Can we justify EU Cohesion Policy?

_ Roman Römisch, economist, wiiw. Vienna, 25 November 2020. Published for debate.

New wiiw research shows that cohesion policy has positive effects on GDP growth, and that spending in poorer regions increases demand in richer parts of the EU. In a recently accomplished research project, supported by the Austrian National Bank (OeNB), wiiw addressed the question whether EU Cohesion Policy can be justified from an economic point of view. In three research papers and one policy note, Ambre Maucorps, Stefan Jestl and Roman Römisch analysed the effects of EU Cohesion Policy spending on economic growth and aggregate demand.

Positive dynamic effects of Cohesion Policy through stimulating regional growth

Cohesion Policy support has positive effects on regional GDP growth. This is shown in this research paper, which concerns the impact of EU Cohesion Policy on the economic growth of 276 EU NUTS-2 regions between 2008 and 2016. The authors identified and tested various regional development factors. They found that besides EU Cohesion Policy, good institutional capacities and governance as well as being geographically close to economically strong regions are also supportive of regional development. Yet, throughout the EU, regions with structural weaknesses have a more limited capacity to fully exploit Cohesion Policy support and their own growth potential.

Small static inefficiencies outweighed by dynamic gains

In a scenario analysis, the authors reallocated 50% of the total ERDF and CF support for the Central and Eastern European countries to the four largest European economies of Germany, France, Italy and the UK. The results of their macroeconomic model suggest that the one-off effects of this reallocation would sum up to around 0.15% of the EU’s GDP. That said, Cohesion Policy support entails small statistic inefficiencies. Those are, however, outweighed by its dynamic growth effects particularly in the Cohesion countries.

Strong demand spillovers from the less-developed to the more-developed regions

EU Cohesion Policy spending in the less-developed EU regions also causes increased demand in the more developed EU regions. This research paper analyses demand spillovers induced by Cohesion Policy in the EU by using regional input-output tables. Cohesion Policy not only creates investment and consumption demand directly in the regions receiving support. Part of this demand is satisfied by importing goods and services from other regions, thus creating indirect demand there.

The results of the paper suggest that during 2007-2018, such spillovers from the less-developed EU regions to the more-developed EU regions amounted to around EUR 85 billion in current prices. The regions benefitting most from these were the industrially strong regions in the EU.

Yes, EU Cohesion Policy can be economically justified

In conclusion, the authors are convinced that the dynamic Cohesion Policy gains outweigh the static allocation inefficiency. Additionally, the spillovers from the less-developed regions mitigate potential losses in demand in the more-developed regions. Therefore, their answer to the question ‘Can we justify EU Cohesion Policy from an economic point of view?’ is ‘Yes, we can.’

Source: https://wiiw.ac.at/

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