International Public Transfers and Convergence in the European Union

Abstract

This article investigates the effects of international public transfer programs from the European Union (EU) on the investment and growth paths of the recipient economies-Greece, Ireland, Portugal, and Spain—and, ultimately, on the convergence of these economies to EU standards of living. Numerical simulation results based on endogenous growth models of the recipient economies suggest that the absolute gains induced by the transfer programs, as measured by the evolution of gross domestic product per capita, are substantial for Greece and Portugal and more modest for Ireland and Spain. In terms of the relative gains (i.e., of the convergence to EU standards), Greece, Portugal, and Spain greatly improve their status quo gains through the transfer programs, but Ireland's status quo gains do not seem to improve noticeably. The most striking aspect of the simulation results, however, is how far the recipient economies will still be from the EU standards even after the EU transfer programs. This suggests that these administrative programs, although useful, have a limited scope, and greater progress in achieving convergence needs to come from structural market reforms.