European Cohesion Policy to the Rescue? Revising (Counter)-Cyclical Effects in the EU-28 Recipient Countries

Abstract

This paper empirically verifies recent efforts of EU policymakers and government authorities to apply the European Cohesion Policy (ECP) as a possible counter-cyclical instrument to boost economies in their economic downturns.Compared to limited country-specific studies, we allow for an endogeneity issue between the business cycles and the ECP payments and apply a system GMM estimation for the EU-28 recipient countries sample in the time period 2000 -2018. Even though the overall ECP payments follow a pro-cyclical path, the model estimations for the sub-periods based on individual programming periods reveal a time-varying cyclical character of the ECP. Whereas the observed procyclicality can be mainly contributed to the period 2000 -2006, we find the conditional counter-cyclical effects in 2007 -2013 and 2014 -2018, when a lower price level and obeying the rule of law seem to have an extra counter-cyclical dimension, confirming a rationale of the convergence criteria and the Stability and the Growth Pact.