Transmission channels of the cohesion policy: direct and indirect effects on EA synchronicity

Abstract

This study focuses on the examination of the side effects of the European cohesion policy (ECP), in particular, the direct and indirect effects of the European structural and investment (ESI) funds on business cycle co-movement in the Euro area (EA) countries. The results of analysis performed using the simultaneous equations framework in the 2000–2019 period reveal that increasing ESI payments within the cohesion policy have overall contributed to more synchronized EA business cycles. Even though the ESI payments do not seem to directly support synchronization, probably because of their procyclical nature, we find that the unintended benefits of the ESI payments with respect to the synchronization lie in their indirect positive effects, which outweigh the negative direct effect. The total positive effect of the ECP emerges because increasing investment from the ESI funds promotes the EA business cycle synchronization via trade, bilateral FDI, and income similarity. Meanwhile, similar evidence has not been confirmed for the specialization channel.