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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.

Federal Funding System for Structural Development Regions

On 1 January 2020, the Federal Government launched the Federal Funding System for Structural Development Regions, reorganising and pooling regional assistance schemes to create a unified system. Funding programmes formerly restricted to eastern Germany have been extended to cover all structurally weak areas, no matter whether these are located in the eastern or western part of the country. Also, funding measures available nation-wide are being equipped with special funding conditions which offer targeted support for regional economic development.

Structural change in coal-mining regions

The coal phase-out is not only relevant to energy policy, it also has a structural policy dimension. From the outset, structural assistance is therefore being made available as power plants are shut down. A legal basis for this was created by the Structural Reinforcement Act for Mining Regions, adopted by the Bundestag and Bundesrat on 3 July 2020.

The Structural Reinforcement Act for Mining Regions implements the structural-policy recommendations made by the Commission for Growth, Structural Change and Employment. Lignite-mining areas will receive up to €14 billion in financial aid until 2038 for significant investments aimed at promoting structural change. In addition, up to €26 billion has been earmarked for further measures within the remit of the Federal Government, including top-ups for research and support programmes, the expansion of transport infrastructure projects, and the establishment of federal institutions in the areas affected. Further support has been announced for selected hard-coal sites as well as Helmstedt and Altenburger Land, formerly the sites of opencast lignite mines.

Structural assistance for lignite-mining regions will be provided until all power plants are shut down by 2038 at the latest. In order to give political backing to the implementation of this mammoth task and to choose the right projects along the way, the Federal Government and the Länder are working together closely via a coordination body established for this purpose.

It is the task of the lignite-mining Länder to develop principles and regional concepts that can guide structural change in the affected areas. In addition to calls for projects and assistance programmes also launched by the Länder, these concepts form an important basis for the recommendations made by the Federal/Länder Coordination Body. The websites of the Länder provide further information as well as contacts to whom specific ideas for projects can be addressed:

Saxony-Anhalt
www.strukturwandel.sachsen-anhalt.de (in German)

Brandenburg
www.lausitz-brandenburg.de (in German)

Saxony
www.strukturentwicklung.sachsen.de (in German)

North Rhine-Westphalia
www.wirtschaft.nrw/strukturwandel-im-rheinischen-revier (in German)

Promoting the regional economy - in figures

3.1
Symbolicon für Geldscheine

billion
amount of funding for commercial investments that was approved under the coordination framework for the GRW between 2015 and 2019

2.1
Symbolicon für Fabrik

billion
amount of GRW funding approved for the manufacturing sector between 2015 and 2019.

899
Symbolicon für Schreibtisch

million
amount of GRW funding approved for the services sector between 2015 and 2019

33
Symbolicon für Bürogebäude

per cent share of GRW funding for infrastructure
approved for business-related infrastructure in the field of tourism between 2015 and 2019 – a figure exceeding €733 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 boost investment activity in the region, 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 competitiveness, particularly that of SMEs’.

  • 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 GRWthe map of Assisted Areas, the instruments available and the rules and maximum funding rates that apply are all set out in the “coordination framework” (PDF, 282 KB) 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.

With effect of 1 January 2020, the Federal and Länder governments expanded the range of GRW funding instruments. Going forward, the scheme will also cover investments by certain commerce-related research institutions that are not subject to state aid. Also, funding for cooperation projects in the field of applied research and development has been opened up to the research institutions involved. In addition to the existing support that is available for investments by trade and industry, a supplementary clause has been introduced to pave the way for the funding of investments in modernisation by small and medium-sized companies. As far as funding for communications infrastructure under the GRW is concerned, support is now only available for those connections that offer gigabit capability.

In July 2020, against the background of the economic impact of the COVID-19 pandemic, access to GRW funding was temporarily facilitated. The link can be found here (in German) (PDF, 5 KB).

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 (referring to 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, 579 KB) shows the current area receiving funding as of 1 July 2014. Subsequent to the extension of the relevant EU state-aid rules and the European Commission’s approval of the continued definition of the funding area, the funding period has been extended by a year until 31 December 2021. 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 western 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 companies.

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 (cf. “Länder-specific rules and information issued by the Länder”).

For more detailed information and clarification, please see the First Report on Regional Policy (in German). The report provides in-depth information about the GRWits 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 2022

The GRW is a dynamic instrument that is continuously being honed and developed. The current GRW funding period is set to end on 31 December 2021. The regions that are eligible to receive GRW funding in the period from 2022 will be defined anew. Preparations such as these are being undertaken by federal and Länder representatives in the GRW subcommittee.

Each EU Member State is free to decide which of its regions are to benefit from support under its national regional policy. The maximum share of the total population represented by the designated areas receiving assistance in a Member State is specified according to EU regional guidelines. The Federal Government and the Länder have commissioned a study looking at how possible changes to the method of calculation to be used during the next funding period would affect the expected share of the population of the Assisted Areas in the total population and what impact this would have on the process of identifying national Assisted Areas. The European Commission has not yet 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 for defining new boundaries.

The review of the regional indicator model for the uniform nationwide assessment of the structural weakness of regions is supported by the academic study “Betrachtung und Analyse von Regionalindikatoren zur Vorbereitung der Neuabgrenzung des GRW-Fördergebiets ab 2021 (“Raumbeobachtung”)” (Consideration and analysis of regional indicators in preparation for the redefinition of the GRW Assisted Areas from 2021). On the basis of the results of this study, the GRW subcommittee has decided to retain the basic structure of the indicator model with its labour market, income and infrastructure indicators, and in future also to use indicators for underemployment, gross domestic product per person in work (productivity), the development of the number of those able to work as forecast for 2015-2035, as well as quality of infrastructure. These indicators and the newly defined labour market regions will be used to determine the structural weakness of the various regions; this will probably happen in 2021. The new GRW Assisted Areas will then be stipulated on this basis.

Regional policy – figures and review system

The amount of funding for investments by trade and industry approved under the GRW between 2015 and 2019 was worth more than €3.1 billion. It helped leverage an overall investment volume of over €18 billion, create more than 48,000 permanent jobs, and safeguard more than 178,000 existing jobs. Over the same period, GRW funds worth more than €2.2 billion were approved to support investments in commerce-related infrastructure worth a total of nearly €3 billion.

The GRW funding scheme is reviewed by external experts at regular intervals. In its evaluation study released in 2020, the Halle Institute for Economic Research (IWH) shows that employment growth in companies funded under the GRW remains almost twelve percentage points stronger for up to five years after the end of funding than in similar companies that are not being supported. GRW funding also has a considerable positive impact on turnover growth. The findings confirm the conclusion of previous evaluations that the GRW scheme helps to create new permanent jobs in regions that are structurally weak.

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.

Also, the RWI has presented an in-depth consideration of certain structural data in the four lignite-mining regions. This brief study can be found here (in German).

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 IMW analyses national and international experience with structural change and offers three case studies (in German) showing the processes and factors driving successful 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.

Commission for Growth, Structural Change and Employment recommends complete phase-out of coal by 2038 and compensation payments

As an important part of its efforts to shape structural change in the lignite-mining regions, on 6 June 2018, the Federal Government launched a Growth, Structural Change and Employment Commission made up of high-level experts (in German). The aim of the Commission was to achieve broad-based consensus across society on how the structural change, taking place for energy and climate policy reasons, should be shaped. The priority is to develop specific prospects of new and future-proof employment in the regions concerned.

The work of the Commission came to an end on 31 January 2019 when it submitted its Final report to the Federal Government. In the report, the commission of experts recommends that the phase-out of coal-fired power plants be completed by 2038. It also foresees more than €40 million in funding being needed to support the regions affected by structural change. Moreover, the phasing-out of lignite should not burden electricity customers additionally as energy companies also receive compensation payments for the shutdown of their power plants.

Structural Reinforcement Act for Mining Regions

The recommendations for structural policy made by the Commission for Growth, Structural Change and Employment are implemented by the Structural Reinforcement Act for Mining Regions. On 22 May 2019, the Federal Cabinet adopted a set of key points for the implementation of the structural policy recommendations of the Commission for Growth, Structural Change and Employment.

On 28 August 2019, the Federal Cabinet adopted the draft Structural Reinforcement Act for Mining Regions presented by the Federal Minister for Economic Affairs and Energy.

Further information on the implementation of the recommendations made by the Commission for Growth, Structural Change and Employment can be found here (in German).

Construction workerssymbolizes Social Market Economy

© Halfpoint/stock.adobe.com

Rebuilding Eastern Germany (Aufbau Ost)

Economic development within the New Länder

30 years after German reunification, the situation is positive: eastern Germany’s economic potential is expanding, and the same goes for employment. Despite this, the process of converging standards of living is still ongoing. Further efforts to boost the regions' economy by promoting investment, innovation, and internationalisation are of the essence.

As the 2020 Annual Report on the Status of German Unity shows, Germany has made great progress on bringing standards of living into line – even if regional disparities do persist in terms of income and employment opportunities, quality of infrastructure and public services.

In 2019, the economic potential of the new Länder as expressed in GDP per capita amounted to roughly 73% – 79.1% in the case of Berlin – of the German average. Eastern Germany and Berlin are making steady progress – albeit in small steps – towards attaining the level of economic performance of Germany as a whole. In 1990, after all, they had started out at only 37%. Since reunification, GDP per capita in the new Länder (excluding Berlin) has quadrupled – or tripled if Berlin is included.

This catching-up process is largely due to the emergence of a strong SME sector in the new Länder, with a major focus being placed on forward-looking technologies. Once again, small and medium-sized companies have put an unmistakable stamp on the economies of Saxony, Saxony-Anhalt, Thuringia, Brandenburg and Mecklenburg-Western Pomerania. They have created many new jobs in recent years. But despite all this, the economic potential of eastern Germany still lags far behind the national average and the level of highly developed European regions.

30 years after Germany’s reunification, the Federal Government is continuing to aspire to establish equivalent standards of living throughout the country, to reduce disparities and to prevent their becoming entrenched. The national funding system for structurally weak regions forms a key element of Germany’s proactive regional structural policy. It will continue to play an essential role in the Federation’s efforts to support development in the eastern German Länder, which, apart from a few exceptions, are all still suffering from structural economic weaknesses.

Construction of track rails symbolizes Investment Strategy

© iStock.com/blyjak

Boosting investment

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European Regional Policy

A structural policy for Europe

Regional policy is on the European agenda as well: social, economic and territorial cohesion within the Union is a central objective in EU policy. Therefore, in the current funding period from 2014 to 2020, around a third of the EU budget is being used to level out differences in development between the various European regions. Under its regional and structural policy, the EU actively promotes growth and employment via its two structural funds – the European Regional Development Fund (ERDF) and the European Social Fund (ESF). EU structural policy is the most important European investment policy, especially with regard to the field of innovation and research.

The ERDF primarily finances investments aimed at strengthening the competitiveness of commercial enterprises and at creating jobs in small and medium-sized companies. It also finances activities that promote research and technological development and help to reduce carbon emissions across the economy. ESF funding is targeted at labour market and employment policy. It supports measures in the field of education and training and promotes social inclusion and the fight against poverty.

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.

In Germany, overall coordination of EU structural policy and ERDF-related matters falls within the remit of the Federal Ministry for Economic Affairs and Energy.

Supporting sustainable growth in Europe

European structural policy aims to promote growth and employment.

Negotiations are currently underway on the upcoming funding period from 2021 to 2027. It appears that EU structural policy will continue to be a major priority. The European Commission has proposed placing the focus of the upcoming funding period on the goals of innovative and smart economic transformation as well as climate action and environmental protection. The Federal Ministry for Economic Affairs and Energy advocates a modern and pro-innovation European structural policy that promotes forward-looking technologies, especially in regions that are structurally weak. The negotiations on the next Multiannual Financial Framework and on the legislative package on the structural funds have entered a key stage in 2020 and have been one of the priorities of Germany’s Presidency of the Council of the EU in the second half of the year.

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

Construction of a building symbolises regional policy