Effects of EU Regional Policy, 1989-2013 and A Few Thoughts on Reform Options Sascha O. Becker, University of Warwick, CEPR and CAGE Peter H. Egger, ETH, CEPR and CAGE Maximilian von Ehrlich, U Bern, CRED and CAGE

Motivation What is the effect of EU structural funds on economic development? Difficult to identify causal effects because ... (a) ... poor regions are more likely to receive funds. (b) ... poor regions are expected to grow faster anyway (convergence; mean reversion). Channels of the growth effect: what are the factors that make transfers work? What is the optimal design? Self-sustaining long-run economic development or short-run consumption effect? What are the distributional effects of the transfers?

Research Do EU Regional Transfers (here: Objective 1) cause additional growth, on average? (Becker, Egger, von Ehrlich, Journal of Public Economics 2010) Do EU Regional Transfers (here: Objective 1) cause additional growth, for all recipient regions alike? Role of Absorptive Capacity (Becker, Egger, von Ehrlich, American Economic Journal:EconPol 2013) Do more Regional Transfers (here: all funding programs) generate more additional growth? ’Dose-response’ (Becker, Egger, von Ehrlich, European Economic Review 2012) See also Pellegrini et al. (2013, 2016) Own extended analysis in Becker, Egger, von Ehrlich (2016)

How Does the EU’s Regional Policy Work? Objective 1/Convergence (roughly 70% of regional policy budget): Promote the development and structural adjustment of regions whose development is lagging behind. Objective 2/Regional competitiveness and employment: Support the economic and social conversion of areas experiencing structural difficulties. Objective 3/European Territorial Cooperation: Support the adaptation and modernization of education, training and employment policies and systems. Objectives 1, 2, and 3 are mutually exclusive

Objective 1 Eligibility Rule (On Paper) Sharp regression discontinuity design (RDD): Regions close to 75% threshold are likely to be very similar ... ... but regions just below the threshold do receive Objective 1 money and those just above do not.

Objective 1 Status (Reality) Eligibility rule observed in 93% of observations; 7% non-compliance. But still: discrete jump at 75% threshold!  fuzzy RDD: (partial) non-compliance with 75%-rule.

Does Objective 1 Work Overall? Yes: econometric analysis shows that recipient regions grow faster than non-recipient regions because of transfers. The "multiplier" is around 1-1.2, i.e., on average. “you get out what you put in” (or slightly more than that) Mechanism: Public investment/GDP, employment growth (in recent programming periods)

Does Objective 1 Benefit All Regions Alike? No: there is heterogeneity across recipient regions. A region’s absorptive capacity matters. Results in Becker, Egger, von Ehrlich (AmEcJ:EconPol 2013): only regions with a more educated work force and a high quality of governance are able to turn transfers under the Union's Objective 1 Structural Funds programme into faster growth. Only those regions are responsible for the positive average effect of the programme.

EU Structural Funds As A Whole: Do More Funds Mean More Growth?

Becker, Egger, von Ehrlich (EurEcRev 2012): Analyse effect of transfer "intensity" on regional growth Result: decreasing returns; after a certain point, additional funds do not lead to additional growth.

Effect of increase in transfer intensity for given concentration of spending Increase in transfer intensity is less effective when concentration of spending is high (blue and red curves throughout further left).

Effect of increase in concentration of spending for given transfer intensity More concentration of funding only good when funding very concentrated to begin with, but might be detrimental when starting from high levels of dispersion.

Long-run effects Evidence on long-run effects of Obj. 1 (Becker, Egger, von Ehrlich 2016): Regions dropping-out of the program grow btw. 3 and 4 percent less than regions that neither received treatment in t nor in t-1. Lessons from German Zonenrandgebiet (von Ehrlich and Seidel, 2016): Place-based transfers have a persistent effect on spatial equilibrium. Mechanism: Durable capital.

Does Money Buy Love (of the EU)? EU Structural Funds per capita over the EU Programming period 2007-2013 have no predictive power in Brexit vote. Davies (2016) argues that EU funding may be perceived by voters as a handout and a symbol of foreign dependence.

Overall Summary of Results The EU's Objective 1 program works on average. Not all regions are equally good at turning EU transfers into additional growth: absorptive capacity matters. Level of EU regional transfers too much of a good thing for some regions: those featuring "too high" transfer intensity. Concentration of spending not generally beneficial, except when very concentrated to begin with. Under-researched: Distributional effects; long-run effects; Crisis and regional resilience.

Reform options for regional policy budget Given importance of absorptive capacity: invest in it. Too much of a good thing: cap transfer intensity? Sudden stop when dropping out of Objective 1: improve phase-out transitional arrangements. Focus funding exclusively on poorer countries: Now: regional transfers from UK via Brussels to Cornwall Now: regional transfers from Germany via Brussels to East Germany Instead: limit the funds to EU member states with income levels at 90% or below the EU average (as proposed by the UK Labour Government and Open Europe)