Regional Community Policy: Does Aid Received from the EU Displace Funding by Member States?

Abstract

The implementation of the EU regional policy has been characterized by the establishment of multiannual public investment programs in the Member States that are co-financed by the EU through matching grants. According to the additionality principle, governments receiving aid should increase their financial efforts in relation to the pre-existing situation. Using data on the implementation of regional policy, this paper has two aims: to verify whether Community aid displaces local funds for public investment, and to uncover whether there is endogenous behaviour regarding Community aid as a result of local political processes. We have obtained evidence that funding from the EU crowd-out local financing of public investment. On the other hand, although there is some evidence of an endogenous behaviour of Community aid, we find that this endogeneity is not statistically significant.