Why the financial aid of the EU's regional policy does not impact on the public investment level? The case of the Spanish regions

Abstract

Given that an expansive impact of the European Regional Development Fund (ERDF) aid on public investment is expected, two models have been estimated to determine, respectively, the size of this impact and the relationship between the own financing of regional public investment and the external financing received from ERDF in Spanish regions. Evidence has been obtained that the impact of transfers from the ERDF on public investment is almost nil. In addition, for each euro that the Spanish regions received from the ERDF, own funds for public investment allocated by regional governments have been reduced 23 cents, showing an important relation of substitution between the two sources of financing. Both models include data between 1994 and 2014 and their estimation has used traditional methods and methods based on the cointegration of variables with a panel structure, such as FMOLS and DOLS. The main results obtained with the two methodologies they are quite close, confirming the initial hypothesis: in the presence of weak donor restrictions, the political process in governments receiving ERDF transfers determine revealed preferences about public investment, neutralizing conditions established by the donor. This study also unequivocally demonstrates the presence of simultaneous causality between investment aid received from the ERDF and regional public investment and between said aid and the own resources that regional governments dedicate to financing public investment. These findings confirm the existence of a bias that seriously affects the effectiveness of the European Union's regional policy.