Original publication: October 2018
Authors: Coordinator: Andrea NALDINI (Ismeri Europa);
Alessandro DARAIO, Gessica VELLA and Enrico WOLLEB (Ismeri Europa), Roman RÖMISCH  (wiiw)
Short link to this post: http://bit.ly/2Co6Fiv
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This study investigates the effects of Cohesion Policy (CP) which occur in a country other than the one in which CP resources were actually spent. These effects are called “externalities” or “spillovers” in the study; and these terms are used here as synonymous even if technically they can differ. Externalities, or spillover effects, are well known in economic literature but have only occasionally been associated to CP. A recent study (Bartkiewicz P., 2016) which includes new estimations of externalities has revived this debate which might also be relevant for the preparation of the CP for the 2021-2027 period.

 

Spillover effects are interlinked with Cohesion Policy

To analyse spillover effects a specific theoretical framework has been developed in the paper through a review of the main development theories on which CP is based. This theoretical framework shows that spillover effects are an inseparable component of CP policies and produce positive results both in the country where CP resources are actually spent and the country where the spillovers effects occur. The framework also highlights a number of transmission channels of the spillover effects: trade, mobility of workers and researchers, physical and cooperation networks, spatial contiguity. As a consequence, the sensitivity of a country to these effects, both as origin and as destination of spillovers, mainly depends on:

  • the degree of openness and competitiveness of its economy and, in particular, of the sectors funded by CP;
  • participation in physical networks, such as transport or energy networks, or in collaboration networks such as research networks;
  • the propensity of its citizens to move to a different country;
  • its geo-political position and the extension of its borders.

These mechanisms are deeply rooted in the CP and in the economic relationships between integrated and open economies. Hence, to a different extent spillovers affect all the EU Member States, as both producers and users of spillovers, and also non-EU countries, as users only.

Spillover effects are more than 15% of Cohesion Policy expenditure

The analysis of CP spillover effects has been carried out at three levels: macroeconomic, microeconomic and sectoral.

At a macro-economic level direct effects and spillover effects of CP have been examined with the support of international econometric models; in particular, the study used the QUEST III model with simulations provided by the Commission and the WIOD model with simulations directly designed by the study team. Simulations demonstrated that international trade is one of the principal transmission channels of spillovers and that spillovers mainly flow from cohesion countries[1], which spend the principal share of the CP resources and consequently increase their imports, to non-cohesion countries which have a higher export capacity.

In general, it is possible to affirm that of every CP Euro spent in the cohesion countries in the period 2007-2013, 9 Euro cents flowed to non-cohesion countries and 8 Euro cents to non-EU countries in the form of import demand.

According to QUEST III simulations, in the long run (2023) the total effects of CP for non-cohesion countries are limited but positive (an approximate 0.1% increase in GDP) and on average 40% of this additional growth is due to spillover effects. Conversely, in cohesion countries the total effects of CP spending are significantly higher (between 0.5% and 4% of GDP) but gains from spillovers are negligible.

According to the WIOD simulations, spillovers generated around EUR 800 million of additional annual demand in Germany, with EUR 700 million coming from CP in cohesion countries. In France, Italy, the Netherlands and the UK additional annual demand from CP spillovers exceeded EUR 200 million, and for Belgium, Austria, the Czech Republic, Poland and Spain it was still over EUR 100 million per year, again with a significant proportion coming from cohesion countries.

Aggregating the spillovers over all countries results in total annual spillovers worth EUR 5.4 billion, of which EUR 5.2 billion stems from cohesion countries. Considering only the EU countries as destination of spillover effects, total spillovers amount to EUR 2.9 billion of which EUR 2.4 billion stem from cohesion countries. These estimations of the spillover effects are lower than those proposed by Bartkiewicz et al. (2016) but are higher than the ones presented in a previous study (Bradley et al., 2009). While in this present study all non-cohesion countries in the long run have an economic advantage, however small. In (Bradley et al., 2009) the largest part of spillovers went to non cohesion countries, as in our simulations, but were not sufficient to counterbalance the financial contribution of some of the net payer countries towards CP budget.

The findings confirm that spillovers are an important component of the final impact of CP. They have a relatively higher impact in non-cohesion countries and are usually, but not exclusively, generated by cohesion countries. Spillovers in no way hinder the objective of economic convergence pursued by CP as the overall effects of CP continue to benefit mainly cohesion countries.

Foreign owned companies play a significant role in Cohesion Policy and involve non-EU countries to an important extent

The microeconomic analysis investigated the foreign owned companies that benefit from CP expenditure in Poland and the Czech Republic. Estimations in the analysis are based on the available information on the typology of investments carried out by foreign beneficiaries in the 2007-2013 period. The estimations indicate that:

  • the funds allocated to foreign enterprises comprise around 10% of the ERDF and CF resources in Poland and 5% in the Czech Republic;
  • the financial benefit for the countries of these enterprises varies between 6% of the total ERDF and CF resources in Poland and 3% in the Czech Republic, because the remaining part of the CP financing remains in the countries of origin;
  • non-EU countries received around 50% of the spill-over effects stemming from the funding of foreign owned enterprises.

Multiple mechanisms trigger spillover effects

The sectoral analysis confirmed the importance of spillover effects in some particularly sensitive policy areas: research and higher education, environment and transport. To illustrate the concrete functioning of transnational spillover mechanisms in these three areas , a number of demonstrative cases have been identified and described in individual project fiches (see annex C).

Multiple mechanisms potentially triggering transnational spillovers operate in the above sectors. In higher education and research, the internationalisation of the activities and the participation in transnational networks as well as the mobility of students and researchers are important mechanisms promoting spillovers abroad. In transport, network connections are of the greatest importance and their spillover potential is related to the rank occupied in the European hierarchy of infrastructures. In the environment policy, physical and geographical linkages are crucial, as are biological connections and ecological networks.

Using these mechanisms as proxies of the intensity of the potential spillovers it was found that in the 2007-2013 period at the European level the share of total CP expenditure potentially contributing to transnational spillovers in the three sectors amounts to around 18% of total ERDF and CF expenditure. Considering the effect of proximity in border regions, where spillovers are stronger, the share rises to over 20%. Even if information on expenditure by regions is still not available, similar percentage of potential spillovers may be assumed in the current programming period.

Economic benefits of spillovers are concentrated in few countries

The study provides different analyses and estimations of externalities. Their findings can help to account for how, and to what extent, spillovers benefit Member States.

Making several assumptions on the sectoral distribution and the size of the benefits for foreign countries, the micro-economic spillovers have been added to the demand spillovers calculated by the WIOD model. The resulting overall estimations of the spillover effects do not differ substantially from the estimations calculated using the QUEST III model, which includes micro and macro dimensions, reinforcing the validity of both results.

The sum of the macro and micro net effects (spillover in entrance minus spillover in exit) is shown in Error! Reference source not found. below and indicates Poland, Hungary and the Czech Republic as the main producers of net spillovers and Germany and the United Kingdom as the major receivers after the block of non-EU countries.

[Figure 1]

Spillover effects and the cost of Cohesion Policy

An in-depth comparison of the spillover benefits with the net contribution to the EU budget in the different countries is beyond the scope of the study, however our findings indicate some important facts.

It is clear that non-cohesion countries, which are the net contributors to the EU budget and thus to CP, benefit from macroeconomic and microeconomic spillover effects. This element has to be taken into consideration in the negotiation concerning the MFF and the CP budget. However, the analyses of the spillover effects shows that their importance cannot be measured only on their financial value.

On the one hand, CP is based on solidarity principles which are not overshadowed by spillovers. In fact, most significant positive impacts of CP remain concentrated in cohesion countries and this confirms the key role of CP in promoting economic convergence.

On the other hand, both macro and micro spillovers indicate that CP plays an important role in increasing the size of and fostering integration within the common market. These effects positively influence the overall productivity of the EU and counterbalance the possible competitive disadvantages produced in some non-cohesion countries by the higher growth of some cohesion countries where CP investments are more substantial.

The exploitation of these positive outcomes triggered by spillover effects depends on the ability of each MS to adapt its economy to innovation and international trade. The non-cohesion countries are generally better equipped for this goal, while less developed cohesion countries need the support of CP. If well governed and supported by an effective CP, the recursive process between CP and spillover effects can lead to increasing convergence between MSs and regions.

Spillovers towards non-EU countries are important

Normal trade interactions and foreign investments give rise to an extensive flow of spillovers towards non–EU countries, and lead to some further considerations. Firstly, it should lead to a more effective policy of import substitution in sectors where dependence on non-EU countries is stronger, such as the energy sector. Secondly, a selective promotion of foreign investments to favour new productive plants and technologically advanced productions would be desirable. Thirdly, public funding of enterprises from ‘tax haven’ countries should be controlled and limited, especially if countries are on the blacklist of the EU[2].

Conclusions

The findings of the study corroborate the conclusion that the effects of CP are not limited to the destination where funding is spent and spillovers are a powerful tool to support EU economic growth and integration.

Individual Member States tend to calculate their own gains and spending without taking into consideration the all European context. The findings have demonstrated that such an “accounting” vision is an undeniable dimension, but it is too restricted and hampers a full understanding of the CP effect on growth and competitiveness of Member States.

In the debate on the future 2021-2027 CP, the policy implications of spillovers should be considered and a positive use of these transnational effects should be promoted. Spillovers should be interpreted as a means for reinforcing CP and the possibility of extending CP effects beyond the administrative borders of a country should be explicitly addressed by activating adequate networking and planning tools.

In this context, microeconomic and sectoral spillovers are not unintended or unexpected effects, but should rather be promoted and governed. They are also a fundamental opportunity to stimulate less developed regions to participate in international networks and increase exports. The strategy of sectoral investments – such as transport, environment, research, higher education – and the attraction of investments need to adopt a broader view and cross the administrative borders. Macro-regional strategies already address the issue of a more open and integrated CP, but further improvements are possible.

The proposed new regulations for the 2021-2027 period in part address this issue. They introduce “component 5” (interregional innovation investments through the commercialisation and scaling up of interregional innovation projects[3]) into territorial cooperation. In the proposal of the Common Provisions Regulation[4], article 17 (Content of programmes) paragraph 3 facilitates, and implicitly promotes, transnational projects.

However, more focused incentives and requirements in this direction could be included in the regulation. For example, the definition of transnational implementation “models” in some critical sectors (education, research, environment and SME collaboration) can facilitate transnational projects and orient high added value foreign investments, as happened in the models used in integrated territorial investments (‘ITI’) or community-led local development (‘CLLD’)[5]. These transnational operations may be optional but when implemented should receive an “award” in terms of EU co-financing; the greater technical and administrative complexity of these interventions justifies the award.

Finally, minor and not too burdensome improvements are possible in the CP monitoring system that may result in a substantial advancement in the capacity of tracking spillover effects. Two pieces of key information should be made available in the list of selected operations expressly requested by the Commission proposal of the Common Provisions Regulation (COM(2018) 375, article 44 paragraph 3):  the names of the companies called to implement projects and the nationality of the ownership of the company receiving CP resources.

[1]    Bulgaria, Cyprus, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Spain, Romania, Slovenia, Slovakia.

[2]    See Council of the European Union, The EU list of non-cooperative jurisdictions for tax purposes, 8 march 2018. http://data.consilium.europa.eu/doc/document/ST-6945-2018-INIT/en/pdf

[3]    European Commission, COM(2018) 374 final, Proposal of a regulation of the European Parliament and of the Council on specific provisions for the European territorial cooperation goal (Interreg) supported by the European Regional Development Fund and external financing instruments.

[4]    European Commission COM(2018) 375 final, Proposal for a regulation of the European Parliament and of the Council laying down common provisions on the European Regional Development Fund, the European Social Fund Plus, the Cohesion Fund, and the European Maritime and Fisheries Fund and financial rules for those and for the Asylum and Migration Fund, the Internal Security Fund and the Border Management and Visa Instrument.

[5]    See article 23, 24 and 25 of the European Commission COM(2018) 375 final, Proposal for a regulation of the European Parliament and of the Council laying down common provisions.

Link to the full study: http://bit.ly/617-491

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