How to Make EMU Closer? Role of EU Funds in Synchronizing Business Cycles

Benoit Dicharry and Lubica Stiblarova

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: This paper focuses on the potential role of the European Cohesion Policy in the business cycle synchronization of the EU-28. Using over 3 000 bilateral country-pairs during examined period 2000-2016, we assess the impact of actual EU funds expenditures on the business cycle synchronicity. Due to possible endogeneity issue between actual EU funds and current business cycle conditions, we instrument actual payments from the EU funds by their commitments, which are driven by supranational political factors and allocated before the beginning of each programming period. Special attention is put on countries belonging to the Economic and Monetary Union (EMU) as increased business cycle synchronization is considered, according to the Optimum Currency Areas (OCA) theory, as an inevitable condition for the successful implementation of a common monetary policy. We find that the EU funds promoted business cycle synchronization in the EMU, which can suggest that the European Cohesion Policy has a positive externality on the EMU’s common monetary policy. We also find a promoting role of the EU funds for the EMU–nonEMU country-pairs. We further provide a more detailed analysis conducted for each EU fund, highlighting the role of both – the European Regional Development Fund (ERDF) and the Cohesion Fund (CF). The same analysis is conducted with the EU-15 and the Central and Eastern European (CEE) countries and reveals that the EU funds have been able to promote the business cycle synchronization in the EU-15, between the EU-15 and the CEE countries, and among the CEE countries as well. We find qualitatively similar results for different estimators and different business cycle estimation techniques, confirming robustness of our results.

Keywords: Business cycle synchronization; Economic and Monetary Union; Supranational fiscal transfers; European integration; European Cohesion Policy. (search for similar items in EconPapers)
JEL-codes: E32 F44 F45 O47 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2020-03

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