The European Central Bank published a Working Paper analysing the growth impact of the European Union’s Structural, Cohesion and Pre-accession Funds, finding that these transfers support economic growth only in countries with strong institutions. Using indicators such as low corruption, strong rule of law, effective government and strong regulatory quality, the paper concludes that countries with weaker institutional quality are unlikely to translate EU funds into higher per capita GDP growth. The study covers 27 European Union countries plus the United Kingdom over 1989–2020 and measures EU fund inflows as a share of gross national income, paired with a governance proxy based on World Bank Worldwide Governance Indicators (averaging Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption). Econometric results indicate a negative average association between funds and growth in specifications without institutional interaction, while an interaction term shows the growth effect rises with institutional quality; country-by-country evaluations imply negative or non-positive effects at low governance levels and positive effects in better-governed countries, reaching around 1 percentage point in those with the strongest institutions. Local-projection estimates suggest the positive effect persists over time, with around a 0.4–0.5 percentage point annual per capita growth uplift over a seven-year horizon for a 1 percentage point increase in funds (as a share of GNI) at average institutional quality. The authors link the findings to expectations for Next Generation EU and the Recovery and Resilience Facility, noting that allocations are larger where institutional quality is weaker, which may raise efficiency risks, while recipients are also expected to implement structural reforms that could improve institutional quality and, in turn, the effectiveness of EU funding.
European Central Bank 2025-01-31
European Central Bank working paper finds EU cohesion-related funds lift growth only where institutional quality is strong
The European Central Bank's Working Paper finds that EU Structural, Cohesion, and Pre-accession Funds boost economic growth only in countries with strong institutions, indicated by low corruption and effective governance. Covering 27 EU countries and the UK from 1989–2020, the study shows positive growth in well-governed nations, while weaker institutions correlate with negative or non-positive effects. Larger allocations to countries with weaker institutions, as seen in Next Generation EU and the Recovery and Resilience Facility, may pose efficiency risks unless accompanied by structural reforms.