EU Needs to Rethink Cohesion Policy
Research
15.07.2024
ZEW Analysis Suggests Refocusing Cohesion Policy on the Least Developed Regions Where a Significant Impact Can Be Expected
Cohesion Policy aims to reduce economic divergence between the regions of the EU and to promote catch-up processes in the least developed regions. New and significant fiscal demands on the EU budget, related to defence needs and resources required for climate action, raise the question of whether this convergence objective is still a top priority for the EU. One way to address this dilemma is to further concentrate spending on the least developed regions of the EU, thus saving resources for other priorities.
This was one of the more general recommendations made by researchers at ZEW Mannheim as part of an extensive research project conducted with a team of European policy experts and funded by the German Federal Ministry of Finance (BMF). The project concluded on 15 July 2024 with a high-level conference in Brussels, where the report was handed over to Commissioner Elisa Ferreira. The event was also attended by a number of finance ministers from EU Member States, including Germany’s Minister Christian Lindner.
Success of Cohesion Policy depends on local environmental factors
The analysis shares its conclusions with those of a large body of literature which indicates that Cohesion Policy has positive effects on growth and employment, although these tend to be short-lived and diminish with increasing funds. “In fact, despite 30 years of Cohesion Policy, regional disparities have hardly decreased in Southern Europe. Of course, in a scenario without Cohesion Policy, the differences could be even greater, but the meagre result of decades of efforts remains sobering,” explains Zareh Asatryan, deputy head of ZEW’s Research Unit “Corporate Taxation and Public Finance”.
“Given the unambitious results and the large body of evidence on the conditional effectiveness of Cohesion Policy, it would be desirable to redirect the funds to concentrate on regions in need, where a significant impact can be expected. This particularly pertains to regions in less developed EU Member States which have efficient and corruption-free administrations,” explains Friedrich Heinemann, head of the same ZEW unit.
Another important finding from the report is that Cohesion Policy, which is primarily a tool for investing in public capital stock, has the potential to facilitate private investments in Member States. Funds should therefore continue to be spent on projects that complement private investments, rather than those that serve as a substitute for private sector activity.
More effective, targeted and transparent Cohesion Policy
Reallocating resources based on local enabling factors is a task that is easier said than done. One constraint is political feasibility, but another important trade-off comes into play as well: regions that are the least developed and thus receive more EU transfers are often those with unreliable institutions. This means that financial resources cannot be optimally reallocated. This trade-off should be addressed by significant administrative reforms that remove local bottlenecks, including strengthening the human capital of local administrations.
“This reform agenda should be accompanied by a further strengthening of the evaluation system of Cohesion Policies with the aim of making funding decisions more evidence-based,” adds ZEW researcher Carlo Moana Birkholz, who co-authored a one-of-a-kind academic study on the evaluation system of Cohesion Policy using innovative tools provided by Large Language Models.
In addition, Cohesion Policy currently suffers from an inflated set of objectives and the existence of parallel structures. These redundancies blur responsibilities and ownership of the policy and lead to coordination problems. The coexistence of Next Generation EU funds alongside the permanent cohesion funds only complicates these administrative issues.
Going forward: An evidence-based reform of Cohesion Policy
Academic evidence on the economic effects of Cohesion Policy is often more nuanced than the rosy optimism presented by policymakers. Evidence-based decision-making in the future must require a more unbiased and transparent discussion at the European level as to what works and what the limits of our knowledge are about the consequences of Cohesion Policy.
