State Aid,Regional Policy and Locational Competition in the European Union

In this article we show that there are inconsistencies between European regional policy and national state-aid policies. Arguing within a locational competition framework, we differentiate between the macro and the micro-level. On the macro-level, encompassing for example infrastructure and education, the European periphery is clearly disadvantaged vis-a-vis the core member states. On the micro-level, focusing on direct support to the productive sector, European state-aid regulations establish a hierarchy. According to Article 92 of the EC Treaty, least-favoured regions and regions in industrial decline are allowed to use region-specific state aid in order to attract mobile factors of production. All other regions are only allowed to use horizontal state aid. In the empirical analysis we show, however, that this privilege is not reflected in higher state-aid expenditure levels of the periphery vis-a-vis the core. This is mainly due to the limited budgetary possibilities of the peripheral member states. The present spatial pattern of expenditures reduces the prospects for cohesion and the efficiency of regional policy, and it leads to a waste of resources. The aggregate amount of state aid in Europe, as well as the market distortions induced by this state aid, is unnecessarily inflated. We therefore argue in favour of a tightening of state-aid regulations for the core countries and suggest a further concentration of EU resources in the periphery.