16 December 2013

ECFIN Economic Paper: EU governance and funds - testing the effectiveness of EU funds in a sound macro-economic framework

This paper analyses whether sound fiscal and macro-economic policies are beneficial to the achievement of the socio-economic development objectives enshrined in the TFEU, and in particular whether sound policies have an impact on the effectiveness of European Structural and Investment Funds.

The current crisis has strained national budgets and has revived the debate whether fiscal consolidation would underpin and help sustain growth and ultimately Member States' socio-economic development. Socio-economic development is to a large extent supported by national and public EU policies and fiscal consolidation is sometimes seen as slowing down the improvement of standards of living and welfare despite its positive effects on macro-financial stability. At the same time, macro and fiscal imbalances can undermine the effectiveness of ESI funds as they can lower the ability of the country to ensure the long term viability of the co-financed projects and the achievement of the overarching socio-economic development objectives.

The objective of this paper is to empirically analyse the impact of a sound fiscal and macro-economic framework on the effectiveness of ESI funds. More specifically, it tests whether sound fiscal and macroeconomic policies play a positive role in achieving the socio-economic development objectives enshrined in the Treaty on the Functioning of the European Union. It also scrutinizes whether sound macro policies have an impact on the effectiveness of European Structural and Investment Funds (ESI funds), i.e. in helping Member States to progress towards these socio-economic development objectives.

The empirical analysis provides evidence on the positive association between the effectiveness of the ESI funds and sound macro-economic and fiscal policies. First, sound fiscal policies proxied by low levels of government debt and deficit contribute to improving the socio-economic development of Member States. Second, sound macroeconomic policies proxied by low levels of net foreign liabilities are beneficial as well to socio-economic development. Third, there is evidence that the ESI funds are effective in helping Member States to enhance their socio-economic development. Finally, this effectiveness is higher when combined with sound national fiscal and macroeconomic policies.

These main findings show the relevance of linking ESI funds with economic governance. For this reason, making the ESI funds conditional to sound fiscal and macroeconomic policies is likely to be benefitial to the achievement of the Union's socio-economic objectives, hence to enhance the effectiveness of EU funds.

Press release

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