How Does EU Cohesion Policy Work? Evaluating its Effects on Fiscal Outcome Variables

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp09051.pdf Non-technical summaryThe impact of the EU Cohesion Policy has mainly been evaluated by analysing its growth effects. However, this perspective neglects that the EU support might affect other policy fields as well. There are at least two reasons why the impact on public investment should be of special interest. First of all, according to the principle of additionality the Member States have to co-finance EU-funded projects but must not crowd out spending for national public investments elsewhere. Second, since a major part of Cohesion Policy payments is spent on government investments, virtually all empirical studies on the investigation of the growth effects assume that the Cohesion Policy increases investments leading to a higher steady-state capital stock per capita, which, in turn, increases the GDP growth rate. Hence, an essential condition for the effectiveness of EU transfers is the degree to which they affect overall national public investments. However, the impact of Cohesion Policy payments on national public investments has not yet been evaluated.Furthermore, instead of increasing future-orientated spending, EU Cohesion Policy payments may (indirectly) be used to reduce public deficits. This is possible if EU regional policy crowds out national spending, which is most likely to occur in poorer countries. To the best of our knowledge, there has been no paper investigating the effects on public deficits.Against this background, the paper at hand examines through which channels this policy field works by analysing the impact of EU Cohesion Policy payments on national public investments and primary budget balances. In doing so, we use a comprehensive dataset of 27 EU countries, extend the time period of investigation to 1982-2006 and apply advanced panel econometric methods.Our results indicate that EU Cohesion Policy payments do not significantly increase national public investments, thus pointing to a crowding out of national spending. Moreover, the hypothesis that EU funds are used for the consolidation of public budgets cannot be rejected in all econometric specifications. AbstractThe impact of EU Cohesion Policy has mainly been evaluated with regard to its growth effects. We extend the perspective by investigating the impact of EU Cohesion Policy on public investments and budget deficits in order to learn more about the channels through which this polic...