Have EU funds benefited the UK – and which aspects of EU Cohesion Policy should be maintained if they are replaced? Marco Di Cataldo and Vassilis Monastiriotis (LSE) argue that the funds have significantly contributed to regional growth in the UK, particularly in poorer areas. Strategic investments have played a distinct role in the economic growth of UK regions, and key aspects should be incorporated into post-Brexit regional policy.

One of the consequences of Brexit is that the UK will no longer be eligible to receive EU regional development funds. This will deprive UK regions, particularly poorer ones, of an important source of financial help. While the UK government has committed to replace Cohesion Policy by establishing a ‘Shared Prosperity Fund’, the contours of such a policy are still unclear.

Filling the vacuum generated by the loss of Cohesion Policy will be far from simple, as the loss of EU funds represents not only less money for local economic development policies, but also a prospective problem of policy design. Therefore, it is crucial to understand not just whether EU Cohesion Policy should be replaced but also how, and where it is most urgent to do so.

In a recent paper, we study whether EU funds have helped to foster the economic performance of recipient UK regions, and examine which successful features of EU spending should perhaps be maintained once regional policy responsibility is fully ‘repatriated’ to the national level. These issues are crucial, particularly for the UK regions currently entitled to receive the largest shares of EU funds, and which may significantly lose out if public subsidies are not adequately replaced after Brexit.

Regression analysis provides a clear picture of the role played by EU funds for regional growth in the UK. The level of funds allocated to regions has had a positive and non-exhaustible link with economic growth over the 1994-2013 period, suggesting that Cohesion Policy interventions have been productive irrespective of their scale. Furthermore, it looks as if poorer regions – i.e. those classified as ‘less developed’ by the EU – have been those growing relatively faster, an effect which is additional to that of actual EU spending. Hence, EU funds appear to have been most effective where they were most needed and where the highest investment effort has been made.

Next, inspired by recent research, the analysis focuses on a number of key aspects of policy design, investigating what type of regional strategies have been most successful. By calculating the proportion of EU investment across different investment goals, it is shown that concentrating spending in one single objective – rather than distributing funds across many investment targets – did not confer an advantage. Over-concentration of EU funds across development categories seems, if anything, to be negatively associated with regional growth. The only exception applies to areas that specialise in innovative activities. In these cases, additional investment in innovation and technological development is found to be associated with better economic performance.

Next, the analysis shows that where investment priorities (i.e. key investment goals identified) did not coincide with regional needs (i.e. points of weaknesses of a region), development strategies have been less conducive to growth. This finding reflects the importance of giving due consideration to the local socio-economic context in the design and prioritising of Cohesion Policy interventions. The main message here is that development policy works better not when concentrating on enhancing regional advantages, but rather when focusing on remedying regional disadvantages. It is interesting to note that this is broadly the direction followed by Cohesion Policy in recent years, with more emphasis on ‘place-based’, tailored interventions that are more sensitive to local characteristics and consider local socio-economic assets and needs carefully.

These results have strong implications for Brexit. For a long time, Cohesion Policy has been a significant stimulant to regional and national growth and, due to its focus on economically backward regions, a force for regional convergence in the country. The prospective withdrawal of the UK from the EU and the loss of eligibility for Cohesion Policy funding will thus not only deprive UK regional economies of an important source of investment funds, but also from a mechanism which has – at least partly – neutralised the forces of economic divergence. It follows that policy efforts in the post-Brexit era, such as the ‘Shared Prosperity Fund’, may concentrate on developing a similarly funded regional development policy which will substitute for the withdrawal of the Cohesion Policy interventions and, indeed, improve on them. Our evidence base suggests that the policy’s positive features include the EU’s approach to multi-annual programming and the award of higher shares of funds to the most disadvantaged areas.

On the other hand, it could be improved upon by increasing the level of spending, a move away from concentration of funds in specific investment categories unless the regional structure is already predisposed to a good use of such investments and, above all, more attention to targeting investments so that they match the specific pre-existing weaknesses of each region.

References

Crescenzi, R., Fratesi, U., & Monastiriotis, V. (2017). The EU Cohesion Policy and the Factors Conditioning Success and Failure: Evidence from 15 Regions. Regions, 305, 4-7.
Di Cataldo, M. (2017). The impact of EU Objective 1 funds on regional development: Evidence from the U.K. and the prospect of Brexit. Journal of Regional Science 57, 814-839.

This post is based on the authors’ recent paper in Regional Studies. It represents their views and not those of the Brexit blog, nor the LSE.

Marco Di Cataldo is an Affiliate Postdoctoral Researcher in the Department of Geography and Environment, LSE.

Vassilis Monastiriotis is Associate Professor in Political Economy at the European Institute, LSE.