Blog Post

Income convergence during the crisis: did EU funds provide a buffer?

Did EU funds play an important role in limiting the hit of the crisis on regional income?

By: and Date: November 10, 2016 Topic: Macroeconomic policy

Economic convergence is at the heart of European Union integration.  Cohesion policy was born in the 1980s with the aim of complementing the creation of a single European market and fostering the economic development of less advantaged EU regions. This objective is especially relevant in light of the economic crisis that has exacted a heavy toll on many EU countries and regions, and created scepticism about the merits of EU policies.

In a recent paper, I look at how income convergence evolved in EU regions during the crisis, and assess the role played by the EU funds that are provided to the more disadvantaged regions with the aim of facilitating their convergence to average EU income levels. I find that EU funds did play an important role in limiting the hit of the crisis on regional income, providing an anchor for convergence.

Income convergence in the EU during the crisis

The starting point to assess the role of EU convergence funds during the crisis is to understand what happened to regional income convergence across the EU, over the last 15 years. To this end, I start from an absolute and a conditional income convergence analysis. The idea is simple: I regress income growth over a certain time period on an initial level of income, and a negative estimated coefficient will suggest that relatively poorer regions grow faster than richer ones. If this is the case, we can conclude that there has been income convergence.

table1-sm-8-11-16

When considering the EU as a whole, regions are found to have convergenced at pace of 2 percent per year over 2000-14. When looking at EU14 or EA11, no significant convergence is detected over the same period. The reason for this becomes clear when breaking the time series into subperiods. From 2000-07, all three groups show very significant evidence of convergence, but when looking at 2007-14 there is no evidence of convergence for either the EU14 or the EA11, suggesting the crisis altered the previous path of income convergence.

The eligibility rules for EU convergence funds

On the basis of this evidence, I then investigate the role played by those funds (‘Objective 1’) that the EU provides to regions whose per capita GDP in purchasing power standard (PPS) is below 75 percent of EU average. These funds have the aim to foster convergence to average EU income levels. I focus on the 2007-13 allocation period, which includes the crisis years.

Eligibility for Objective 1 funds is determined at the regional level. The EU has a hierarchical regional classification named NUTS (Nomenclature of Territorial Units for Statistics), with NUTS1 being the most aggregate and NUTS3 the most detailed level. Objective 1 funds’ allocation is decided at the NUTS2 level.

This eligibility rule creates a threshold: NUTS2 regions below 75 percent are entitled to the funds, while regions above are not. As a result, it is perfectly possible that some NUTS3 regions in eligible NUTS2 areas have a per-capita GDP level higher than the threshold for eligibility at the NUTS2 level. These NUTS3 regions would not qualify to receive Objective 1 transfers if they had been assessed as independent entities, but in practice they qualify, because they are part of a relatively poor NUTS2 region. Similarly, some NUTS3 areas might be below the threshold if looked at individually, but the fact of belonging to a relatively rich NUTS2 region makes them ineligible for Objective 1 funds.

As convincingly pointed out by Becker et al (2008), this rule creates a quasi-experimental setting that can be exploited for empirical investigation. I exploit this rule to construct a treatment/control framework based on two groups of comparable regions.

I apply to each NUTS3 region the eligibility criteria that is normally applied to NUTS2 regions. In this way, I can identify all those NUTS3 regions that would be eligible if the threshold were applied to their individual income rather than that of their parent NUTS2 region.

Then, I match this ‘actual’ measure of eligibility with the ‘formal’ eligibility status of the same NUTS3 regions. This allows me to identify two sub-groups of regions: one group includes those NUTS3 regions that would be eligible based on their individual income and were also formally eligible based on their parent region’s income; a second group includes those NUTS3 region that would be eligible based on their individual income but were not deemed formally eligible based on their parent’s level of income.

We can think of these two groups as a treatment and control group: regions in both groups have an individual income level that is below 75 percent of the EU average, but depending on their parent region’s income, some of them have been “treated“ (ie deemed eligible for convergence funds) while others have not.

The role of EU convergence funds during the crisis

Once these treatment and control groups have been defined, I do an income convergence analysis similar to the one for the full sample, but adding one dummy that identifies the “treated” regions and one interaction term of this dummy with the initial level of income.

table2-sm-8-11-16

The sign and significance on the ‘treatment’ dummy suggests that during the crisis, those regions that were “treated” grew faster than those regions that had a comparable level of income but were not deemed eligible for funds. The effect is particularly strong for region in the EA11 and particularly in the euro-area periphery. The sign and significance of the interaction term suggests that among those regions that were ‘treated’, per capita income in poorer regions grew faster (or decreased less fast). This is again evidence of convergence.

Conclusions

While this model is very simple, the evidence is relevant from a policy perspective. It suggests that convergence funds did play an important role in helping income convergence during a time of crisis, within the group of disadvantaged regions that were entitled to receive the funds, and especially in comparison to equally disadvantaged regions that were not eligible. This holds not only at the EU level, but especially for regions in those euro-area countries that were hardest hit by the crisis and/or underwent EU/IMF macroeconomic adjustment programmes, suggesting that the role of convergence in counteracting the effect of the crisis on income dynamics was particularly important there, possibly because of the stricter financial constraints that regions in those countries were facing. At a time when the merit of EU policies is often criticised, and Europeans are increasingly sceptical of the domestic economic implications of EU membership, I believe this is a very relevant message.

References

Becker, S. O., Egger, P. H., von Ehrlich, M. and R. Fenge (2008) ‘Going NUTS: The Effect of EU Structural Funds on Regional Performance’, CESIFO Working Paper No. 2495, December

 

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Opinion

Will this be the century of youthful Asia?

Youthful Asia offers immense opportunities for investors, but this potential can only be realised if their infrastructure and energy needs are fulfilled.

By: Alicia García-Herrero Topic: Global economy and trade Date: February 18, 2022
Read article More on this topic
 

Blog Post

Venture capital: a new breath of life for European entrepreneurship?

Whether the dynamism of European venture capital of the past two years can be sustained and kick start a credible alternative to bank finance in the European Union remains to be seen.

By: Maria Demertzis and Lionel Guetta-Jeanrenaud Topic: Banking and capital markets Date: February 10, 2022
Read article
 

External Publication

European governance

EU borrowing—time to think of the generation after next

Financing post-pandemic recovery via EU borrowing has proved remarkably straightforward. So why keep it temporary?

By: Grégory Claeys, Rebecca Christie and Pauline Weil Topic: European governance, Macroeconomic policy Date: December 9, 2021
Read about event
 

Past Event

Past Event

Future of work and inclusive growth: Digital dialogues

An end of year series of digital discussions on the Future of Work and Inclusive Growth in Europe.

Speakers: Janine Berg, Arturo Franco, Stijn Broecke, Esther Lynch, Mario Mariniello, Laura Nurski, Leah Ruppanner, Nicolas Schmit, Kim Van Sparrentak and Tilman Tacke Topic: Digital economy and innovation, Inclusive growth Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 7, 2021
Read about event
 

Past Event

Past Event

China’s medium term outlook: Will innovation save China from becoming old before it becomes rich?

What can China do to stop the deceleration of its economy. Is innovation the solution?

Speakers: Jean-Francois Di Meglio, Alicia García-Herrero and Guntram B. Wolff Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 1, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

Chinese economic statecraft: what to expect in the next five years?

Chapter from 'Storms Ahead: the Future Geoeconomic world order' on the expectations from the next five years of Chinese economic policy, published on 27 October 2021.

By: Alicia García-Herrero Topic: Global economy and trade Date: November 26, 2021
Read article More by this author
 

Opinion

European governance

Growth and inflation after the pandemic in the EU

Countries hit comparatively hard during the financial crisis, helped also by domestic and European policies, are bouncing back from the pandemic faster than their peers.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article Download PDF
 

Policy Contribution

European governance

Next Generation EU borrowing: a first assessment

The Next Generation EU programme is radically changing the way the EU finances itself and interacts with financial markets. This paper assesses the first design decisions made by the European Commission and the issuances that have taken place so far. It also outlines the potential risks and opportunities linked to this upgrading of the EU borrowing.

By: Rebecca Christie, Grégory Claeys and Pauline Weil Topic: Banking and capital markets, European governance, Macroeconomic policy Date: November 10, 2021
Read article
 

Blog Post

European governance

Is the risk of stagflation real?

Most economic forecasts predict a return, in the medium-term, to pre-pandemic growth and inflation. Nevertheless, the European Central Bank and fiscal authorities need to be vigilant for signs of the contrary.

By: Monika Grzegorczyk, Francesco Papadia and Pauline Weil Topic: European governance, Macroeconomic policy Date: November 2, 2021
Read article More on this topic
 

Blog Post

Strong, balanced, sustainable and inclusive growth? The G20 and the pandemic

The G20 is not doing enough to support strong, balanced, sustainable and inclusive growth in the wake of COVID-19, with the poorest countries left behind by the recovery.

By: Suman Bery and Pauline Weil Topic: Global economy and trade Date: October 29, 2021
Read about event More on this topic
 

Past Event

Past Event

Can climate change be tackled without ditching economic growth?

What will be necessary to achieve climate goals and keep growing?

Speakers: Francesco Starace, Simone Tagliapietra and Guntram B. Wolff Topic: Green economy Date: October 28, 2021
Read article More on this topic
 

Opinion

Can climate change be tackled without ditching economic growth?

The ultimate answer to the question on whether climate change can be tackled without ditching economic growth depends on our willingness to step up climate action massively.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Green economy Date: September 27, 2021
Load more posts