# **1. INTRODUCTION**

**Cohesion Policy in the European Union (EU) aims at reducing disparities among countries and regions.** The objective of cohesion was defined in the 1986 Single European Act, for “reducing disparities between the various regions and the backwardness of the least-favored regions” (Article 130a). During the EU’s current 2014-2020 budget period, about €469 billion of EU and national budgets have been allocated under Cohesion Policy funds through the European Regional Development Fund (ERDF), the European Social Fund (ESF), and the Cohesion Fund (CF).<sup>1</sup> In the previous 2000-2006 and 2007-2013 budget periods, €198 billion and €347 billion, respectively, was committed under Cohesion Policy initiatives.<sup>2</sup>

**The EU has successfully reduced inequalities between member states in average incomes, but inequalities between regions within countries have increased.** Since the last big wave of new Member States joining the EU in 2004, the average gross domestic product (GDP) per capita of the three poorest EU countries – namely, Bulgaria, Latvia, and Romania – has risen from 15.7% of the EU average in 2004 to 29.3% in 2018.<sup>3</sup> In this sense, the EU has been a ‘convergence machine’ for its Member States. However, most of that convergence has been driven by economic growth in leading regions within each country – usually, the capital cities. For example, Sofia achieved a 9.2% average yearly GDP per capita growth rate over the period 2004-2017, Riga an 8.3%, and Bucharest a 12.5%.<sup>4</sup> Overall, despite the positive results in terms of economic convergence at the country level, regional inequality has started to rise again since the early 2000s both across and within countries, after a promising reduction observed during the 1990s with respect to the previous decade (Storper, 2018; Iammarino et al., 2019).

**Regional economic performance has been analyzed almost always at the NUTS-2 level.** Given the large share of EU and national budgets allocated to reduce regional inequality and promote harmonized growth, economists, economic geographers and regional scientists have investigated with great scrutiny the economic impact of the EU Cohesion Policy (e.g. Cappelen et al., 2003; Beugelsdijk and Eijffinger, 2005; Bussoletti and Esposti, 2008; Dall’erba and Le Gallo, 2008; Ramajo et al., 2008; Pellegrini et al., 2013; Rodríguez-Pose and Garcilazo, 2015; Di Cataldo, 2017; Bachtrögler et al., 2020; Crescenzi and Giua, 2020), and the factors underlying regional economic growth and convergence (e.g. Quah, 1996; Fingleton, 1997; Magrini, 1999; Rodríguez-Pose, 1999; Canova, 2004; Gardiner et al., 2004; Basile, 2008, 2009; Tselios, 2009; Arbia et al., 2010; Crescenzi and Rodríguez-Pose, 2012; Rodríguez-Pose and Ketterer, 2020). A commonality characterizing the empirical works analyzing the effectiveness of cohesion investments in particular, and the determinants of economic growth and convergence in general, is that they consider the NUTS-2 level geography as unit of analysis, coherently with the EU policy design. Indeed, policy and programming have conventionally focused on NUTS-2 regions, and eligibility for Cohesion Policy funds is determined according to GDP per capita measured by NUTS-2 regional boundaries.

**However, NUTS-2 regions are large entities, with populations of 800,000 to 3 million people, which hides substantial heterogeneity inside the regions.** The pitfall of the NUTS-2 level as spatial unit for policy design and programming is that this large size often hides substantial variations in economic performance and economic potential. For example, the Emilia-Romagna region (Italy) sees the coexistence of large and wealthy NUTS-3 regions, such as Bologna and Modena, with lagging ones, such as Ferrara and Rimini. In Croatia, a single NUTS-2 region includes the richest city of the country – i.e. Zagreb – and five of the EU’s poorest counties. In Bulgaria, the NUTS-2 region of Yugozapaden includes Sofia Province and Sofia City – that recorded a 10.6% and

> 1 Authors’ elaboration on data available at “https://cohesiondata.ec.europa.eu/overview”.

> 2 Various figures appear in different sources (e.g. European Commission, 2015). The breakdown by year and by fund in each country available under ‘Data on budget commitments’ at <u>https://ec.europa.eu/regional_policy/en/policy/evaluations/data-for-research/</u> indicates the totals cited here.

> 3 Authors’ elaboration of Eurostat data.

> 4 Authors’ elaboration on Eurostat data. The spatial unit of reference corresponds to the level 3 of the _Nomenclature des Unités Territoriales Statistiques_ (NUTS) adopted by the EU.

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