The Heterogeneous Effects of EU Structural Funds: A Spatial VAR Approach

ABSTRACT This paper focuses on the impact of EU structural funds (SFs) on the GDP per capita of 183 European NUTS‐2 regions throughout the 1990–2018 period. To allow for the endogeneity of funds allocation to regions, we estimate a bivariate structural panel VAR model, including a rich menu of control variables. Our main identifying restriction is based on the widely documented long lags affecting the implementation of EU's cohesion policy. Through a spatial VAR specification, we also estimate spillovers from local SF expenditure on other areas. We find highly significant multipliers measuring the local response of GDP to an exogenous shock in local SF expenditure, with a long‐run value settling at 2.7. Spillovers for GDP from an exogenous shock to SFs are also positive and significant, but much smaller (about one‐fifth of the within‐region responses). When partitioning our sample according to features suggested by the literature (stage of development, EU funding regimes, size), we find that within‐region multipliers are higher in lagging regions, especially if located in countries supported by the Cohesion Fund, and in regions with a larger population. Spillovers are also heterogeneous across different groups of regions, turning out to be negative in regions belonging to countries not supported by the Cohesion Fund. This evidence is largely validated in qualitative terms by refinements of the analysis concerned with the choice of proximity matrices.