Too much of a good thing? On the growth effects of the EU's regional policy

The European Union (EU) provides grants to disadvantaged regions of member states from two pools, the Structural Funds and the Cohesion Fund. The main goal of the associated transfers is to facilitate convergence of poor regions (in terms of per-capita income) to the EU average. We use data at the NUTS3 level from the last two EU budgetary periods (1994–1999 and 2000–2006) and generalized propensity score estimation to analyze to which extent the goal of fostering growth in the target regions was achieved with the funds provided and whether or not more transfers generated stronger growth effects. We find that, overall, EU transfers enable faster growth in the recipient regions as intended, but we estimate that in 36% of the recipient regions the transfer intensity exceeds the aggregate efficiency maximizing level and in 18% of the regions a reduction of transfers would not even reduce their growth. We conclude that some reallocation of the funds across target regions would lead to higher aggregate growth in the EU and could generate even faster convergence than the current scheme does. ► We evaluate the Structural Funds and Cohesion Fund programmes at the NUTS3 level in 1994–2006. ► We estimate the effect of funds/GDP on GDP/capita growth by generalized propensity scores. ► In 36% of the recipients the transfer intensity exceeded the efficiency-maximizing level. ► In 18% of the regions a reduction of transfers would not even have reduced their growth. ► Some reallocation of the funds would have benefited aggregate growth convergence in the EU.