Going NUTS: The Effect of EU Structural Funds on Regional Performance

Abstract

The European Union (EU) provides grants to disadvantaged regions of member states to allow them to catch up with the EU average. Under the Objective 1 scheme, NUTS2 regions with a GDP per capita level below 75% of the EU average qualify for structural funds transfers from the central EU budget. This rule gives rise to a regression-discontinuity design that exploits the discrete jump in the probability of EU transfer receipt at the 75% threshold. Additional variability arises for smaller regional aggregates - so-called NUTS3 regions - which are nested in a NUTS2 mother region. Whereas some relatively rich NUTS3 regions may receive EU funds because their NUTS2 mother region qualifies, other relatively poor NUTS3 regions may not receive EU funds because their NUTS2 mother region does not qualify. We find positive growth effects of Objective 1 funds, but no employment effects. A simple cost-benefit calculation suggests that Objective 1 transfers are not only effective, but also cost-efficient.