EU structural funds and the potential impact of Brexit on the North

20 June 2016

William Vittery   - Doctoral Researcher, University of York

With the EU providing important funding for the economic development of poorer regions, uncertainty looms for the North if Britain votes to leave

Whilst the threat of ‘Brexit’ poses many uncertainties for the UK a whole, its impact would not be nationally uniform but would differ across regions. The ramifications would be not simply economic, but also relate to the political governance of the UK’s regions.  This issue is discussed at greater length in my paper for the ‘UK in a Changing Europe’.  This post explores the specific issue of European funding for poorer regions, which not only provides an important source of finance for investment in the North (which have to be matched by central government), but also underpins the role of local and regional authorities in local economic development.

The ‘structural policy’ of the European Union has existed since the 1970s with the aim of reducing the economic inequalities between the regions of Europe.  Structural policy currently focuses on aiding regional competitiveness for poorer regions, and helping to promote employment amongst under-represented cohorts in the labour market.  Given the decline of the North’s traditional heavy industries, a significant focus of this funding is to create new industries in the region, with a particular focus on small and medium-size enterprises (SMEs).  Moreover the funding works on the principle of ‘additionality’, in that it is supplied in addition to whatever domestic funding states give to their regions for economic development; it cannot be used as an excuse to cut domestic financial support for poorer regions.  Structural funds also work on a ‘match funding’ principle whereby they will provide a maximum of 50 per cent of the funding for a given development project, ensuring that local private financers also buy into projects.

As our SPERI Brief, published last month, showed, current funding for the North is not inconsiderable; over the current 2014-20 cycle the regions will gain €2665m in European funding before match funding, whilst in the previous round they gained €2923m.  For the North West, North East and Yorkshire and Humber this equates to 93%, 166% and 87% of the national average, with only Cornwall receiving more per-capita funding in England.  London, meanwhile, receives only 54% of the national average, and the South East 19%, highlighting how financial support is skewed to the poorer regions.  Around 70,000 jobs in the North have been created by this funding, alongside 18,000 new businesses.

There is no constitutional law or precedent on what would happen to this current funding were the UK to leave the EU, meaning that essentially it would be open to negotiation. Moreover the issue of whether the British state would increase its own regional funds to compensate for lost development funding is unclear, and has received scant attention during the referendum campaign.  Whilst much of the Leave campaign’s focus has argued that any European funding we benefit from could also be supplied by the British state, this is itself dependent on the macroeconomic strength of the British economy as a whole; a recession caused by Brexit would reduce the tax intake and therefore the money available to the central government to spend on economic development, amongst other priorities.

Other factors also seem to be reducing the autonomy of local authorities in the realm of development, and hence weakening the role of local government within the ‘Multi-Level Governance’ of the UK (for an overview of multi-level governance, see Piattoni and Stephenson).  The current domestic equivalent of European structural funds, the government’s Local Growth Deals, places Local Enterprise Partnerships (LEPs), rather than local councils, as the managing authorities.  The trend of the ‘Northern Powerhouse’ agenda also seems to be attempting to bypass traditional local government structures with more power placed in elected mayors and business-led LEPs.  The government also lobbied the European Commission to allow LEPs to be the managing authorities for structural funds, although this was declined.

This is not necessary to say, however, that European funding offers local authorities and regions in Britain a way to completely bypass the national government when it comes to development strategies. European structural funds still pass through Westminster before being given to local actors, and the methodology which is used to divide the money between regions is still to an extent influenced by the British government.  For differing views on the extent of central influence see Bache and Marks.  The impact of national actors at the local level can be seen through the decision by South Yorkshire and Merseyside councils to take the government to court over changes in structural funding for their regions for the 2014-2020 round, which saw a disproportionately large drop in financial support for these regions compared to others.  Despite initially winning the case, this was overturned on appeal in the Supreme Court.

In conclusion, then, the European referendum highlights a large number of uncertainties over the future place of the Northern economy in a changing Britain and a changing Europe. On the most simple level, the referendum poses questions about regional funding in the event of a Brexit, something that has received scant attention to date in the campaign.  European structural funds have worked to reduce economic inequalities between regions by providing funding for poorer regions, and the extent to which this would continue in an ‘independent’ Britain is unclear.  It also poses wider questions about the competitiveness and policy autonomy of the North more generally however, both externally with other regions of the UK, but also internally within the North itself (see Elcock).  The asymmetric model of devolution currently in existence in Britain gives certain regions greater policy autonomy than others, and potentially places the North at a competitive disadvantage within the current growth model.  The North is therefore heavily dependent on the ‘Northern Powerhouse’ agenda to minimise this discrepancy, but current trends suggest this city-based deal may not work for the benefit of the North as a whole, but focus development within key urban centres.  As with so many other elements of the EU referendum, then, a large amount of uncertainty faces the political economy of the North.

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