Econpol: NextGenEU Recovery Funds Need to Be Adapted to Business Cycles

The implementation of recovery funds under the EU’s Covid-19 recovery program NextGenerationEU should be aligned with business cycle phases to ensure that financial support will have the most even and efficient impact across regions. This is a conclusion derived from a recent EconPol study that analyzed the impact of the European Structural and Investment Funds on regional development over the period 1986–2018. “During upswing phases, the rate of convergence is high; there is a shift to low rates of convergence or even divergence during recessions,” says Carlos San Juan Mesonada, one of the study’s authors.

The EconPol study finds that European Structural and Investment Funds distributed between 1986 and 2018 had a positive impact overall on regional growth: an increase of 1 percent in this EU aid led to a permanent increase of personal income of around 0.03–0.04 percent in the recipient regions.  However, the funds were least effective during downturn phases. “The least developed regions were the ones worst hit by the 2008 financial crisis, and also the ones where European aid was least effective,” explains Carlos Sunyer Manteiga, the study’s co-author. The effect can partially be attributed to lower absorption rates in these regions and liquidity traps. In times of financial crisis, public budgetary resources are scarce; governments cannot use all the EU funds allocated to them as they do not comply with the required minimum co-financing rate. According to the researchers, one way to mitigate this effect is to ease co-financing requirements during economic downturn phases and to adapt funds to the business cycle phase. “Even though the EU eased co-financing requirements in 2011, the data suggests that this measure might have come too late,” San Juan Mesonada adds. With the bulk of recovery funds under NextGenerationEU aimed at supporting regions that were most affected by the coronavirus pandemic, this could be an important policy implication to consider.