The Use of Funds from European Funds Has a Positive Effect on Employment, Income, and Productivity

Researchers from the Croatian National Bank, Domagoj Šelebaj and Matej Bule, presented their work 'The Effects of Using Funds from European Funds on the Operations of Non-Financial Enterprises in Croatia' at a lecture organized by the Institute of Public Finance and the Croatian National Bank, as stated in a press release.

Šelebaj and Bule demonstrate that the use of funds from European funds has a distinctly positive effect on the observed business indicators of enterprises, such as the level of employment, business income, labor productivity, and total factor productivity or capital intensity.

The paper was published by the Institute of Public Finance (IJF) in the latest issue of the scientific journal Public Sector Economics (in English) and in Selected Translations (in Croatian).

In addition to access to the common European market, the possibility of using funds from European funds represents perhaps the most important economic benefit of EU membership for Croatia. Given that Croatia, along with most other new member states, belongs to the group of less developed countries in the Union, the amount of funds it has received significantly exceeds its contributions to the common European budget.

Thus, in 2020 alone, end users received 2.6 billion euros from European funds for various reasons, which represents 5.3 percent of GDP. At the same time, Croatia is just entering a phase where a peak in payments to end users for contracted projects can be expected.

– In recent years, the dynamics of use have noticeably improved and, according to certain measures, reached average utilization at the Union level. Therefore, the next goal should be to increase the efficiency of use – said Šelebaj and Bule.

The use of such a large amount of non-repayable grants undoubtedly has certain direct and indirect effects, which are significantly harder to measure than direct financial benefits.

Namely, in addition to the problem of data availability (especially at the micro level), an additional complicating factor is the fact that non-repayable funds from European funds finance a range of different social areas and sectors of the economy with fundamentally different goals and thus possible effects, from family farms, through social projects aimed at the population or non-profit organizations, to infrastructure projects of the state and local units or projects of non-financial enterprises.

Researchers from the Croatian National Bank have for the first time quantified the effects that the use of funds from European funds has on the results and characteristics of the operations of domestic non-financial enterprises. In addition to quantifying the effects of use, they also addressed additional questions such as the likelihood of obtaining funds from European funds and the relationship between the size of the received grant and the strength of the effect.

Non-financial enterprises represent a part of the domestic economy that is a significant user of money from European funds, and in their case, it would be worthwhile to examine the assumption that the use of non-repayable European grants could positively affect the operations of a large number of enterprises and thus significantly contribute to the competitiveness of the domestic economy.

Although the results of the analysis conducted showed that the use of funds has a significant positive effect on the operations of enterprises, several additional recommendations for economic policy management can still be highlighted.

Šelebaj and Bule particularly emphasized the fact that the age of the enterprise and the number of employees are one of the key determinants of the likelihood of obtaining support.

– Such findings are partially expected, but additional efforts should be made to make funds more accessible to younger or newly established enterprises, as access to financing is one of the most common problems faced by such enterprises – they emphasized.

It also turned out that, despite the fact that it is a non-repayable grant, the use of funds has a negative impact on the relative profitability of operations, thereby calling into question the market profitability of financed projects and opening the possibility for moral hazard. Therefore, more attention should be paid to the issue of profitability during the process of allocating funds.

Finally, one of the more important determinants of effectiveness is also the relative size of the grant, so it would be desirable to take that factor into account when allocating funds.

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