Abstract
Abstract The European Union is characterised by large and persistent disparities across regions concerning income distribution and unemployment rates. European Structural Funds (ESF) have been raised to narrow income differences and foster employment in lagging regions. The paper describes the ESF and argues that they are counteracted by national policies using the theoretical framework of New Economic Geography. The agglomeration of economic activities in some regions can cause unemployment in other regions of the same country since the national wage structure is compressed. National transfers to peripheral regions with high unemployment prevent unemployed people from moving into the core. Assistance from the ESF to peripheral regions enable countries to continue inefficient national wage and transfer policies. In this respect, the ESF must not aim at fighting unemployment but should be restricted to lessen income disparities.
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