorship of the Socialist Union Party (SED), 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. The current fiscal equalisation system between the Federation and Länder, including the so-called Solidarity Pact II, will however expire in 2019, meaning that the new rules from 2020 are an important issue.

2017 Annual Report on the Status of German Unity

The Annual Report of the Federal Government on the Status of German Unity (PDF: 8MB, in German) shows that Germany has been developing well over the past few years. The eastern German regions have also benefited from this. The number of people in work has grown, as have average incomes. Unemployment has fallen. Also, today's share of industrial output in terms of the GDP of the New Länder is higher than the comparative figure for the European Union. Subjective life satisfaction in both eastern and western Germany is at its highest average since reunification. Over the last ten years, in particular, life satisfaction in eastern Germany has increased a great deal, almost catching up with the higher level of satisfaction in western Germany.

Between individual German regions, however, there are still considerable differences when it comes to economic strength. It is true that some eastern German regions have succeeded in building stronger economies than some western German regions. Overall, however, per-capita GDP in eastern Germany was still as low as 73.2% of the level posted by the western German regions in 2016. This is mainly due to piecemeal economic structures in eastern Germany where only a small number of large corporations are headquartered, resulting in comparatively low levels of innovation. The relevant economic weaknesses are further compounded by adverse demographic change in the many rural areas of eastern Germany, which leaves them held back in their economic development and causes issues with essential public services and utilities.

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

© Getty Images/Thomas Trutschel

Boosting investment

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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 the ESF and the ERDF 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. Also, EU regional funding is always granted in addition to funding provided by the member states themselves (so-called principle of additionality). It is never allowed to replace national funding (so-called principle of additionality).

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.

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