Do European Cohesion Policies Mitigate the Impact of Fiscal Consolidation on Regional Income Inequality?

Abstract

In this paper we investigate the role of EU Structural and Investment Funds in affecting the dynamic impact of regional fiscal consolidation on regional income inequality. Relying on a panel of 162 NUTS-2 regions of twelve European countries, we find that regional spending cuts increase regional inequality in the medium-term, with the effects surviving to a large battery of robustness checks. The uneven distributional impact of regional austerity measures is however cushioned by larger EU funds expenditures, especially through the European Regional Development Fund (ERDF), with the effect magnified during periods of recession and when the regional quality of government is higher.