The growth effect of EU funds – the role of institutional quality

Abstract This paper investigates the impact of the EU's Structural, Cohesion, and Pre-accession Funds on economic growth. We look at a large sample of 27 EU countries and the UK between 1989 and 2020, essentially covering the full history of these funds. We show that the growth effect of the funds is conditional on institutional quality: the funds contribute to economic growth only in countries with strong institutions: low corruption, strong rule of law, effective governments, and strong regulatory quality. Our research has important messages for the expected economic impact of the Next Generation EU (NGEU) and the Recovery and Resilience Facility (RRF), and the design of future EU funds. Our findings highlight the risk that countries with weaker institutions, which tend to receive more funds, may use such funds less efficiently. It is, therefore, important that funding is linked to requirements to improve the quality of institutions. In this respect, countries that receive more RRF funds are indeed expected to introduce more structural reforms, some of which have the potential to improve institutional quality and thereby improve the effectiveness of the RRF and EU funds in general – this is a promising approach that could be used in case of the EU funds too.