Fiscal federalism and Cohesion Policy in the European Union NUTS-2 regions

We contribute to the debate on the implementation of fiscal policy in a supranational federation by examining the role of financing mechanisms and international coordination for policy programmes. We use a computable general equilibrium model calibrated to the NUTS-2 regions of the European Union to simulate the impact of Cohesion Policy under different configurations over a 20-year period. Using different scenarios, we disentangle the implicit fiscal equalisation related to shared financing responsibility and the internalisation of international spillovers. The results show that a national implementation of the same interventions would reduce the macroeconomic impact of the policy and the gains in economic convergence. We find that the two channels affect different groups of regions depending on their relative level of development within the country and their trade openness.