The Occasional Paper Series published by the European Central Bank – Eurosystem, released a new issue (nº 252) on December 2020. The paper, titled “Fiscal transfers and economic convergence” is co-authored by Joao Capella-Ramos, Cristina Checherita-Westphal and Nadine Leiner-Killinger.
The paper reviews the impact of fiscal transfers and, in particular, that of intergovernmental fiscal transfers, on real and business cycle convergence. Its empirical analysis is conducted for the EU-28, the EA-19 and the EA-12 for the period
2000-2016, and leads to the following conclusion: while fiscal transfers have contributed to redistribution across countries and regions, generally leading to (faster) convergence in disposable incomes, their broader impact on economic (i.e. GDP) growth and real convergence has been less clear-cut. Some positive economic growth effect is found at the regional level for the EU structural and investment funds in the medium term, although not in the longer term.
In addition, the paper shows that although fiscal transfers mostly reflect long-term allocation concerns and do not explicitly address short-term stabilisation needs, their underlying impact on the business cycle is not insignificant.
The Occasional Paper is available at ECB´s Publication Website.
Here it is the abstract:
Before the outbreak of the coronavirus (COVID-19) pandemic, discussions were already taking place on how to complete Economic and Monetary Union (EMU) and increase its resilience, inter alia, by speeding up economic convergence. The impact of the current unprecedented crisis on the euro area economy has given the debate
new impetus. As a contribution to this topic – and without going into details of new mechanisms for crisis resolution – this paper analyses the role of fiscal transfers in real and business cycle convergence at a regional level. The paper distinguishes between net fiscal transfers – a broad measure defined as the ratio between disposable and primary incomes – and EU structural and investment funds. It provides evidence that net fiscal transfers have contributed to income redistribution across regions and to faster convergence in disposable incomes, although not to higher
economic growth and real convergence. More positive evidence has been found for the role of the EU structural and investment funds over the medium term, based on the newly available – and richest so far – European Commission database. Going forward, in addition to efficiency considerations, which are important for real convergence, recommendations on the size and allocation of fiscal transfers should account for their impact on the business cycle. At the same time, in the longer run, it should be borne in mind that fiscal transfers are no substitute for genuine structural
reforms and sound macroeconomic and fiscal policies when it comes to promoting sustainable economic growth and convergence.