European Central Bank publishes working paper estimating governance convergence could add 0.5 percentage points to annual regional GDP per capita growth

The European Central Bank published a Working Paper by Marinela-Daniela Filip and Ralph Setzer assessing how differences in regional institutional quality relate to economic growth and resilience across the European Union, finding that better governance is associated with stronger medium-term GDP per capita growth and improved shock absorption, particularly in lower-income regions. Using the European Quality of Government Index for around 200 EU regions over 2010 to 2021 and a two-way fixed-effects framework, the paper reports that the governance-growth relationship becomes statistically significant over three- to four-year horizons. A scenario in which below-median regions converge to the EU median institutional quality implies an average increase in annual GDP per capita growth of 0.5 percentage points over four years (and 0.8 percentage points for low-income regions). On resilience, regions with higher institutional quality are estimated to experience smaller GDP per capita declines when common shocks occur and to have a materially lower incidence of severe crisis episodes, with a mechanical application to the COVID-19 shock suggesting an additional GDP per capita decline of around 4 percentage points in the lowest-quality regions versus the top 10 regions by institutional quality. The paper includes robustness checks, including instrumental-variable approaches, and notes that the findings reflect the authors’ views rather than the ECB’s.